Guide to the Markets
Trends for the economic scenario and markets.
Check out below the main perspectives for the global economy and markets. Gabriela Santos, Global Markets Strategist, highlights the main themes and concerns that impact investors and their decisions, based on information from Guide to the Markets – Latin America.
Guide to the Markets
A summary of the latest trends in the markets (September 2022)
Following a brutal first few months of the year, global markets recovered mid-year due to some better data on inflation and hopes that the Federal Reserve would be able to turn more patient from here after already raising rates 225 basis points this year. This led to the hope that a “soft landing” in the U.S. (and perhaps global) economy would be possible. This led to a fall in global bond yields, a fall in corporate credit spreads, and a rise in global equities. Unfortunately, this better backdrop didn’t last more than two months and volatility returned at the end of August.
This came after the Fed’s annual policy conference in Jackson Hole, where Chair Powell made clear the central bank remains committed to bringing inflation down and is willing to tolerate some pain in the economy in the process. Crucially, Chair Powell re-enforced expectations that rate hikes are not done yet this year – and that rate cuts next year should be expected. This means that interest rates would end the year at 3.75-4.00% and stay there next year.
As a result, investors adjusted their expectations in the bond market, with yields moving higher once again by nearly 50bps. This led to renewed volatility in the stock market as well, as investors lowered the odds of a “soft landing” of the economy and raise the odds of a recession starting over the next year. This led to a fall in the S&P 500 of -3.5%, led especially by more interest rate sensitive sectors like technology, down nearly 6%.
Globally, the market moves were similar as investors worried about an energy crisis in Europe (with European natural gas prices surging nearly 40%) and a muted re-acceleration in China due to low confidence. As a result, investors searched for the safety of U.S. assets and this flight to quality led to an even stronger dollar, up 3% during the month. September will be a very important (and potentially volatile) month for global markets as investors re-assess 3 main questions:
1. Will the Fed raise rates another 75bps at the end of the month and really keep interest rates near 4% next year? The August inflation report will be important to watch.
2. Can Europe avoid energy rationing? The return of natural gas flows from Russia to Europe after maintenance of a pipeline will be key.
3. Can China inject confidence back into its economy? Any announcements about more fiscal stimulus will be important.
Expect volatility to continue in the bond and stock market for a little while longer, while investors work through these issues and how economic and earnings growth respond from here. As usual, the markets will find a bottom and start their recovery way before an actual global recession is confirmed. In fact, looking forwards there is plenty of room for optimism about returns next year and beyond. Valuations are cheaper, yields are higher so potential returns are much better today than on January 1st. Investors just need to stay invested through the last remaining tough part, focusing on active management to help them do so.
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