September lives up to its reputation | Calamatta Cuschieri

Markets had a pretty weak performance in September that included declines in both bonds and equities maintaining its reputation as the worst month of the year for markets. That came amidst jitters over the troubled Chinese conglomerate Evergrande, rising energy prices and hence inflationary pressures, as well as a hawkish turn from multiple central banks. 

Looking at the third quarter as a whole was much more positive however, and it’s worth noting that a number of fears about Covid and new variants at the start of the quarter didn’t materialise, with no major new variants emerging since delta.  In fact, the virus has taken a back seat of late.

In terms of asset classes, the main story in September was a big rise in energy prices with the  West Texas Intermediate (WTI) and Brent oil prices advancing by 9.5% and 7.6%, respectively.  On a year to date basis, oil prices have advanced by over 50%, by far among the best performing asset so far this year.  Alongside this came an astonishing surge in natural gas prices, which had a big impact in Europe in particular.  Indeed, European natural gas prices are up 94.2% over the last month, and 182.4% over the third quarter as a whole. 

The surge in energy meant that commodities as a whole continued to perform strongly through September, with the Bloomberg Commodity Spot Index up 4.9% last month and 6.2% in the third quarter.  That means the index has now risen for 6 consecutive quarters, with its last decline being in the third quarter of 2020 when the Covid-19 pandemic began to spread. 

That said, one segment that has struggled over the month has been precious metals, with higher sovereign bond yields dampening demand for zero interest haven assets.  In fact, silver was one of the worst performing commodities on a monthly, quarterly and year to date basis, having now fallen by 16% since the start of the year.  Gold is also down since the start of the year, but has somewhat limited losses thus far to 7.4%.

US Treasuries are down 1.2% over the last month, which is their worst monthly performance since February, and 10-year yields rose 17.9 basis points since the start of the month.  This follows the announcement by the Federal Reserve during the month that it will soon begin to slow the pace of its asset purchases, with purchases set to come to an end by around the middle of next year. 

The Fed also released its projections for interest rates over the next few years, with the central expectation now being for US interest rates to increase to 1.75% by the end of 2024.  The European Central Bank also  announced a reduction in the pace of its asset purchases, but in contrast to the Fed, was keen to stress that this was not the beginning of a process of tapering purchases down to zero.  Nonetheless, sovereign bond prices  in the continent followed the US lower, with German bunds down 1.4% and Italian BTPs down 0.8%.

The other main news from the eurozone was the result of the German election.  While the outcome means that it could take some time for a government to be formed and the replacement for Chancellor Angela Merkel to be named, the result does suggest that the eventual outcome is now unlikely to be a game-changer for German or European markets, with neither the far left or far right parties likely to be involved in the government.

Turning to equities, we’ve seen the major indices falling back for the first time since January, bringing a consistent run of seven consecutive monthly increases to an end.  The S&P 500 was down 4.7% on a total return basis, while the Stoxx 600 fell 3.3%.  However, over the third quarter as a whole, the S&P 500 was still up 0.6%, whilst the Stoxx 600 rose by 1.0%.  In terms of the sectoral moves, tech stocks underperformed in September, with the Nasdaq down 5.3%, though banks benefited from higher yields, with the S&P 500 financials only down 1.8%, as the Stoxx 600 Banks rose 4.0%.  It is also worth noting that aside from oil, equities are one of the best asset class performers year to date, with the S&P 500 still 15.9% higher over the year as a whole, even with last month’s declines.

Turning to foreign exchange, September marked a good month for the dollar, with the index ending the month up 1.7%, having risen 4.8% on a year to date basis.  Sterling was a major underperformer, however, falling 2.0% against the dollar as the UK grappled with a number of shortages.  UK assets struggled more broadly, with gilts underperforming other sovereign bonds to lose 3.9%, which came after the September Bank of England decision raised the prospect of higher rates sooner than markets were expecting.  Nevertheless, sterling’s depreciation supported the FTSE 100, which managed to only lose 0.2% on a total return basis.

Clearly, winter brings with it some uncertainty in relation to Covid’s potential impact on health systems but even if hospitalisations do start to pick up again, the economic recovery is more likely to be delayed rather than derailed, thanks to still very healthy savings balances that consumers have accumulated.  These elevated savings, along with solid wage growth, should also help most consumers to weather the increase in prices currently underway.  

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.