Market Watch: September 2021

Global financial markets recorded their worst month of the year in September as inflation jitters intensified and expectations mounted that the Federal Reserve would tighten its monetary policy in the following months. Markets also dealt with a myriad of issues such as the persistent COVID-related distortions, Washington’s debt ceiling law, a battle of lawmakers over two major bills, the possibility of tax increases on high-income businesses and individuals, the risk of foreign debt default of Evergrande and the upcoming Fed policy change to begin phasing out asset purchases later this year.

The S&P/TSX Total Return Index was down 2.22% in September as Justin Trudeau was re-elected Prime Minister of Canada for a third term but failed to secure a majority.

The Canadian loonie fell 0.50% against the US dollar, despite a 9.53% increase in crude oil prices. The worries about inflation and Delta coronavirus variant threat over the ongoing global economic recovery propelled the safe-haven US dollar to a nine-and-a-half-month high versus key peers.

In August, Canada’s labor market continued to improve. Employment increased by 90,000, putting the labor market within 156,000 jobs of its pre-pandemic level in February 2020. The services sector saw the most gains as governments eased pandemic restrictions, allowing firms to reopen and expand capacity. The unemployment rate fell to 7.1 percent, a considerable decrease from the pandemic peak of 13.7 percent in May 2020, but still more than 1.0 percent higher than levels seen in early 2020.

The consumer price index in Canada rose 4.1% year-on-year in August. This is the sixth consecutive monthly increase above the Bank of Canada’s (BoC) 1% to 3% target range, and the highest level since 2003. Given expectations of inflation and the ongoing economic recovery, Bank of Canada Governor Tiff Macklem believes the recent trend of above-target inflation is likely temporary.

Furthermore, the central bank kept its benchmark overnight interest rate at 0.25 percent and vowed not to raise it until the harm caused by the COVID-19 virus was fully reversed. The central bank also stated that it would continue to buy C$2 billion in Canadian government bonds each week while noting that the pace of asset purchases will slow as the recovery progresses.

The S&P 500 Total Return Index ended down 4.76% in September, following a difficult month. The third quarter was marked by concerns over COVID-19, inflation fears, and budget bickering in Washington. As a result, the S&P 500 suffered its worst month since the COVID-19 outbreak.

Economic activity in the second quarter was somewhat greater than predicted, as consumer spending remained solid. The US economy expanded at a 6.7 percent in the second quarter, better than the forecast of 6.6 percent, as the country received a considerable boost in the spring from government stimulus payments and coronavirus vaccinations allowing companies to reopen.

the economy added 235,000 jobs last month, trailing all forecasts, after an upwardly revised 1.05 million gain in July. The unemployment rate fell to 5.2% from 5.4%. The deceleration in hiring reflects both growing fears about the highly contagious delta variant and difficulties filling vacant positions.

Regarding monetary policy, The Federal Reserve kept its key rate near zero while stating rate hikes may come earlier than anticipated. According to their forecasts, they are now assuming that the US interest rates will rise to 1.75 percent by the end of 2024. The Fed also stated that it would begin slowing the pace of its asset purchases shortly, most likely in November.

The MSCI ACWI Ex-US Total Return Index finished down 3.14% in September as China’s real estate developer Evergrande debt woes continue to roil global equity markets.

China’s bad news piled in one after another. First, China’s decision to convert private tutoring firms into non-profit organizations alarmed some investors, who began to wonder whether similar moves may be extended to other industries. Then, further technology-related rules were announced, including prohibiting youth from playing computer games for more than three hours per week. Finally, investors had to deal with concerns about a prominent Chinese property developer’s possible default.

In the UK, labor market continued to improve. The unemployment rate decreased to 4.6 percent in the three months to July, down from 4.7 percent, while the number of payrolled employees has returned to pre-pandemic levels, despite GDP remaining much lower. Moreover, the Bank of England took a hawkish move, suggesting that interest rates may be hiked before the end of the year.

In the eurozone, the preliminary September services and manufacturing IHS Markit Purchasing Managers’ Indexes (PMIs) fell, indicating less optimism as the economy’s first catch-up phase ends and activity returns to normal. The services PMI fell from 59.0 to 56.3, while the manufacturing PMI fell from 61.4 to 58.7, both data points falling short of consensus forecasts. Supply interruptions hampered not just manufacturing, but also services activities. Nonetheless, despite the slowdown since the top, the IHS Markit Composite PMI remained in expansionary zone, at 56.1.

The European Central Bank (ECB) announced a slowdown in the pace of its asset purchases but, unlike the Fed, was quick to emphasize it wouldn’t reduce its purchases to zero. As various central banks are planning ahead to raise interest rates, the ECB appears to be falling behind.

The Portfolio Management Team