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Article | 04 October 2023 | Investments
Global equities fell, with the MSCI World Index returning -4.4%. While central banks signalled that they were at or near peak rates, they emphasised that rates would need to stay higher for longer. US shares lost 4.9% (S&P 500 Index), the worst monthly decline since the start of the year, while European stocks dropped 2.8% (EuroStoxx 50 Index) and Chinese equities declined 3.1% (MSCI China Index). The UK’s FTSE 100 Index was the outlier, rising 2.3%, helped by its large weighting to energy companies which were boosted by rising oil prices.
Global bonds sold off sharply as investors reassessed their forecasts for future interest rates given hawkish central bank statements. The 10 year US Treasury bond returned -3.5% while the 10 year German Bund lost 2.5%. Corporate bonds outperformed government debt, although returns on investment grade bonds were still negative. High yield bonds held up better, as their larger coupons provided a cushion against rising government bond yields.
The US dollar strengthened as the Federal Reserve’s “hawkish pause” dashed speculation that US interest rates might move markedly lower in 2024. In contrast, the euro weakened as the European Central Bank signalled that September’s rate rise could be its last. Meanwhile, the Bank of Japan maintained its accommodative stance.
Oil prices surged 9.7% to $95.30 a barrel (Brent crude), the highest level in almost a year, amid fears of tightening supply as OPEC+ members extended production cuts to the end of the year. Gold eased 4.7% to close September at $1,848.60 a troy ounce.
Volatility jumped 29.1% over September, with the Vix Index closing at 17.5. Nevertheless, the Vix Index remained below the 20 level which is usually viewed to be an indicator of market stability.
There are signs that governments are starting to water down their green commitments. The UK, for example, has rolled back the timeframe for banning sales of new cars with oil based engines, as well as gas boilers for heating homes. Some of these decisions are being driven by fiscal constraints; others appear to be more politically motivated.
Central banks in developed markets reinforced the message that rates will need to stay high for some considerable time to bring inflation back to target, dashing hopes of substantial cuts next year. In contrast, Brazil cut rates for the second time this cycle, while Poland lowered borrowing costs for the first time in more than three years.
Evidence gathered that China’s economic slowdown might have bottomed out in July. The Composite Purchasing Managers’ Index (PMI) rose to 52.0 in September from 51.3 the previous month, marking the highest reading since June. Retail sales, industrial production, exports and imports all topped forecasts for August.
The US government narrowly avoided a shutdown scheduled for early October, after lawmakers agreed a last minute deal that pushed the risk of a shutdown back until mid-November. The deal maintains spending at current levels for another 45 days, but excludes funding for Ukraine’s war effort.
The flash estimate of the S&P Global US Composite PMI slid to 50.1 in September, the weakest performance since February, suggesting that the US economic activity might be approaching stagnation. The question is whether the slowdown will also be affecting the jobs market, consumer demand and inflation.
The sell-off in bond markets over September means 10 year government bond yields in the US and Germany are respectively trading at 16 and 12 year highs. If yields remain at this level, this could present a significant headwind for equity markets in the fourth quarter.
Oil prices have spiked to the highest levels in almost a year. As well as the direct impact on drivers, this affects the broader economy through higher input and transportation costs. Will the recent surge spark another inflationary pulse?