Quarterly Investment Update

The everything sell-off resumed in financial markets during Q3. US stocks were among the best performers with an almost 5% drop, while Emerging Markets stocks registered a fall in excess of 11%. The dramatic rise in bond yields continues and is barely registering as a market story, same with the freefall of the EUR. Although commodity prices eased during the quarter inflation still hasn’t shown any appreciable downtrend and so Central Banks around the world are hiking interest rates at record pace. Meanwhile, the US dollar is appreciating against everything, having its best run in 20 years.

The Federal Reserve hiked interest rates twice during the quarter. The central bank made its third 75-basis-point hike in a row on September 21st, confirming that 0.75% is the new 0.25%, which was once the standard increment. With the exception of highly rate-sensitive sectors such as housing, the US economy is faring relatively well as consumer demand is boosted by higher wages and pandemic savings. Retail sales rose at a quicker pace than inflation in August and unemployment is still hovering around record lows. The Federal Reserve vowed to ‘keep at it until the job is done’ and market participants are starting to worry that the combination of higher interest rates and quantitative tightening may lead to market dislocations and eventually a financial crisis.

It's back to the 60s for Europe. Germany is nationalizing Uniper, the country’s largest importer of gas, while France is planning to acquire EDF in full. Countries are trying to shield consumers from spiking energy costs and keep the energy industry afloat as companies are getting squeezed by spiralling costs. Inflation reached 10% in September, a record high. The squeeze in energy supplies is pushing prices up across the board – fuel, food and other products, eroding household spending and hitting industrial production. Although unemployment is at an all-time low at 6.6%, cracks are starting to appear in the Old Continent as factory output recorded its biggest fall since 2020, as the cost of power is hitting manufacturers. The ECB increased borrowing costs by 1.25% in Q3 and interest rates are now at 0.75% and expected to go higher. Although the ECB is raising rates it still lags behind other major Central Banks and this has weighed on the EUR, creating even more headaches to the ECB as the depreciation in the currency raises the prospects for further inflation pressures.

GBP fell 8.3% against the USD and weakened against the EUR while bond yields spiked as market participants weigh the risks of lending large sums of money to the UK government at a time of thin market liquidity, high inflation and high economic uncertainty. Questions on what the BOE’s reaction to the government’s inflationary fiscal plans should be arise, as the central bank is in the midst of an inflation fight. So far, the BOE announced unlimited temporary purchases of long-dated gilts and it remains to be seen whether this will stabilize the market in the medium term. The violent moves in the UK asset markets raise the prospects of a financial crisis both in the UK and worldwide.

Sweden’s Riksbank unveiled its biggest interest rate rise in three decades as it raised interest rates by 1% to 1.75% ,sounding the alarm over sky-high inflation. In August, the inflation rate stood at 9%, the highest in Sweden since 1991. Consumer and business sentiment is very low, while the economy is expected to contract in 2023.

The PBOC is on a mission to support economic growth by easing its monetary policy stance. This is in stark contrast with the Federal Reserve which is trying to hit the brakes hard in a red-hot economy. The policy divergence has sent the Chinese renminbi to a multi-year low and the PBOC is introducing measures to stop renminbi’s weakness. The property sector is still in freefall and the Communist Party is pouring billions in stimulus measures in an effort to shore up confidence. On the trade front, exports came in significantly below expectations in August due to Covid-19 restrictions and a slowing demand from the US and the EU. Imports also missed estimates, a further sign of subdued demand among Chinese consumers.