The impact of the Delta variant continued to subside over the quarter, but it leaves behind concerns about decelerating economic growth and the continued price impact of supply chain disruptions. Although many forward-looking activity indicators are still in expansionary territory, the momentum in slowdown has gathered pace and will face less favourable base effects going forward. This is especially true in China, with the trajectory worsened by power disruptions. Higher energy prices and ongoing supply constraints have kept input prices elevated for much longer than anticipated, especially for producers. Combined, the idea of peak growth and more persistent inflation has stoked fears of potential stagflation further down the line and a concern that the reluctance of policy makers to acknowledge inflationary pressures as anything but ‘transitory’ will leave them behind the curve.  
 

The concerns spilled over into commodity prices and in turn into emerging markets, creating one of the worst quarters for emerging markets since the start of the pandemic. The MSCI Emerging Markets Index lost 8% over the quarter.

Global central banks struck a more hawkish tone in September, with the US Federal Reserve providing indicative timelines for tapering of asset purchases, while the Bank of England guided that interest rates might increase even before the end of the year. Norway raised interest rates by 25 bps from a record low of zero, the first major western central bank to do so.  The US 10-year bond yield increased by about 20 bps over the month to end the quarter at 1,5%, providing a headwind for interest rate sensitive assets. The Bloomberg Barclays Global Aggregate Bond Index returned -1,8% in September.
 

A confluence of factors has seen increased prices of energy commodities emerge as a pressure point across several regions. A surge in the oil price has been one of the reasons for higher inflation across the globe and is reaching levels where it could impede further economic recovery. Reaching a three-year high in September, improved demand and weather-related disruptions were in part responsible for the rise this year, however supply discipline from the OPEC group has kept prices high.

Much greater pricing pressure, however, has emerged from tight supplies in natural gas and coal, with prices for these commodities soaring. A colder-than-usual winter in Asia and Europe earlier this year, planned outages of nuclear reactors, delayed maintenance at gas production facilities and lower availability from wind power all combined to create gas shortages in Europe, which have not yet been replenished ahead of the coming winter. In China, a ban on the import of Australian coal in 2020, regulated electricity prices and tough emissions targets ahead of the winter Olympics in Beijing, have led to local shortages, and coal prices in the region have now hit record highs. This prompted disruption in electricity supply and is adding fuel to global competition for gas and coal. In the face of shortages ahead of winter, demand has continued to climb and the price of natural gas has risen above that of the equivalent barrel of oil. A mild winter will alter dynamics, but lower investment in traditional energy sources has diminished capacity, perhaps highlighting the need for a more mindful energy transition.
 

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