Nov 21

International Markets Review

Orion Investment Managers Managing Director and Chief Investment Officer, Adrian Meager, writes on International markets.

World markets trended softer for the second month in a row, with concerns resurfaced around the outlook for global economies amidst continued high interest rates, which dented optimism.

Markets in the US were blighted by two major concerns, namely, a selloff in treasuries which saw a spike in yields, as well as concerns regarding a potential government shutdown. The threatened shutdown was averted as the Senate voted on a last-minute spending bill to allow government to operate for another 45 days. With recession fears still weighing on the US economy, the Dow closed down 3.5% for the month, the Nasdaq lower by almost 6%, and the S&P 500 almost 5% lower.

On the economic front, headline inflation as measured by the Consumer Price Index (CPI), increased by 3.7% for August contrasted with a slowing to 3.2% in July, while core CPI, which excludes the highly erratic food and energy components, printed at 4.3% in August, vs the July print of 4.7%. Personal Consumption Expenditure (PCE), which also excludes food
and energy, printed below consensus estimates of 3.9% for August, versus the revised 4.3% number of July. At its September meeting, the US Federal Reserve held rates steady at 5.5%, which is only the second time since the March
2022 meeting that there has been no hike. The Fed’s ‘dot plot’ foresees one more rate hike in 2023, and only an easing of 0.50% in 2024, which is lower than the previous forecast of 1%. It is envisaged that core PCE will only hit the 2% target in 2026, despite the scenario of continued high rates. As a result, there is a reticence among policymakers for an earlier market repricing and easing of financial conditions before the inflation monster is fully tamed.

European markets ended the month mixed, with inflation in the Eurozone printing at 5.2% for August vs July’s 5.3%. Unlike the Fed and BOE, the European Central Bank hiked rates by 0.25% to 4.5%, indicating that current rates should contribute significantly to bringing inflation back to the 2% target, and signalling that any future decisions will be dependent on the data.

The UK market ended September in positive territory, with the Bank of England keeping rates on hold (in line with the Fed) at 5.25%, despite a close vote outcome of five votes in favour of a hold and four votes in favour of a hike. This is the first time since 2021 that ‘The Old Lady of Threadneedle Street’ did not increase the cost of borrowing to the consumer. This move was premised on August inflation cooling to 6.7% vs the July reading of 6.8%, and core inflation (excluding energy and food), coming in at 6.2% for August vs the July reading of 6.9%. With inflation at 6.7%, the anticipation by the BoE is for inflation to drop to its 2% target by the second quarter of 2025, with forecasts for the first rate cut pointing to the third quarter of 2024 at the earliest.

Germany, Europe’s largest economy, and France ended the month on the back foot, with the Dax lower by 3.5% and the CAC by 2.5% respectively. In Germany, inflation for September reached its lowest level since the start of the Ukrainian conflict, coming in at 4.3% for the month, vs the August number of 6.1%, while core inflation declined to 4.6% vs the August print of 5.5%. Inflation in France printed unchanged in September.

Asian markets also declined in September as concerns about the strength of the Chinese economic recovery persisted.

Both the Hang Seng and Shanghai Composite were affected by the continued sell off by foreign investors, especially in the financial and consumption areas, and thus ended lower by 3.1% and 0.3% for the month respectively. There were some shoots of positivity, however, as the official PMI numbers for September moved back into expansion territory, coming in at 50.2 vs the August print of 49.7, and the non-manufacturing PMI numbers printing at 51.7 vs 51 in August. Note that a reading above 50 indicates expansion, and one below denotes contraction.

The Japanese market also trended lower by 2.3% for the month, as CPI remained at 3.1% in
August, unchanged from the July reading, but still above the Bank of Japan’s (BoJ) 2% target. Like their US and UK counterparts, the BoJ opted to leave rates unchanged, highlighting a high level of uncertainty regarding the domestic and global growth outlook.