Global equity markets rebounded after last month’s rout. Inflation, monetary tightening and supply chain woes continue to be a drag on economic growth in the short term, but a strong start to the Q3 earnings season made investors look beyond all that. Equity volatility declined significantly over the month. The US outperformed global markets by a significant margin due to its high exposure to growth stocks. Returns for emerging market equities were positive but lower than for developed equities as good performance in China was offset by weaker performance across the rest of Asia and Brazil. Credit spreads did not change much. The US dollar weakened in a slightly more risk on environment and energy prices continued to soar.
Forward-looking purchasing manager indices (‘PMI’) held up in most regions and actually exceeded expectations in the US and UK. Strength in services offset persistent weakness in manufacturing which was more visible in declining industrial production for the US and Germany.
Manufacturing weakness was driven by supply chain disruptions, both on the components and logistics side. The logjam in Californian ports has been getting worse. Efforts to extend the hours of these ports are not necessarily going to solve the problem of truck driver shortages which is exacerbated by environmental and labor regulations on the state level.
Limited supply has kept inflation close to the peaks reached earlier this year in most major developed economies. Emerging markets have also seen notably higher inflation. Developed market central banks have therefore continued to prime the market for monetary tightening coming earlier than expected at the beginning of the year, while some emerging market central banks have already entered their hiking cycle.
Fiscal policy is also scaling back its ambitions. In the US, Democrats are nearing an agreement that would allow them to pass both the budget and infrastructure packages, after significantly scaling them back. There were no major surprises in the UK budget where the focus was on fiscal responsibility.
10-year yields continued to rise as tighter monetary policy was priced in but to a lesser degree than in September. There was little movement in credit spreads.
Mercer's Monthly Market Monitor provides an overview of global financial markets.
In this issue we cover: