Market Overview:
Markets performed well over the quarter only to give up those gains in the latter half of September after hotter than expected (US) inflation, forcing the Federal Reserve (Fed) to hike interest rates by 0.75%, thus maintaining their single-minded focus on bringing down inflation.
Persistent inflation raises the risk that the Fed will need to raise rates even higher and will wind up inflicting too much damage on the economy, which is fortunately in a healthy position currently.
The S&P 500 notched its third straight weekly fall and its third straight quarterly slump, this kind of persistent loss has not been faced by investors since 2009.
September was particularly tumultuous, with the S&P 500 falling 9.3% and notching its worst monthly decline since March 2020. The Nasdaq dropped 10.5%, with tech stocks suffering as bond yields raced higher in the month. The Dow tumbled 8.8% (in USD dollars).
On a quarterly basis, the S&P 500 fell 5.3%. The Nasdaq dropped 4.1%, and the Dow lost 6.7% (in USD dollars).
Higher rates and higher yields, as well as the US’s relative economic health when compared with that of other countries around the world, have drawn investment to Wall Street. This has helped strengthen the dollar when compared with currencies that represent major U.S. trading partners. As a result, the dollar has just experienced its biggest quarterly rise since the first quarter of 2015 and is the strongest it has been in two decades.
In Britain, proposed tax cut stoked inflation fears and raised concerns over the country’s borrowing needs, sending the British pound down to its weakest level against the USD since 1985, having lost 20% against the dollar in its worst year since 2008. Emergency intervention by the Bank of England soothed markets, pushing the pound back close to levels it had attained before the proposals.
The Bank of Japan intervened for the first time in 24 years to buy the yen and sell the dollar, the intervention costing roughly ¥3tn ($21bn). In Japanese markets, the Topix index fell 1.9 percent for the three months to the end of September.
Tumultuous energy markets continued to define much of the EU narrative as Russia manipulated supply. Natural gas prices surged more than 30% at the beginning of September, when Gazprom PJSC announced that the controversial Nord Stream pipeline would remain shut, depreciating the euro to its weakest level against the dollar since 2002.
Europe has been preparing for energy supply disruptions by aggressively accumulating natural gas at any price, bringing Europe’s storage levels up to 88% of capacity. …but winter is coming.
Europe’s Stoxx 600 ended the quarter almost 5 percent lower.
The mainland stock index in China — the CSI 300 — fell more than 15 percent over the same period.
Inflation data however further reflected China’s favourable monetary positioning with CPI easing to 2.5% (from 2.7%) in August. Aside from the property market woes, the economic data illustrate an encouraging continuation of China’s recovery. The most recent industrial production, retail sales and fixed asset investment figures significantly beat expectations while infrastructure investment continued to accelerate as GDP estimates for the year moderated to around 3.5%.
South Africa
The rand has been hit from both sides this year as the dollar’s resurgent dominance and domestic structural economic issues drove rand weakness. The rand’s recent underperformance relative to the emerging markets (EM) leaves it with some catching up to do. The rand has lost 5% against the dollar in September alone, making it the second worst performing EM currency.
The weaker rand is no surprise as loadshedding escalated dramatically in the worst year on record and the grid risked breaching stage 6 for the first time since 2019. Ongoing power cuts were a major contributor to the SA economy’s 0.7% contraction in the second quarter, and Eskom’s state-backed debt (R500bn) continues to loom ominously over President Cyril Ramaphosa’s drive for a solution.
Fortunately, Eskom has agreed to buy 1 000 MW from private companies, an immediate increase in supply at no extra cost. Public Enterprises Minister Pravin Gordhan announced that 18 former Eskom employees with extensive experience had been recruited to keep the ligghts on, bringing back people who worked at Eskom for most of their lives. Meanwhile, Eskom wants consumers to pay 32% more for electricity from 1 April 2023.
In terms of local equities, the FTSE/JSE ALSI was down -4.1% for September, -1.9% over the last quarter (July-Sept) and -13.4% over the last 6 months (Apr-Sept). (Time to invest directly off-shore)
The JSE All Bond Index was down -2.1% in September, +0.6% over the last quarter.
Against the USD, the Rand weakened by 5.4% in September, 9.7% over the last quarter and 23.0% over the last 6 months.
Rand/Euro Exchange Rate 2.7% (Sept) 2.8% (last quarter) 8.3% (last 6 months)
Rand/Pound Exchange Rate 1.2% (Sept) 0.8% (last quarter) 4.3% (6 months)
“Sugar rush” – How investor sentiment impacts markets
Investors are behaving like sugar-starved children offered a lollipop, grasping for it with delight only to scream when it is taken away again. The sweeties came in the form of some mild bad news on the economy. The Institute of Supply Management’s manufacturing index came in a little weaker than forecast. This prompted an extraordinary rush to buy bonds and stocks as bets mounted that the Federal Reserve would raise interest rates less aggressively.
Bond yields continue to fall, and stocks have followed suit. This was boosted by falling job openings, a sign of a weakening labour market. Thus, the sugar rush was well under way. The trouble is that single data points contain little of lasting nutritional value for the markets. The markets risk a tantrum if the lollipops are once again confiscated, as has happened several times in the past few months. Worse still, the whole bad-news-is-good-news pattern will shift back to bad news being bad news once it looks like recession is on the way.
There is a good reason why economic data has gained importance over other factors in moving markets. Investors have a well-founded fear: The Fed will raise rates much more to crush inflation, squashing the economy in the process. The outlook for interest rates dominates stock-price moves.
That is reasonable, but the problem is that economic data swing about from month to month, while the market treats them as gospel truth. Any data point has the potential to create huge swings and changes in directions. Overreactions thus become far more likely.
Why are markets so sensitive to data that would normally be regarded as merely an imprecise guide to the economy, to be taken in the context of other reports? Here are three theories:
First, the Fed is watching the data, so we should too. Fed Chairman Jerome Powell has made clear that the Fed is looking at reported figures, rather than relying on its models. Not since the early 1990s have interest rates been so influenced by the economic data that come out between Fed meetings. Since interest rates are themselves having an outsize effect on markets, the data thought to be influencing the rates should move prices a lot, too.
Second, liquidity is terrible. A mix of volatile markets and tighter monetary policy has made traders and market makers less willing to take risk, which means prices move more on bursts of buying or selling.
Third, there is a general fear of something breaking thanks to the Fed tightening, which makes everyone much more focused on the short term and much more sensitive to any potential problems. Last week the British government bond market cracked and had to be saved, and unfounded online rumours hammered Credit Suisse’s shares and bonds.
These can only be theories, though, and none is entirely satisfactory. At the very least, though, investors should recognize the inherent unreliability of any given economic report, and the risk of market overreaction. Lollipops are nice, but don’t provide real sustenance.
We trust this communication will provide you an overview of current market conditions, what to expect, how this is likely to influence and impact your investments. Rest assured, despite the volatility, despite the noise, we always keep you informed, we are on top of it, and we understand you!
