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Last week, the MSCI All Country World Index (MSCI ACWI) retreated -2.7% (11.5% YTD).
In the US, the S&P 500 Index closed with a loss of -2.9% (13.9% YTD) as investors reacted to hawkish forecasts from the Fed’s latest meeting and rising US Treasury yields. The S&P 500 Index recorded its largest one-day loss in six months on Thursday on its way to a third-straight losing week.
In addition to concerns about higher interest rates, worries about the impact of the United Auto Workers’ strike and the potential for a US government shutdown may have also weighed on markets. Meanwhile, selling could have been exacerbated by tax-loss harvesting as fiscal year-end approached for some investors.
Growth stocks fared worse than value stocks, while large-cap shares outperformed small-caps. The Russell 1000 Growth Index returned -3.4% (25.3% YTD), the Russell 1000 Value Index -2.6% (2.7% YTD) and the Russell 2000 Index -3.8% (1.9% YTD). Over the week, the technology-heavy Nasdaq Composite fell -3.6% (27.0% YTD).
In Europe, the MSCI Europe ex UK Index decreased -2.0% (9.9% YTD) as central banks signalled that interest rates will stay high for some time to come. Higher oil prices and poor business activity data also clouded the economic outlook. Major country stock indexes fell. Germany’s DAX Index lost -2.1% (11.7% YTD), France’s CAC 40 Index dropped -2.5% (14.2% YTD) and Italy’s FTSE MIB Index slipped -1.0% (25.4% YTD). Switzerland’s SMI Index moved down -1.5% (5.9% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.07 for EUR.
In the UK, the FTSE 100 Index retreated -0.4% (6.2% YTD), supported by a depreciation of the British pound versus the US dollar. The pound ended the week at USD 1.22 for GBP, down from 1.24. A weaker UK currency helps to bolster the index, which includes many multinationals with overseas revenues. The more domestically focused FTSE 250 Index was down -0.9% (1.2% YTD).
Japan’s stock markets fell over the week. The Nikkei 225 Index dropped -3.4% (25.7% YTD), the broader TOPIX Index decreased -2.1% (27.4% YTD) and the TOPIX Small Index lost -1.3% (21.7% YTD). Sentiment was dampened by the US Fed signalling that it planned to keep interest rates higher for longer to combat persistent inflation. In contrast, the BoJ matched expectations of no change to its monetary policy, dashing hopes that the central bank would hint at an exit from negative interest rates.
Continued monetary policy divergence between the hawkish Fed and the dovish BoJ weighed on the yen, which weakened to JPY 148.4 against the US dollar, from JPY 147.9 the previous week. As speculation about potential intervention in the foreign exchange markets to prop up the yen continued, Finance Minister Shunichi Suzuki said that the government would respond to excessive currency volatility without ruling out any options. In his view, the operations last year to buy yen and sell the US dollar had been effective, to a certain degree.
In Australia, the S&P ASX 200 Index dropped -2.9% (5.3% YTD) as a result of the hawkish tone from both the Fed and the RBA and continued weakness in China equity markets. Australian government bond yields shifted notably higher with the curve staying largely unchanged. The Australian dollar remained stable versus the US dollar.
MSCI Emerging Markets Index closed the week down -2.1% (3.3% YTD), with a positive contribution to performance from the stock market of China and a negative contribution from those of Taiwan, India, South Korea and Brazil.
Chinese equities rose as investors grew more optimistic about the country’s economic outlook. The Shanghai Stock Exchange Index gained 0.5% (4.1% YTD) and the blue-chip CSI 300 Index added 0.8% (-1.2% YTD). In Hong Kong, the benchmark Hang Seng Index declined -0.7% (-5.5% YTD).
No major indicators were released in China during the week. However, official data for August released the prior week provided evidence of economic stabilisation in the country. Industrial production, retail sales and lending activity rose more than forecast last month from a year earlier, although fixed-asset investment grew less than expected as the drop in property investment worsened.
In Türkiye, the central bank held its regularly scheduled meeting on Thursday and, as expected, raised its key policy rate, the one-week repo auction rate, from 25.00% to 30.00%. While this is well above the 8.50% level, where it was as recently as May, year-over-year inflation is currently around 60%, so real (inflation-adjusted) interest rates are still well below 0%.
T. Rowe Price sovereign analyst Peter Botoucharov is encouraged by Türkiye’s return – albeit at a measured pace – to a more orthodox monetary policy stance. To build on this progress, he believes that Türkiye needs the lira to be more stable in the foreign exchange (FX) market. This would reduce the attractiveness of FX-protected bank deposits, reduce the pass-through effects of a weak lira to inflation, and limit the government’s fiscal costs due to increased sovereign debt denominated in non-lira currencies.
However, Botoucharov notes that there is still the risk that President Erdogan’s unorthodox policy views – for example, he has openly opined in the past that high interest rates cause high inflation – could resurface. Also, Botoucharov acknowledges that there are still extensive macro prudential regulations in place that are not allowing more normal functioning of the local interest rate markets and the FX market.
In Peru, the central bank began a monetary easing cycle on 14 September, cutting its key policy rate – the reference rate – from 7.75% to 7.50%. This 25bp rate cut was in line with broad expectations, though some had expected policymakers to take no action.
According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the post-meeting statement continued to highlight declining inflation and inflation expectations, with the central bank’s forecast of inflation reaching its 1% to 3% target range by early next year still intact. With regard to economic growth, central bank officials highlighted that the impact of the El Nino weather phenomenon has been worse than expected, even though some leading indicators are turning up a bit. In terms of forward guidance, policymakers said that their rate cut decision “does not necessarily imply a sequence of interest rate reductions” and that the pace of easing would be data dependent. However, Gifford continues to expect incremental rate cuts until the reference rate reaches a neutral stance – neither stimulative nor restrictive.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.3% (1.7% YTD), Bloomberg Global High Yield Index (hedged to USD) -0.6% (6.1% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index -0.6% (2.1% YTD).
The prospect of the Fed keeping short-term rates higher for longer along with healthy economic growth signals helped send longer-term US Treasury yields higher. The 10-year US Treasury yield increased 11bp during the week, up to 4.44% from 4.33% (up 56bp YTD) and reaching a 16-year high. The 2-year yield increased 7bp, up to 5.11% from 5.04% (up 68bp YTD).
Eurozone government bond yields increased after European Central Bank (ECB) officials said another interest rate increase could not be ruled out and after the Fed indicated that rates are likely to remain higher for longer. However, the move moderated later in the week after a surprise decision by the BoE to keep short-term interest rates on hold as well as weak eurozone PMI data. Over the week, the yield on the 10-year German government bund increased 7bp, ending at 2.74% from 2.67% (up 17bp YTD).
UK gilt yields decreased, with more notable moves at the shorter-maturity end of the yield curve. The yield on the 10-year gilt decreased -11bp, to 4.24% from 4.35% (up 58bp YTD).
In the US investment-grade corporate bond market, spreads (yield premiums relative to Treasuries) remained relatively stable despite the risk-off environment in the equity market. Meanwhile, the primary market for high yield bonds remained busy, with more deals expected amid strong demand for new issues.
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