Global Asset Allocation Team Market Update – October 2022
Volatility gripped the marketplace in September, as central banks’ unwavering resolve to combat inflation brought into question the health of the global economy and rippled through financial markets. All major financial assets generated negative results last month, with the exception of the U.S. dollar.
Global equity markets saw some notable weakness in September and capped their third straight quarterly decline, the longest stretch of losses since the Global Financial Crisis. The MSCI All Country World slumped nearly 10% last month. The S&P 500 (-9.3%) posted its worst monthly loss since the onset of the pandemic in March 2020 and retraced its summer gain, with the growth-oriented benchmark hit particularly hard by the latest back-up in bond yields. The S&P/TSX also edged lower, albeit more modestly (-4.6%). Looking abroad, European stocks continued to suffer from the spiraling energy crisis, with the MSCI EAFE losing -9.7%, while emerging market equities (-11.9%) sunk by the most as fears over a global recession intensified and the greenback soared.
Fixed income markets also generated negative results after several major central banks stepped-up their efforts to quell inflation. Of note, the Federal Reserve, Bank of Canada, and European Central Bank all raised interest rates by 75 basis points last month and signaled that further tightening was imminent. The closely-monitored U.S. core PCE inflation report showed both a monthly and annual acceleration, solidifying the Fed’s hawkish stance. The 2 year treasury yield spiked by 79 basis points to 4.28% in September, while the 10 year treasury yield rose by 64 basis points to 3.83%. The upward move in Canadian bond yields was less severe following the latest CPI report that showed both headline and core inflation edging lower. The 2 year Government of Canada bond yield rose 14 basis points to 3.79%, while the 10 year yield rose by 5 basis points to 3.17%. Consequently, the FTSE Canada Bond Universe lost only -0.5% in September, while the Barclays U.S. Aggregate was down -4.3%.
The U.S. dollar hit a fresh high in September as investors flocked to the safe haven as the mood in the market soured, while the Fed’s hawkish-leaning bias also boosted the greeenback. The Canadian Dollar, Euro, Pound, and Japanese Yen all depreciated versus the U.S. dollar last month.
Finally, the stronger U.S. dollar and a deteriorating global demand outlook weighed on commodity markets. Crude prices slumped into bear market terrain and fell to levels last seen prior to Russia’s invasion of Ukraine, while copper retreated amid unrelenting concerns about Chinese demand. Gold also slid lower as the double-whammy from both higher treasury yields and a firming greenback dampened the appeal of the precious metal.