Global Asset Allocation Team Market Update – September 2023
Extreme optimism throughout 2023 gave way to growing skepticism in August as investors contemplated the trajectory for monetary policy. Volatility resurfaced and most asset classes ended the month lower as the higher-for-longer interest rate narrative took hold following data that showed ongoing resilience in the US economy. Meanwhile, Chair Powell struck a balanced tone in his Jackson Hole appearance. He repeated that officials are “prepared to raise rates further if appropriate” but stressed that the central bank would “proceed carefully” and would be guided by the economic data. On the latter, the risk-off mood subsided towards month-end after a series of softer US economic data revived wagers that the Federal Reserve is done raising rates, which buttressed both stock and bond markets towards month-end and tempered some of their earlier losses.
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 3.0% in August. Regionally speaking, all major benchmarks we track generated losses last month. The S&P/TSX (-1.6%) outperformed its global peers given a solid gain in the heavyweight energy sector. The S&P 500 wasn’t far behind and retreated 1.8%, marking its first monthly decline since February. Elsewhere, the MSCI EAFE fell by 4.1%, while the MSCI gauge of emerging market stocks tumbled by 6.4%, led by China (-9.0%) as ongoing signs of a deteriorating economy were met with a lacklustre policy response.
Fixed income markets failed to act as a safe haven and also generated negative results in August. Global bond yields extended their upward climb as robust economic data challenged the view that central banks rates are peaking. Treasuries were a key driver of the global debt selloff as ongoing resilience in the US economy defied expectations that cumulative rate hikes would bring on a recession. As the macroeconomic narrative shifted away from recession, investor sentiment also swung back in favor of rates needing to stay higher for longer. Treasuries also came under pressure on expectations the US government will issue more bonds to plug widening federal deficits. On the latter, the surprise decision by Fitch Ratings to strip the United States of its AAA credit ranking in early August put a spotlight on the country’s booming fiscal deficits. For the month, the FTSE Canada Bond Universe slipped by 0.2%, while the Barclays US Aggregate Bond Index shed 0.6%.
The US dollar advanced as investors braced for an environment of higher interest rates for longer than previously thought. The greenback was stronger against all of its major trading peers, with the Canadian dollar (-2.4%), euro (-1.4%), pound (-1.3%), and yen (-2.2%) all depreciating last month.
In commodity markets, crude oil managed to buck the global trend and gained for a third straight month after OPEC+ heavyweights Saudi Arabia and Russia extended production cuts and as US stockpiles sank, providing further evidence of a tightening physical market. Gold retreated on the back of surging US treasury yields that dampened the appeal of non-interest-bearing bullion – while copper stumbled lower amid fears about the outlook for growth and demand in top-consuming China.