General | October 6, 2022
Volatility gripped the market in September as central banks’ unwavering resolve to fight inflation challenged the health of the global economy and spilled over into financial markets. All major financial assets generated negative results last month, with the exception of the US dollar.
Global equity markets experienced notable weakness in September and capped their third consecutive quarterly decline, the longest stretch of losses since the global financial crisis. The MSCI All Country World fell almost 10% last month. The S&P 500 (-9.3%) posted its worst monthly loss since the start of the pandemic in March 2020 and retraced its summer gain, with the growth-oriented benchmark particularly affected by the latest rally in yields bondholders. The S&P/TSX also fell slightly, albeit more modestly (-4.6%). Overseas, European equities continued to suffer from the spiraling energy crisis, with the MSCI EAFE losing -9.7%, while emerging market equities (-11.9%) fell the most as fears of a global recession intensified and the greenback soared.
Fixed income markets also generated negative results after several major central banks stepped up their efforts to curb inflation. It should be noted that the Federal Reserve, Bank of Canada and European Central Bank all raised interest rates by 75 basis points last month and signaled that further tightening was imminent. The closely watched US core PCE inflation report showed monthly and yearly acceleration, reinforcing the Fed’s hawkish stance. The yield on 2-year Treasury bills jumped 79 basis points to 4.28% in September, while the yield on 10-year Treasury bills rose 64 basis points to 3.83%. The upward movement in Canadian bond yields was less severe after the latest CPI report showed that headline inflation and core inflation declined slightly. The 2-year Government of Canada bond yield rose 14 basis points to 3.79%, while the 10-year yield rose 5 basis points to 3.17%. Consequently, the FTSE Canada Bond Universe lost only -0.5% in September, while the Barclays US Aggregate lost -4.3%.
The US dollar hit a new high in September as investors flocked to the safe haven as market sentiment deteriorated, while the Fed’s hawkish bias also boosted the greenback. The Canadian dollar, euro, pound and Japanese yen all depreciated against the US dollar last month.
Finally, the strengthening US dollar and deteriorating global demand outlook weighed on commodity markets. Crude prices crashed into bear market terrain and fell to levels last seen before Russia’s invasion of Ukraine, while copper fell amid lingering demand concerns Chinese. Gold also slid lower as the double whammy of higher Treasury yields and a stronger greenback dampened the precious metal’s appeal.