Equity markets: weak month for global stock markets
Equity markets worldwide experienced a sharp decline in September. The weakness last month was due to a number of factors, including the tightening of monetary policy, the rise in bond yields, increased fears of recession, and a weakening earnings outlook. Geopolitical risks remained in the spotlight with the partial mobilization in Russia, the annexation of four Ukrainian provinces, and the sabotage of the Nord Stream pipeline in the Baltic Sea.
The US stock market recorded its worst monthly performance since March 2020 and underperformed the European stock market in dollar terms. However, due to the rise in the dollar, the performance of both markets was similar in euro terms. Exchange rates had a significant impact on the stock market performance of other regions as well over the past month. Within emerging markets, Asian stock markets in particular, were in the losing camp driven by a weak China, while Latin American stock markets held up somewhat better.
Stocks sensitive to higher interest rates performed weaker than the stock market average, in Europe and the US, although differences in performance were contained. Growth stocks, such as the technology sector, were among the losers, but the real estate sector also took a sharp hit. Besides higher interest rates, the impact of a weaker economy and higher inflation is also a factor for that sector. Value stocks that suffer less from higher interest rates (financials and cyclical sectors) performed better than the stock market average but also negatively.
|MSCI EMU NR||-6.3%||-4.5%||-22.4%||-18.0%|
|MSCI EUROPE NR||-6.3%||-4.1%||-17.4%||-11.0%|
|MSCI USA NR||-6.9%||1.6%||-13.0%||-2.5%|
|MSCI JAPAN NR||-8.0%||-1.5%||-14.5%||-16.4%|
|MSCI EM. MARKETS NR||-9.4%||-5.6%||-15.4%||-15.0%|
|MSCI AC WORLD NR||-7.2%||-0.6%||-13.7%||-6.1%|
Bond markets: long-term interest rates at the highest level in more than ten years
Higher-than-expected inflation data pushed bond yields in September to new highs not seen for a decade. Eurozone inflation reached 10% for the first time. US 10-year yields rose to just under 4% over the past month (up from 3.1% at the start of the month). German 10-year rates rose above 2.2% for the first time since 2012 (up from 1.55% at the start of the month).
Italian government bond spreads moved marginally higher ahead of the end-September parliamentary elections but remained within the range of the past few months. As indicated by the polls, the right-wing coalition led by the far-right Fratelli d'Italia won the elections. The latter has signaled it will maintain fiscal discipline. However, it is unclear whether structural reforms to the Italian economy will continue in the longer term.
In the UK, the new Truss government's interim budget caused a stir. The package of tax cuts and new spending, to be financed by borrowing, caused a loss of confidence in the new government and an outright selling wave in bonds. As a result, the 10-year yield reached 4.6% during the month, up from just over 2% in early August. This increased volatility in the markets led to a reaction from the Bank of England, which announced that it would buy long bonds for fear of financial instability. Indeed, the upward movement in bond yields was amplified by the sale of securities by certain UK pension funds facing significant margin calls. At the end of the month, bond yields fell to 4.1%, which was still 1.3% higher than the previous month.
Central banks: a global surge of monetary tightening
September has been a record month in terms of interest rate hikes by central banks worldwide. The United States, Canada, Australia, the eurozone, the United Kingdom, Switzerland, Norway and Sweden - to mention only the main ones – raised policy rates. The pace of interest rate hikes remains extremely high, as illustrated by the Swedish central bank, which raised its policy rate by 100 basis points in one go.
The European Central Bank raised its policy rate by a historic 75 basis points (bps). The central bank confirmed that it will continue to raise interest rates at an accelerated pace to bring inflation back to target. Another 75-bps interest rate hike in October is likely.
In the US, the Fed raised its key rate by 0.75% to 3% to 3.25%. The Fed now expects interest rates to reach 4.4% by the end of the year, implying a further 75-bps increase in November, followed by a 50-bps increase in December. The median forecast for the end of 2023 is raised to 4.6%, implying a further 25-bps rate hike early next year. Fed members’ views are diverging on the need to cut interest rates in the future.
After the Swiss central bank had already unexpectedly raised interest rates sharply by 50 bps in mid-June, it followed up with another 75-bps rate hike in late September, which was again more than expected.
|Fed funds||3.0-3.25%||+0.75%||Sept. 2022|
|ECB deposit rate||0.75%||+0.75%||Sept. 2022|
Currencies: turbulent currency markets
The dollar strengthened past parity against the euro—the most substantial level of the US currency in the past 20 years. However, the dollar did not only strengthen against the euro. Against other currencies, the dollar also reached high levels not seen in several decades, such as against the Japanese yen (since 1998), the British pound (since 1985), or the Chinese renminbi (since 2008). This evolution is mainly due to the relatively better economic situation in the US and differences in monetary policy.
The Japanese government has intervened in the foreign exchange market to halt the yen's fall against the dollar. Since the beginning of the year, the yen has fallen by almost 25% against the US currency. Clearly, the level of 145 yen per dollar, corresponding to the 1998 low, was the signal to intervene.
The Chinese currency fell past 7 renminbi per dollar, bringing its loss since the beginning of the year to over 12%. The Chinese central bank has not intervened directly in the foreign exchange market but is said to be preparing to do so. However, the central bank has introduced measures that make it more expensive to take short positions against the currency.
A notable faller was the Norwegian krone, which slipped 6.9% against the euro in September. Norway, the first major developed economy to begin a rate hike cycle last year, raised the policy rate by 50 basis points to 2.25% in September but announced that future increases would be "more gradual". The fall in oil prices also weighed on the currency.
However, the eye-catcher in September was the British pound, another consequence of the new government's announced fiscal package. The pound lost over 10% against the dollar to 1.03 during the month. Following the central bank's interventions in the bond market, the currency was able to recover partially, limiting the overall loss for the month.
Commodities: a weak economic outlook weighs on commodity prices
Brent oil prices fell below 90 dollars a barrel in September. This level had last been reached in February. However, OPEC+ unexpectedly announced a production cut at the beginning of the month, reversing the previous month's 100,000-barrel-a-day increase. Another production cut, possibly by more than 1 million barrels daily (about 1% of daily global production), is expected in early October. With this, OPEC+ aims to keep the price at its desired high level despite the anticipated decline in demand. The European gas price fell sharply in September to well below 200 euros per megawatt hour from a peak of 340 per megawatt hour at the end of August, although the market had to cope with the complete shutdown of deliveries through the Nord Stream 1 pipeline at the beginning of the month and the suspected sabotage of the pipeline at the end of September. In both cases, this caused only a temporary boost to the gas price. The replenishment of gas stocks in Europe for the winter is on track.
Industrial commodities continued their slide in prices. Metals such as copper are a good indicator of economic activity. China consumes half of the world copper production, and the faltering property market in the country weighs on demand.
Gold prices also continued their decline. US real interest rates (an indicator of the opportunity cost of gold) continued to rise, and the dollar continued to appreciate. These two elements weighed on the gold price in September, as in the months before.