September saw developed market (DM) equities record their worst month since March 2020, when the pandemic hit (MSCI World -4.1% MoM), as numerous events combined to rattle global markets. In the US, 10-year government bond yields jumped 0.2% to end the month at 1.5%, with the US Federal (Fed) Open Market Committee (FOMC) members seemingly ready to start tapering quantitative easing (QE) before year-end, with the intention of no longer growing the Fed balance sheet after mid-2022. The latest forecasts from FOMC members also revealed that the majority of members thought it would be appropriate to start increasing US rates in 2022, a more hawkish stance than they held three months earlier.
Markets were also rattled by estimates from US Treasury staff that emergency measures currently in place to avoid breaching the US debt ceiling would be exhausted towards the end of October, causing the US to default on its debt if Congress is unable to approve an increase to the debt ceiling. Late in the month, Congress agreed on a temporary suspension of the debt ceiling to December to allow for more time to agree on a more permanent solution. In China, the world’s largest property developer, Evergrande, saw its share price fall 33% (leaving it down 80% over the past 6 months) as it appeared increasingly likely that it would default on its debt. The company owns c. 1,300 projects in 280 Chinese cities, and it has taken c. US$200mn in deposits from c. 1.5mn Chinese homebuyers, who are still waiting on their homes to be built. The company’s US$300bn debt load appears very unlikely to be repaid in full. Investors were scrambling to assess the implication for other companies in the sector and whether stress in the sector could spill over to create systemic risk for the world’s second-largest economy.
Growth stocks were particularly impacted by higher rates and heightened risk aversion, with the Nasdaq 100 amongst the worst-performing indices in September (-5.7% MoM). The only S&P 500 sector to end the month higher was the energy sector (+9.4% MoM) as a global shortage of natural gas, heading into the Northern Hemisphere winter, saw natural gas prices spike 33% MoM to leave them up over 100% YTD. The search for alternative sources of energy helped drive crude oil higher (+8% MoM) just as hurricanes were pressuring supply in the Gulf of Mexico.
Industrial metals fared significantly worse, with iron ore (-24% MoM) impacted by concerns around a slowdown in construction activity in China. Risk aversion and higher US yields helped the US dollar end the month stronger against most currencies (Dollar Index +1.7% MoM). China, and Brazil (where inflation is approaching double digits and a fractious political environment minimises the prospects of improved fiscal discipline) dragged emerging markets (EMs) lower (MSCI EM -4% MoM), despite a positive performance from Indian and Russian stock markets, both of which were helped by outsized exposure to energy companies.