Overall Market Backdrop for September
- Developed markets struggled throughout the month as they continue to battle against high inflation, monetary tightening and lower growth expectations.
- The US 10-Year Treasury yields saw a huge uplift and ended at 3.80%, 67 basis points higher than the start of the month.
- Minimum Volatility was the best performing factor for September.
Drivers of Market Conditions in September
- The first week of the month proved to be an anomaly as US equities showed promise and had a steady increase due to Chair Powell reaffirming the Federal Reserve’s (Fed) hawkish stance. The joys of the first week were however short-lived and global equities began to nosedive as renewed fears of aggressive monetary policy across central banks crushed investor sentiment. The combination of this and interest rate hikes delivered a one-two punch and global equities continued their downward slope once again igniting concerns regarding recessions in major economies. Interestingly, even with US equities edging lower and lower as investors continue to grapple with hawkish monetary policy positioning from the Fed, economic data seems to be positive with a stronger-than-expected jobless claims print.
- No equity market was safe during September and European and UK equities shared the same fate as US equities. European and UK equity markets shared a similar story with US equities as the first week looked promising with the European Central Banks (ECB) record rate hike and UK stimulus plan to tackle the country’s cost of living crisis outweighed recession worries. The latter stages of the month proved to be extremely problematic for UK investors as uncoordinated policy caused turmoil across British assets which resulted in the Bank of England’s (BoE) quantitative easing announcement.
- Global policy rates continued their upward trajectory:
o While the ECB has tended to be more cautious about interest rate hikes than their UK and US counterparts, the ECB raised key policy rates by a record 75 bps, bringing its benchmark deposit rate to 0.75%, its highest since 2011. A similar theme of raising interest rates further in an attempt to curb inflation pressures echoed from the central bank.
o Federal Open Market Committee (FOMC) hiked another 75 bps to give a final rate of 3.125%. The Fed has maintained its position throughout much of this year and stated on several occasions that it would do anything necessary to curb inflation even if that means further economic deceleration.
o In the UK the BoE also raised its rates by an additional 50 bps to end at 2.25%.
- The UK Prime Minister Liz Truss announced support for businesses and a cap on household energy bills for 2-years. Energy prices have been at the forefront of the inflation challenge and have continued to increase rapidly over the last few months. The reason we have seen more policy intervention to combat the rising inflation in Europe and the UK is that energy has been a greater contributor to overall inflation in the Euro area than in the US, warranting higher aggression in terms of central bank and policy actions which are aimed at controlling energy costs and ensuring adequate corporate and household energy access.
- With the effects of high inflation being felt around the world we have seen central bank policies being more hawkish across developed markets. This has caused global central banks to raise their respective interest rates at a record high; nearly 80% of major central banks are hiking.
- It was apparent that the newly appointed UK Prime Minister Liz Truss wanted to start with a bang however, maybe not in the way that she expected. Her first course of action was to announce much-needed energy price caps, nevertheless, ‘The good times of today, are the sad thoughts of tomorrow’ and Liz Truss quickly went from hero to zero as she proceeded to announce a mini-budget. The budget consisted of a fiscal splurge – comprising tax cuts and increases in government borrowing. The policy announced put the U.K. monetary and fiscal policy on a collision course and threatened to unpick the work of the central bank. The mini-budget put the UK market under tremendous stress and led to a forgetful week for many UK investors. The Pound crashed and fell to a record low of 1.035 against the dollar. In addition, the cost of borrowing soared, with the yield on 10-year gilts rising by more than 100 basis points within a few days. The sell-off that occurred led to margin calls from pension funds, forcing them to slash positions which could lead to potential liquidity issues. This forced the hand of the BoE as it announced temporary purchases of long-dated U.K. government bonds until the middle of October to try and curb the dysfunction happening within gilt markets. While the BoE stepped in to try and stabilise asset prices the problem remains that there will still be lingering concerns now around fiscal credibility.
- Global yields increased throughout the month as strong economic data coupled with central banks holding firm in hawkish stances seemed to provide solid support. We saw rate hikes from the Fed, BoE and ECB. We also saw continuous high US inflation prints which would have been the main reason for the rate hikes that occurred in September. Yields did begin to fall towards the end of the month as markets absorbed information from the BoE that stated their plan to buy long-dated UK bonds. This caused the UK 10-Year Gilt yields to see the largest single-day fall in over a decade.
How did Factors Perform in September?
- The Minimum Volatility factor has been shown to offer protection from the full downside blow of the drawdown that the majority of markets experienced in September. The equity market has seen continued volatility coming from geopolitical, inflation, and tighter monetary policy concerns. Nevertheless, the Minimum Volatility Index has been the best-performing factor in September.
- Momentum was the second-best performing factor in September after having a rough time YTD. The Momentum index now has the highest correlation with the Minimum Volatility index when compared to the other factors on show and this has helped the Momentum index in the last 2-months.
Blog Post by Raj Chana
Investment Analyst at ebi Portfolios.
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