SEPTEMBER 2 0 2 3 • I S S U E 33

September Markets

The stocks and bonds markets faced a decline in September with stocks falling deeper than bonds. The market was volatile, and uncertainties were high as investors feared risks due to rising hawkish outlooks from central banks globally. There were also inflation concerns and general economic uncertainties. The MSCI Emerging Market Total Returns fell by 2.51% while the MSCI EAFE Total Returns, which measures developed market returns outside the US and Canada, fell by 3.37%. Also, the Bloomberg Municipal Bond Index fell by 2.93% while the US Aggregate Bond Index fell by 2.54%

US

The US equity market experienced a decline as the S&P 500 index fell by 4.87%. Bond prices also fell although less severely when compared to the equity market. A yield of 4.59% came about on the 10-year Treasury Bond. This was partly due to the consistency of the Federal Reserve’s higher-for-longer narrative. The Fed's hawkish stance from the last meeting has also left investors fearing another hike before the year runs out. The NASDAQ Composite, which is a weighted index of companies listed on the NASDAQ, also performed poorly, falling by 5.8%. This is the worst monthly performance since December of last year.

Eurozone

The equity market in the Eurozone also experienced dips. The STOXX Europe 600 index fell by 0.14%. There was also a decline in bond prices but not as much as equities. Inflation, recession worries, and other macroeconomic headwinds are the main culprits behind these falls. The European Central Bank continued with its hawkish approach to managing inflation. The rate at which inflation continues makes investors cautious of risky investments as there are strong possibilities of further interest rate hikes. Europe is also facing an energy crisis as Russia has cut supply. The energy shortage is contributing to inflation and eating into the production and purchasing power of businesses and consumers respectively.

UK

The market movements in the UK have been mixed. The FTSE 100 index rose by 1.2% while the FTSE 250 index fell by 1.1%. The 10-year UK government bond yield also rose to about 3.3%. And, while inflation was down to 6.7% year-on-year (YoY), the costs of goods and services are still hurting consumers. The Bank of England is likely to still raise interest rates further as the current inflation rate is higher than its 2% target.

Asia Emerging

The month of September was a volatile one in the Chinese Equity Market. The Shanghai composite fell by 5.2%, H-shares fell by 8.2%, and Singapore STI fell by 4.2. India, Thailand, and Indonesia were also down by 2.5%, 0.6%, and 0.3% respectively. The Chinese economy is still seemingly in a slowdown phase as it faces an ongoing property market crisis and government regulations on the tech sector.

Commodities

The performance of commodities in the September market was a mix of both surges and declines. Silver declined by 8.26% and gold fell by 3.7%. However, Brent crude oil and WTI rose by 7.7% and 7.3% respectively.

Conclusion

The September Market was generally volatile. The index of stocks for both developed and emerging countries fell. Due to ongoing inflation concerns and economic challenges, investors can expect continued volatility in the coming months.

US Federal Reserve Update

During the last meeting held on 19th and 20th of September, 2023, the Federal Reserve Chair, Jerome Powell acknowledged the current inflation rate as well as the effects the war in Ukraine is having on inflation. He made it clear that they are willing to raise rates where appropriate as the current inflation rate is still higher than target. There has been a shift from a constant rate increase to a more sensitive approach to fixing rates. The Feds are becoming cautious due to economic factors such as unemployment, a possible recession, and the ongoing war in Ukraine.

Jackson Hole Symposium

The Jackson Hole Symposium is an annual conference hosted by the Federal Reserve Bank of Kansas. It is held in Jackson Hole, Wyoming. The last symposium was held on the 24th to the 26th of August 2023 and the theme was, "Structural Shifts In The Global Economy."

The symposium creates an opportunity for central bankers, policymakers, and experts to meet and share their views on the global economy and the issues it is facing. Investors keep an eye on the outcome of these symposiums as they can provide direction on the future actions of the Fed. This is because monetary policy decisions reached by the Fed will have big impacts on the global economy as it is one of the most important central banks in the world.

The Fed's views from the last symposium were hawkish. They remain committed to reducing inflation to the target of 2% but raising rates only were needed. The Chair also stated that cuts will only come when they are certain that it would not affect inflation.

Rest of The Year

The Fed has two more meetings for the year scheduled for October 31-November 1 and December 12-13, 2023. Predictions on more hikes for the year vary. Analysts and commentators have different views. Some believe the Fed will be aggressive with rate increases before there will be cuts while others believe the rate hikes will be consistent[1] or the Fed will be halting further hikes before a cut.

