The week in review

What’s happened in markets?

The US labour market remained resilient in the face of stiff interest rate rises and slowing demand. Weekly jobless claims fell to a five-month low of 193k for the week ending 24 September, against the 215k forecast. Meanwhile, Freddie Mac’s mortgage market survey showed that the cost of 30-year fixed rate mortgages (which are more common in the US) had risen to 6.7%, their highest level since 2007. This is likely to affect the new home sales market initially and then the existing home sales market. The Federal Reserve is not expected to slow its rate hikes anytime soon, with another 75 basis points anticipated in November and 50 basis points in December.

In the UK, the ramifications of the government’s radical tax-cutting mini-budget on 23 September continued to play out. When the price of UK government bonds plunged and threatened to impact UK pension funds, the Bank of England was forced to intervene to calm markets. The central bank postponed its quantitative tightening programme until 31 October and announced it would buy as many long-dated UK government bonds as necessary, for a temporary period from 28 September, to “restore orderly market conditions”. The fallout during the week of 26 September also saw mortgage lenders withdraw products on the expectation of higher interest rate hikes, triggering chaos in the UK property market. The UK government’s debt-funded tax cuts also came under attack from the International Monetary Fund, which said it was “closely monitoring recent economic developments in the UK”. Meanwhile, a YouGov poll showed a massive swing to the opposition Labour party which took its largest lead (33 points) over the Conservatives since the late 1990s.

Soaring energy costs as a result of the Russia-Ukraine conflict continued to impact inflation in the eurozone, which reached 10% in the year to September, an acceleration from 9.1% in August and higher than the 9.7% expected. While German inflation shot up to 10.9% over the same period, up from 8.8% in August and the first time it’s reached double digits since 1951. All of which signalled more hawkish rhetoric from the European Central Bank.

In corporate news, Apple reversed plans for an iPhone production boost due to waning demand. Meta announced it would be implementing a hiring freeze and warned of restructuring amid a slump in advertising and increasing competition.

In other news, Swedish media reported a fourth suspicious leak had been discovered by coast guards in the Nord Stream undersea pipelines that have been at the centre of the energy conflict between Russia and Europe. Geopolitical risk was also heightened following Russia’s annexation of four regions in south-eastern Ukraine, after referendums in which locals allegedly voted overwhelmingly to join Russia.

In terms of markets, the current environment remained unconducive for all asset classes, with equities and bonds down sharply.

Emerging markets (-11.9%) underperformed developed markets (-9.1%) over the month as Hong Kong’s Hang Seng index had its worst month since September 2011. There was little to differentiate between style and market capitalisation, although value (-8.6%) continued to outperform growth (-10.1%) and large capitalisation stocks (-9.1%) were slightly ahead of small capitalisation stocks (-10.5%). From a sector perspective, healthcare (-3.9%) was the best performer and real estate (-13.7%) the worst over the last 30 days.

Fixed income became more of a focus area recently with a significant shift in UK bond yields during the week of 26 September. Short duration government bonds continued to outperform in the face of rising yields, with 1-3 year bonds dropping -0.9%, against -3.7% for 7-10 year bonds.

Sterling was the currency in the spotlight this week after falling to its weakest level since the Bretton Woods monetary system was established in 1944. It declined to 1.03 against the US dollar on Monday 26 September following the UK chancellor’s much maligned mini-budget, before recovering to a pre-budget rate.

What’s happened in portfolios?

The current environment is marked by higher inflation, rising interest rates, slowing growth and increasing geopolitical risk. In the face of these significant headwinds, it remains challenging for equities. We are taking a more cautious stance across all asset classes and feel it is an appropriate time to tilt our equity positioning towards quality focused strategies, which along with our US regional tilts have performed better on a relative basis during the recent volatility.

Within fixed income, we have a short duration bias which has worked quite well for us. The current environment is less supportive for credit and we have reduced our overweight to high yield and believe it is a good time to gradually increase duration. The significant upward shift in yields has made fixed income more attractive and we are adopting a more neutral approach.

Real assets have held up well on a year-to-date basis and remain attractive as an alternative to fixed income and with some inflation protection. The recent liquidity squeeze has put the investment trusts under pressure, but we remain confident in their fundamentals. We have been reducing cyclicality in the portfolios by lowering our REITS exposure.

It is a similar story in our alternative allocation where our strategies have also held up well year to date. Forced sellers have led to some market declines but we expect this to correct once markets settle. Renewables have provided inflation protection on a year-to-date basis. Alternative strategies remain preferable in the current environment to provide a credible diversifier within portfolios.

As asset classes are increasingly correlated on the negative side, cash is starting to look more attractive, especially given rising interest rates. It also offers the option to pick up attractive opportunities that may be presented in the current market volatility.

What’s happening this week?

5 October • UK Purchasing Mangers’ Indices | 5 October • EU Purchasing Mangers’ Indices | 7 October • US Nonfarm payroll