Sabco® Investment's Monthly Market Report - September, 2021

Sabco® Investment's Monthly Market Report - September, 2021

In September, investor sentiment took a hit as concerns about higher inflation and the situation in China dampened market enthusiasm. However, Japanese equities stood out as a positive outlier. The US dollar continued its upward trend.

After a seven-month streak of rising prices, stock exchanges experienced a decline in September, erasing much of the gains from the previous months. Investors grew slightly alarmed about the possibility of inflation persisting longer than anticipated, driven by higher energy prices and ongoing supply issues. This raised concerns about the impact on the accommodative monetary policies implemented by central banks. Additionally, complications surrounding Chinese property developer Evergrande added pressure to the markets, as the company's financial troubles posed a risk of contagion to other real estate companies and the financial sector. On a positive note, Japanese equities performed well after a period of underperformance, as unpopular Prime Minister Suga dropped out of the November parliamentary elections, raising hopes for accelerated structural reforms and fiscal stimulus measures under new leadership.

In both Europe and the US, value stocks outperformed growth stocks in September, partially offsetting their underperformance in previous months. This coincided with the rising trend of bond yields.

Inflation fears took centre-stage in September after concerns about economic growth had pushed yields lower in recent months. US 10-year yields increased by over 20 basis points, surpassing 1.5%. German yields followed suit, reaching levels not seen since June. While recent inflation numbers were influenced by baseline effects compared to the low figures during the pandemic, inflation is expected to remain somewhat elevated due to supply constraints, rising commodity prices, and energy prices. The rise in German nominal interest rates was mainly driven by inflation expectations, while in the US, it was primarily influenced by expectations regarding monetary policy. Central banks in the US and Europe are expected to scale back their bond purchases in the coming months.

Corporate bond spreads narrowed significantly for both Investment Grade and High Yield issuers, returning to levels close to the lowest of the year. Strong second-quarter corporate results supported corporate bond prices, and European companies generally have healthy balance sheets.

Federal Reserve Chairman Powell signaled the potential start of tapering the bond purchase program in November, with a complete wind-down expected by mid-next year. However, a debt ceiling crisis in late October could potentially delay these plans. The new median dot-plot forecast indicated that policy rates could rise sooner than expected, with FOMC members divided on the possibility of an initial interest rate increase in 2022. The European Central Bank announced a reduction in accelerated bond purchases, with a decision expected in December regarding the end of the PEPP program.

The Norwegian central bank became the first Western economy to raise interest rates since the beginning of the pandemic, citing the country's healthy economic conditions. Several emerging market countries, including Brazil and Paraguay, also raised interest rates due to rising inflation.

The US dollar strengthened further in September, reaching levels against the euro not seen in over a year. The Federal Reserve's relatively stricter stance and uncertainties surrounding the Chinese property sector contributed to the dollar's gains. The Norwegian krone also appreciated against the euro, supported by higher oil prices and the central bank's interest rate hike. Emerging market currencies, including the Brazilian real and Turkish lira, faced downturns against the euro. Despite the interest rate hike in Brazil, inflation remained high, while the Turkish central bank unexpectedly lowered interest rates despite rising inflation.

Energy prices saw an increase in September, with Brent oil prices reaching $80 per barrel for the first time in nearly three years. The recovery in demand following economic reopenings and increased demand for substitution from the electricity sector, driven by higher gas prices in Europe due to supply disruptions in Russia, contributed to the rise. Gas prices were also pushed up by speculative purchases in anticipation of winter in the northern hemisphere.

Industrial metals had a mixed performance in September. Iron ore declined significantly due to anticipated slowdowns in the construction sector following the Evergrande situation and China's efforts to reduce emissions. Metals like palladium and platinum were also affected by reduced demand from the automotive sector, which faced production constraints due to semiconductor shortages. However, copper and aluminium held up well or even advanced.

Gold prices decreased in September, influenced by rising bond yields and a stronger dollar. This placed the price at the lower end of its range, where it has been fluctuating since the summer.