Energy in China has been a big hindrance to the property sector, while Saudi Arabia and Russia announced oil production cuts. However, stagnant interest rates by the Bank of England meant a more optimistic growth outlook for the region.
Market sentiment deteriorated against a backdrop of re-emerging risks on the energy front, stress in the Chinese property sector and a firm message from monetary policymakers that interest rates will stay at restrictive levels for as long as necessary to reach inflation targets. In addition, investors had to calibrate the risk of a United States (US) government shutdown as policymakers remained at loggerheads on funding until a last-minute deal pushed the deadline out to mid-November.
Manufacturing activity, industrial production and retail sales in China showed some improvement in August, while Chinese authorities announced further monetary measures to shore up the economy. Headline inflation in the country also turned positive at a marginal 0,1% yoy, partially stemming concerns around recent deflationary trends becoming more entrenched.
Saudi Arabia and Russia announced an extension of oil production cuts to the end of the year. US crude inventories declined beyond expectations, with the Strategic Petroleum Reserve recording its lowest level since 1983. Combined with curtailed supply from OPEC+ members, the oil price increased by 9,7% in September, trading above US$95 a barrel by month-end. This brings the increase over the quarter to a hefty 27,2%, emphasising the risk of higher energy prices to the inflation outlook and driving the narrative of higher interest rates for longer. Strikes and an outage at Australian gas plants sent European gas prices higher by 19,2% over the month, highlighting that prices remain sensitive to supply disruption.
Higher fuel prices saw US headline inflation increase to 3,7% yoy in August, ahead of market expectations, while core inflation moderated to 4,3%. Data for the US personal consumption expenditure price index (PCE) was recorded at 3,5%, with the annual rate for core PCE [the US Federal Reserve (Fed)’s preferred measure of inflation] slowing to 3,9%. In line with expectations, the Fed kept the policy rate on hold, but the accompanying commentary from US Fed Chair Jerome Powel was hawkish, indicating further hikes could be considered.
The Bank of England (BOE) surprised the market by keeping interest rates on hold, relative to expectations for a 25 bps hike. This followed a more benign inflation print for August ahead of the meeting. The vote was quite tight though, with 5 of the 9 committee members voting in favour of the hold and 4 preferring a 2 5bps hike. The European Central Bank (ECB) increased policy rates by 25 bps, while downgrading the outlook for economic growth in the region.
After a positive 1st half, risk assets started to price for the more challenging backdrop in the 3rd quarter. Both developed and emerging market equities suffered drawdowns in September and over the quarter as volatility picked up and investors recalibrated for restrictive conditions. The S&P 500 lost 3,3% over the 3rd quarter, while declines across Europe and Asia were more meaningful. Domestic Chinese assets suffered noteworthy losses as investors priced lacklustre economic data and the challenges in the property sector. Illustrative of these local challenges, Chinese property developer Evergrande missed a bond payment in September and revealed that new bond issuance was on hold due to investigations into the company. On a quarterly basis, the Hang Seng Index declined by 4,1%, while the MSCI Emerging Markets index traded down 2,8%.
Sovereign bond yields increased over the month with several regions seeing yields at multi-year highs. The Bloomberg Global Aggregate Bond index declined by a hefty 2,9% in September, bringing the losses over the quarter to 3,6% and 2,2% year to date. US bond yields traded under pressure over the month, reflecting hawkish comments from monetary policymakers but also fiscal sustainability concerns given the increased issuance that may be required to maintain current fiscal plans. The US 10-year bond yield reached another cycle high of 4,6% during the month. With investors pricing a higher probability of persistently higher rates, the US dollar rallied in September, with a gain of 2,5%, helping the greenback appreciate by 3,2% on a trade-weighted basis over the 3rd quarter.
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