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Article | 06 October 2022 | Investments
Global equities plummeted over September (MSCI World Index -9.5%). US equities slid sharply (S&P 500 Index -9.3%; Nasdaq -10.5%) as the Fed dialled up its aggressive stance on raising interest rates after inflation topped estimates in August. Chinese equities also plunged (MSCI China Index -14.7%). European equities fell 5.7% (EuroStoxx 50 Index -5.7%), joining the US and China in bear markets. ASEAN markets fared far better amid signs that companies may be shifting production from China to the region.
Global bonds fell sharply as central banks stepped up their inflation-fighting stance. The 10 year US Treasury dropped 5.0% over the month, with yields reaching a peak of 4.0% for the first time in more than 12 years. European bond yields also surged, especially in the UK where the 10 year benchmark bond yield touched 4.5% for the first time since 2008. The 10 year German Bund lost 4.5% as yields moved above 2.1% for the first time since late 2011.
The US dollar continued to strengthen, supported by the Fed’s hawkish policy. With the Japanese yen weakening to a 24-year low against the US dollar, the Bank of Japan intervened in the currency markets for the first time since 1998. The British pound plunged, falling to an all-time low against the US dollar, after the new UK government lost the confidence of financial markets.
Oil prices fell back to pre-invasion levels as fears of a global recession weighed on demand. European gas prices initially surged as Russia said the Nord Stream 1 pipline would remain closed indefinitely, but subsequently fell to levels last seen in July, as Germany announced its gas storage facilities to be more than 90% full, thanks to imports of LNG. Gold fell to a two-year low.
Volatility picked up sharply towards the month end after the new UK government’s unfunded stimulus plan sent shockwaves through financial markets. Overall, the Vix index increased 22.2% over the month to close at 31.6.
Egypt will host COP27 in November. The focus on limiting global warming is ever more relevant, after the northern hemisphere saw record temperatues this summer. The war in Ukraine also presents challenges, with some countries having to revert to using coal to generate electricity. Over the longer term, however, the war is expected to accelerate the use of renewable sources of energy.
Central banks continued to raise rates aggressively. The US Federal Reserve (Fed) raised the federal funds rate by 75 basis points (bps), its third such move of that magnitude. The European Central Bank also increased rates by a larger-than-expected 75 bps while Switzerland’s own 75 bps increase ended the era of negative interest rates in Europe.
After Ukraine made significant territorial gains in the east of the country, President Putin mobilised “300,000” reservists to support Russian frontline troops. Russia also annexed four regions of Ukraine after holding sham referendums and threatened to use nuclear weapons if Russian territory was attacked.
In the UK, the new government, headed by former Foreign Secretary Liz Truss, froze energy costs and announced the largest tax cuts in 50 years in an attempt to stimulate growth. The spending was unfunded, causing the Bank of England to intervene as the British pound and UK bond prices tumbled amid fears of unsustainable levels of UK borrowing.
The start of the third quarter earnings season will be watched closely to see how corporate profits are faring, in an environment of higher interest rates and inflation. Current expectations are for earnings growth of around 3% for companies in the S&P 500 Index. This would be the lowest year-over-year earnings growth since the third quarter of 2020.
Following the latest FOMC meeting, US policymakers forecast interest rates will be at 4.4% by the end of 2022. Compared to the current range for the federal funds rate of 3.00-3.25%, this implies there will be two more significant rate rises in the Fed’s two remaining meetings of 2022.
European countries are stepping up protection of underwater gas pipelines after the Nord Stream 1 and Nord Stream 2 pipelines sprang leaks in the Baltic Sea. This prompted accusations of sabotage from both Russia and the West. Ships were warned to avoid the area of the leaks, with the United Nations Environment Programme stating that the leaks could be the single biggest release of greenhouse gases into the environment.