Monthly Market News September 2023 – Market trends

Alexandre Gauthy - Economist

Expectations for central banks' monetary policy continue to have a major influence on financial markets. Both stock and bond prices lost ground in September.

Our expert, Alexandre Gauthy, analyzes market trends in September 2023

Equity markets: interest rate expectations weigh on stock prices

In the third quarter, several major indices reached their peaks so far this year, but in September stock markets gave up some of their previous gains. Investors are wondering whether a stronger than expected US economy is good news for equities, if it means that monetary easing will move further into the future ('higher for longer') and in the meantime bond yields continue to rise.

In Europe, fears of a recession are becoming more prominent, due to weakening economic indicators and rising oil prices. American equities performed weaker than European equities, but this was partly offset by the rise in the dollar. Japanese shares gained more attention from investors as economic momentum improved. Chinese shares continue to underperform, which has an impact on the performance of the emerging markets as a whole.

The US mega-cap names (the "Magnificent Seven") from technology and other growth sectors underperformed the broader market in September. Their often higher stock market valuations suffer from rising interest rate expectations. At sector level, energy stocks, the financial sector and the defensive pharmaceutical sector performed well in both the US and Europe. In addition to the technology sector, consumer goods and services were also among the underperformers. Investors fear that higher interest rates and higher oil prices will weigh on household spending.

Equity markets	September	3 months	Since 31/12	12 months
MSCI EMU NR	-3.2%	-4.4%	10.2%	24.3%
MSCI EUROPE NR	-1.6%	-2.1%	8.8%	19.2%
MSCI USA NR	-2.3%	-0.2%	14.0%	12.0%
MSCI JAPAN NR	0.4%	1.4%	12.1%	16.5%
MSCI EM. MARKETS NR	-0.2%	0.0%	2.6%	3.4%
MSCI AC WORLD NR	-1.7%	-0.5%	10.9%	11.8%
(Performances in EUR dd. 30/09/2023)				(bron: Bloomberg)

Bond markets: impressive rise in bond yields

Bond yields in the US, the eurozone and Japan rose in the third quarter and continued to gain momentum in September. This is a counter-intuitive development given that central banks in the US and Europe have most likely reached the peak of their interest rate cycle and the disinflationary trend is slowly but surely continuing. Among other things, the prospect of interest rates that remain 'higher for longer' and the rising oil price pushed bond yields higher.

The US 2-year bond yield, which is more sensitive to changes in the outlook for monetary policy, rose to 5.15%, a new high in this cycle. The 10-year yield rose to 4.6% (+45 basis points in September), a level not reached since 2007. German 10-year yields fell briefly after the ECB's announcement, but subsequently followed the upward trend in US yields and oil prices. It fell just short of 3.0% (+37 basis points in September), the highest level since 2011.

The spread on high-quality corporate bonds ('investment grade') in euros fell slightly in the third quarter and in September. Due to the rising risk-free interest rate, the nominal interest rate for corporate bonds also rose. Returns are therefore still close to the highest level in more than 10 years.

Government Bond Yield 10 yr	Current	September	3 months	Since 31/12
Belgium	3.50	0.41	0.44	0.27
France	3.40	0.42	0.47	0.28
Germany	2.84	0.37	0.45	0.27
Italy	4.78	0.66	0.71	0.07
Greece	4.36	0.58	0.69	-0.27
Spain	3.93	0.45	0.55	0.27
United States	4.57	0.46	0.73	0.70
Japan	0.77	0.11	0.36	0.34
Evolution until 30/09/2023				Source : Bloomberg

Central banks: 'higher for longer' was the theme of the month

Although the Federal Reserve kept its policy rate unchanged (5.25% - 5.50%) in September, the outlook was seen as strict. The US central bank was more optimistic about the economic prospects than three months ago. The other side of the coin is that the current interest rate level will be maintained for longer. The median expectation of Fed members ('dot plot') still assumes one additional interest rate increase this year, but what was more striking was that only two interest rate cuts are expected for 2024 compared to four previously.

As expected, the European Central Bank has increased its policy interest rate to 4% (+25 basis points). The ECB lowered its growth outlook and the inflation expectations indicate that it believes that current monetary policy is consistent with achieving its inflation target, provided it is maintained for a sufficiently long period. However, the central bank gave no indication of how long that period would be.

The Swiss central bank unexpectedly left interest rates unchanged at 1.75%. Lower inflation and slower growth are the reasons, although the SNB indicates that a new interest rate hike remains a possibility.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	5.25-5.5%	+0.25%	July 2023
ECB deposit rate	4.00%	+0.25%	Sept. 2023
Situation on 30/09/2023			Source : Bloomberg

Currencies: weaker euro

The euro weakened quite sharply against the dollar and against most other currencies in September. The macroeconomic indicators in Europe show a sharp weakening more than in the other major regions, while the ECB has taken a more cautious tone and additional interest rate increases are unlikely.

The Swiss franc weakened slightly after the National Bank did not raise interest rates further. The Norwegian krone, on the other hand, strengthened after an additional interest rate increase by the Norwegian central bank. The krone is also supported by higher oil prices. The Bank of England paused for the first time after 14 consecutive increases, sending the pound lower. Inflation is finally starting to fall and with it interest rate expectations.

There was no mention of tighter monetary policy at the Bank of Japan's most recent policy meeting. The Japanese yen remained virtually unchanged against the euro, but weakened further against the dollar and is approaching its previous all-time low of October 2022 at 150 USD/JPY.

Currencies	Current	September	3 months	Since 31/12
USD	1.057	2.5%	3.1%	1.2%
GBP	0.867	-1.2%	-0.9%	2.1%
JPY	157.95	-0.2%	-0.3%	-12.5%
CHF	0.968	-1.1%	1.0%	2.2%
Evolution versus EUR until 30/09/2023				Source : Bloomberg

Commodities: oil price approaches 100 dollar

The Brent oil price continued its advance and exceeded a level of 95 dollar per barrel. At the start of the quarter, the price still fluctuated below 75 dollar. The upward trend is still driven by production cuts of 1.3 million barrels per day until the end of the year by OPEC+ members Saudi Arabia and Russia and low inventories in the US. It is assumed that the global market will have a shortage between supply and demand until the end of the year.

The gold price fell in September. The precious metal is experiencing a difficult environment with rising interest rates (both nominal and real) and a stronger dollar. Industrial raw materials showed a mixed picture. The copper price declined slightly (-1.8% in September) despite slightly better economic signals from China. The nickel price continued its decline (-8.0% in September) to its lowest level in two years, due to a global oversupply and a dip in demand from electric vehicle battery manufacturers. Other metals (aluminum, zinc) did improve, partly driven by short covering.

Commodities	Current	August	3 months	Since 31/12
Industrial Metals (GSCI)	420.25	1.4%	3.0%	-6.8%
Oil (Brent)	95.31	9.7%	27.2%	10.9%
Gold	1848.63	-5.1%	-3.3%	2.2%
Evolution in EUR until 30/09/2023				Source : Bloomberg