September 2022 left few portfolios unscathed in a major drawdown that affected all asset classes in public markets. Equities sold off across the board, bringing major indices back into bear market territory. Fears of more monetary policy tightening appear to be the primary cause, as inflation continued to surprise to the upside in most countries. The sell-off was broad based across sectors and regions with emerging market equities faring worse than developed markets. US dollar strength weighed on foreign market returns for US investors. Equity market volatility returned to the heights seen in early summer.
Bond returns were also negative after another meaningful rise in yields as central banks in most regions continued to tighten monetary policy. The UK bond market suffered a major sell-off after investors deemed an extraordinary budget fiscally unsound. This forced the Bank of England to launch a temporary bond purchase program targeting the longer end of the curve after soaring yields led to a scramble for collateral by UK pension plans to meet margin calls from leveraged fund vehicles used for liability hedging. Leveraged debt markets were also caught in the risk-off environment with high yield spreads rising substantially over the month.
Commodities indices were not spared from the drawdown this time as the deteriorating economic outlook superseded supply concerns. Oil fell substantially over the month which brought some relief to consumers, although oil has rebounded in early October on the potential for an OPEC production cut.
US inflation for August was a major driver of negative market sentiment. Even as CPI continued to decline from its previous peak, core inflation gained pace, suggesting that inflation momentum remains strong across all sectors. Investors interpreted this as a sign that monetary tightening is likely to continue over the near-term.
Geopolitics remained in the forefront. Russia suffered major defeats in Ukraine, announced a partial military mobilization and continued to suggest that further escalation was possible. The Nord Stream pipelines also appear to have been sabotaged. Elections in Italy and Brazil have brought additional uncertainty.
The US dollar rose against all major developed and emerging market currencies, posting low- to mid-single digit gains against sterling, euro, yen, Australian dollar and Chinese renminbi, among others. This prompted Japan and Korea to intervene in foreign exchange markets to stem the decline of their currencies. The strong dollar is contributing to a global liquidity squeeze that is already having a major impact on financial stability in emerging and frontier economies.
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Source: Bloomberg; as of 8/31/22