Wells Fargo economists predict that the Fed will continue to raise rates until their goal of a 2% inflation rate is achieved. Tom Lee of Fundstrat is of the opinion that the Feds are likely done with rate hikes for the year and would now be looking at cuts for 2024. Mohamed El-Erian, a top economist from Allianz, has also shared views similar to Tom Lee's.

Next Year

Most economists expect the Fed to cut rates by the second quarter of 2024. Though, there are some economists of the view that the first rate cut will come in the first quarter of 2024. Economists at Goldman Sachs are expecting cuts in the second quarter while the economists at Morgan Stanley are predicting cuts to come in the third quarter. Others, like the economists at Deutsche Bank and Wells Fargo, think the first cut would not be before the fourth quarter. Experts like the Chief Economist at KPMG, Diane Swonk, are of the opinion that while there will be cuts, they will not be as rapid as the hikes have been.

Conclusion

Different economists are predicting different rate raises and times for the first cut in 2024. The size of rate raises to expect as well as the time for the first cut is still uncertain. The Fed's decisions will depend on the strength of the economy and the direction of inflation. If inflation reduces, we can expect lower rates and early rate cuts in 2024. Investors must keep paying attention to the Fed's narrative to guide investment decisions.

Oil Prices

Oil remains a major source of energy worldwide as it is needed for transportation, industries, and even the heating of homes in many countries. Fluctuations in oil prices have direct impacts on the global economy. An increase in oil prices leads to inflation as transportation costs rise and industries have to spend more on production. However, this often translates to an increase in revenue for oil-exporting countries.

Lately, oil prices have been approaching new highs for this year as oil exporting countries are placing caps on the number of barrels to be supplied to the market. Many predictions point to further inflation and varying impacts on different industries.

OPEC

OPEC, the Organization of the Petroleum Exporting Countries, is a group of oil-producing nations that work together to manage and stabilise oil production and its prices in the global market. The decisions made by OPEC affect both member and non-member countries as well as the global economy. An agreement to produce limited barrels can boost oil prices which benefits member countries but not without ripple effects like inflation. However, the body still prevents extreme fluctuations in price and production which can have disastrous effects on global energy security as well as the state of the global economy.

OPEC's stance to limit supply to the market after the dip in oil prices during the pandemic was aimed at stabilising its value. Together, these oil-producing countries will be cutting the supply to the market to about 2 million barrels daily.

Saudi Arabia, the biggest exporting member of the organisation, along with other member countries has swung to action in a bid to improve oil prices. The political tension between Ukraine and Russia, another big exporting member, further intensifies the effect of the supply cut. With many Western countries sanctioning Russia, it has turned its supply to Asian markets like China and India.

Russia

Russia is one of the top three largest exporters of oil and a big player in the global energy market. In 2022, the country produced over 11 million barrels per day. Since Russia's war with Ukraine began over a year ago, many Western countries have imposed sanctions on Russia to stand in solidarity with Ukraine. This has affected the supply to these countries as well as oil prices.

The war is not without impact on Russia. In late September, Putin's government placed orders for the return of oil to Russia to help cushion the shortfall and inability to meet internal demands for oil. Prices are uncertain and analysts believe even if a barrel surges to over $100 in coming months in favour of oil exporters, it's unlikely to stay up for a long time.

Going forward, it's expected that Putin is likely to wield oil prices in his favour. Russia's position in OPEC and its alliance with the Middle Eastern members since its intervention in Syria are its biggest strongholds. Russia could push for an extension in price cuts longer into 2024 to raise oil prices and/or negotiate with Middle Eastern countries to invest in its oil fields.

Industry Impact

Higher oil prices impact industries differently. When oil prices go up, oil companies benefit as they make more profit. Industries that take the most hit from higher oil prices include agriculture, construction, transportation, and manufacturing. In agriculture, for instance, operating machinery like tractors and irrigation systems will come at a higher cost. And like with all industries, the consumers face the most hit as the cost of food and other products will increase.

Potential Opportunities for Investors With Higher Oil Prices

Higher oil prices open up several opportunities for investors. Investing in oil can create room to benefit from profits when prices go higher. Also, alternative energy sources like solar and wind power are likely to experience increased patronage, making them potentially favourable investment choices.

Conclusion

The profitability of investments in various industries is affected by oil prices. As such, it is important for investors to consistently watch energy prices in order to make informed and profitable investment choices.