September – Yielding month
The stock market anomaly known as the “September effect” was proven right this year. Markets were down in most major countries and nine out of eleven sectors of the S&P500 receded. In fact, the two sectors that performed well, technology and communication, explain the positive performance of the Nasdaq index.
There is a lot to say about the month, but what stole the headlines is probably the continuing and accelerating trend of yields going up. We will touch on the subject in more detail in the graph of the month section, but in a nutshell, the US Federal Reserve hiking rates this month spilled over the rest of the world, triggering sovereign yields going up pretty much everywhere, even in the forever-zero-interest-rate Switzerland. This is a source of major worry if this goes on, because yields and equity performance are typically negatively correlated, and at some point it just becomes unsustainable for borrowers.
Inflation readings, though the August figure was stable (+3.4%), remain a data point everyone is looking at. As current inflation arises from energy prices, in particular an oil supply shortage, and with demand highly inelastic, bringing it down is not something a single rate hike can solve. Only a peaceful outcome to the conflict in the Middle East will be effective, though looking at the stalled talks around the recent UN assembly, is not for the foreseeable future. We are not alarmed by the current level, as wages growth is at a five-year low, thereby avoiding the vicious circle we could otherwise find ourselves in.
European equities lost ground, ending a 6-month upward streak, mostly as a result of yields going up and inflation fears, after it went up from 3% to 3.2% in August, despite the ECB having raised rates twice over the summer and thereby increasing the prospect of further hikes. But as we wrote further up, this is not the type of inflation a central bank can fight, unless it is willing to completely kill growth. Encouragingly, European PMIs came out at 53.1, the highest level in three and a half years. We can only hope that this translates into higher GDP growth for a region growing in slow motion.
Asia, besides Japan, which was helped by the performance of tech companies and a weaker yen, suffered from the same problems as the rest of the world, namely high energy prices and increasing yields. China completely wiped out the year’s gain and more, despite factory activity rebound, strong tech performance and an economic stimulus.
House View
Given the good market performance this year, we continue to have products autocalled and we take advantage of short-lived volatility events to issue our usual structured products with downside protection. A wise choice, we believe, when markets are at an all-time high despite all the macro and geopolitical headwinds.
Chart of the month
We find the current trend in government debt yields, still considered “risk-free” for many, to be alarming. We have been saying it for months, and the rather violent moves observed support our thesis.
The average US government debt outstanding has a maturity of about 6 years. Therefore, below, in green, we are looking at the 6-year yield curve, which now sits at 5.58%, a level not seen in almost 20 years. Even worse, the 30-year yield curve is flirting with the 7% level.
In white is the total outstanding US debt, which, this month, peaked at the 40 trillion mark.
What this means, using simplified math, is that every year, it will cost the US government over 2.2 trillion just to service the debt.
Other countries are experiencing the same move. The UK 30-year yield touched 6%, a level not seen this millennia. Japan is seeing it’s yields normalizing at brutal speed, going from 3.2% to 5% in less than a year.
As mentioned last month, with lending becoming scarce due to the massive debt build up from hyperscalers, investors are expecting higher returns and rethinking the risk-free nature of many governments, especially in a raising inflation environment.
Source: Bloomberg
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