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September 2021 Monthly Market Commentary: Increased market volatility fueled by higher energy prices and geopolitical tensions

13 October 2021

MARKET CONTEXT: Increased market volatility fueled by higher energy prices and geopolitical tensions  

Global Macro:  The US economy only added 194k jobs in September, the lowest in 2021 and below market expectations of 500k. Meanwhile, commodity prices surged, with oil prices up 10% in September and 55% in 2021, and natural gas prices have doubled year to date, as demand for energy rebounded sharply. Inflation may stay longer than expected, which is likely to affect consumer spending. In China, Evergrande’s partial default on its US$90bn debt and the ongoing regulatory tightening on the tech and education sectors have temporarily scared foreign investors away from Chinese assets. We believe those economic headwinds will be conducive to global market volatility in the coming months. Nonetheless, central banks continue to be accommodative, which, combined with strong economic growth, will support global equity markets in the longer term.  

Financial Markets: 

The 10-year US yield rose from 1.30% to 1.52% and the 10-year German Bund yield increased from -0.38% to -0.20%, while the 10-year Chinese government bond yield remained unchanged at 2.80%. Based on our econometric model, over the next 12 months, we expect to see the 10-year US Treasury yield within the [1.2%; 2.0%] range, the 10-year German Bund yield within [-0.4%; +0.2%], and the 10-year Chinese government bond yield within [2.8%; 3.2%]. On the equity side, stock markets experienced a sell-off in September, driven by rising bond yields and investor concerns over faster-than-expected central bank tightening, higher inflation, and moderating growth. Energy shortages and the US debt ceiling stalemate in the Senate also undermined market sentiment. On the currency side, we note a pause in the US dollar secular bearish trend. The USD rose in September and in 2021 against most major and emerging market currencies (e.g. EUR, GBP, JPY, and BRL), with the exception of the RMB as the USDRMB has remained below its 6.50 resistance level over the past months. The USD benefited from its safe-haven status as economic headwinds accumulated ahead of Q4.

Equity: Month to date the S&P 500, Euro Stoxx 50, and Hang Seng Index fell 4.6%, 3.5%, and 5.2%, respectively, amid investor concerns about the Delta variant and the global economic recovery. Fixed Income: The 10-year US yield climbed 21bps in September to 1.52%, fueled by market anticipations of the Fed’s future tapering move; as a result, Emerging Market government bonds (-2.7% in USD; -3.5% in local currencies) and High-yield corporate bonds (-0.3% in USD; -1.7% in EUR) all went down. Currencies: The greenback continued to appreciate against most major currencies ahead of the Fed’s tightening measures: EUR -1.9%, AUD -1.6%; CNY +0.2%; safe-haven JPY -1.1%, CHF -1.7%. Commodities: Gold lost 3.3% in September against the backdrop of a stronger US dollar; oil prices jumped 9.3% amid supply fears.