Global equity markets saw some profit taking in September after new all-time highs earlier in the month following strong Q2 corporate results. Widespread reports of supply chain disruptions, skill shortages and rising energy costs increased concern that the spike in inflation may prove less transitory than previously thought and could lead to central banks raising interest rates sooner than expected.
Despite falling 2% over the month, global equities ended Q3 up by just over 2%, making 15% year-to-date. A combination of dollar strength and sterling weakness - cable closed at $1.34 - boosted international returns for sterling-based investors. The change in Japan’s political leadership increased expectations of another stimulus package and Japanese equities had a very strong month and quarter despite lagging year-to-date. Asia Pacific and emerging markets fell in September on a combination of the strong dollar, supply chain disruption, ising Covid-19 infections and regulatory tightening as a result of the Evergrande debt crisis and are the worst performing regions over the quarter as well as year-to-date. The oil price ended the quarter marginally ahead at $77 after some volatility caused by supply disruption and stronger than expected non-OPEC demand.
August’s ISM Manufacturing survey
Although equity markets have made reasonably steady progress since January, bonds have been more volatile. Yields rose in the early part of the year as growth accelerated but eased during the summer despite rising inflation. After touching a low of 1.12% in early August, yields on 10-year US Treasuries ended September at 1.5% - little changed in Q3 - but potentially heading towards 2% over the next six months. Faced with a more serious inflation problem than anticipated, the Bank of England Governor has sounded more hawkish and hinted that interest rates could rise before Quantitative Easing is unwound. This helped push UK 10 year yields up 30bp to 1% over the quarter. While these changes are small in absolute terms, yields across most maturities are now higher than they were two years ago with conventional bonds producing negative returns over Q3 and year-to-date. Corporates have held up better as has index-linked with real yields, which remained low.
Monetary stimulus has peaked, and a number of central banks have started to raise rates. The Federal Reserve has sought to reassure markets that its exceptionally accommodative policy will be withdrawn gradually and the Chair, Jerome Powell, has even suggested that tapering is not being tightened - although history indicates otherwise. We will find out soon enough as an announcement on tapering US asset purchases is expected in November. Assuming the programme is completed by mid-2022, a first US rate rise is possible by the end of next year and the “dot plot” forecast has shifted up marginally since June. The European Central Bank has also signalled subtle changes to future policy that are likely to reverse negative rates. The change of German Chancellor and political priorities are unlikely to alter the bias towards fiscal conservatism and caution on Eurozone fiscal integration.
Estimates for global GDP growth of just under 6% in 2021 have been reasonably stable over recent months despite widespread disruption to supply chain logistics and a resurgence in Covid-19 infections, with countries that have high vaccination rates appearing to accept it is becoming an endemic disease. Projections for Japan and the Eurozone have increased while those for China, the US and Australia have eased. The 6.6% for developing markets remains ahead of advanced economies at just over 5%. Global growth next year is expected to be 4% before reverting to long-term averages in 2023. However, reversion to the norm is not factoring in rising inequality and growth imbalances. While these have been evident for some time in the US and other advanced regions, they are becoming more apparent in China with policymakers - no doubt influenced by the Evergrande crisis - placing renewed emphasis on achieving “Common Prosperity”.
Markets, so far, appear relatively sanguine about slowing global growth in marked contrast to increasing concerns on inflation where a range of data has surprised on the upside and CPI is above the 2% target adopted by many central banks. In most economies, rising food and energy costs are the main drivers with Europe experiencing additional pressures from the surge in natural gas prices and emerging markets from a sharp rise in agricultural commodities.