In September, the continuation of hawkish monetary policy, the Russia-Ukraine war, and mainland China property market volatility triggered a further fall in equity markets. The MSCI ACWI fell -9.5% in dollar terms. Notably, sterling weakness cushioned the equity market falls for UK investors, MSCI ACWI fell only 5.7% in GBP terms. The falls were led by Asian and US equities, while European markets proved more stable.
Global Government bonds provided relative stability over the month, falling modestly over the period. Gilts were in the spotlight, as markets priced in further BoE tightening after the UK’s ‘mini’ budget. While yields rose across the curve, pain was most acute at the long end. The market was somewhat mollified after the Bank of England announced a temporary long-dated gilt purchase programme. In the US, the Federal Reserve hiked 0.75% as expected, although indicated that rates were likely to peak at a higher level than previously forecast. The European Central Bank also raised rates by 0.75% during September.
The Federal Reserves hawkishness and rising risk aversion in the market drove the DXY 3.1% higher in September. Better-than-expected US economic data combined with inflation readings that surprised to the upside, reinforced the view that the Fed would move more aggressively to rein in inflation. Cable continued its downward trend in September, as weak economic data, high inflation, and the announcement of the UK government’s new fiscal strategy weighed on the currency. The EUR fell 2.5% against the USD in September given worse-than-expected economic data and double-digit inflation. USD-JPY jumped to nearly 146 after the BoJ’s unchanged monetary policy decision on 22 September. This spike prompted the central bank to intervene in the market to support the JPY, which fell rapidly to 141.0 following the announcement.
Commodity markets were down also. Brent crude fell 8.6%, as increasing fears over a global economic slowdown and a stronger USD overshadowed the prospect for tightening supply.
Amid sticky inflation, central banks are continuing to maintain a hawkish stance. Nonetheless, many indicators are pointing towards cooling inflation towards the end of this year and into early next year.
We expect a total of 4.25% of Fed rate hikes in 2022, leaving policy moderately restrictive by year end. Further US rate hikes are likely in early 2023 with policy makers adopting a ‘hike-and-see’ approach. Fiscal policy will have an important role to tackle growth headwinds. This includes targeted support for households and businesses in Europe and increased infrastructure investment in China.
Recession concerns are beginning to mount with a US recession looking increasingly probable towards the second half of 2023. The European energy crisis will dent growth, while policy and geopolitical developments are likely to continue to keep global market volatility high.