Global Asset Allocation Team Market Update – October 2023
The third quarter wrapped up on a somber note. Volatility resurfaced and both stock and bond markets retreated in September as the “higher-for-longer” interest rate narrative took hold following data that showed ongoing economic resilience in the United States that has translated into elevated and persistent inflation. The upwardly revised forecasts for interest rates in the Federal Reserve’s latest Summary of Economic Projections corroborated that message, which in turn prompted investors to recalibrate their interest rate expectations in line with that view.
Global equity markets ended the month lower as the sharp backup in global bond yields sapped risk appetite and weighed on stock market valuations. The MSCI All Country World slid by 4.3% in September. Regionally speaking, all major benchmarks we track generated losses last month. The S&P 500 (-4.9%) led the monthly decline given steep losses in the heavyweight consumer discretionary (-6.0%) and technology (-6.9%) sectors, as rising bond yields weighed on these more expensive, longer duration corners of the market. Elsewhere, both the S&P/TSX and the MSCI EAFE declined by 3.7%, while the MSCI gauge of emerging market stocks slipped by 2.8%.
The selloff in global fixed income markets intensified in September as traders braced for an extended period of elevated interest rates – while the sharp rise in oil prices stoked fears of a reacceleration in inflation and pushed bond yields higher across the globe. Yield curves steepened in a bearish fashion, with the 10 year treasury yield soaring to a new cyclical high of 4.57% as investors demanded greater compensation to hold long-dated debt with rates set to remain higher for longer, while concerns about Treasury issuance to address ballooning budget deficits also put upward pressure on longer-term bond yields. The rout in treasury markets rippled across the globe, with German 10-year yields reaching the highest since 2011 – while the Canadian bond market also got caught up in the selloff and sent the 10 year Government of Canada bond yield to a 16-year high. The Barclays US Aggregate Bond Index lost 2.5% in September, while the FTSE Canada Bond Universe shed 2.6%.
In currency markets, the US dollar advanced on the prospect for interest rates to remain elevated for a prolonged period, while relative resilience of the US economy also buttressed the dollar. The greenback was stronger against all of its major trading peers, with the Canadian dollar (-0.5%), euro (-2.5%), pound (-3.7%), and yen (-2.6%) all depreciating last month.
In commodity markets, crude oil surged higher in September and capped its largest quarterly rally since the initial jolt from the war in Ukraine as lower Russian fuel exports threatened to further tighten a market wrestling with OPEC+ production cuts and critically low US stockpiles. Gold tumbled to its lowest level since March as the “higher-for-longer” narrative gained ground and pushed treasury yields to multi-year highs, dampening the appeal of the non-interest bearing metal.