Economic news flow was generally supportive, as many releases confirmed further improvements in activity levels within developed economies, with even Europe managing to release data that suggested it had exited its long recession.
Similarly, the second quarter corporate earnings season also brought positive surprises, especially in the US, where 71% of the 492 S&P 500 companies that had reported by the end of the month beat analyst expectations.
Even so, investment markets were in a nervous mood, in part reflecting growing tensions in the Middle East, especially in Egypt and Syria, and also concerns regarding the impact that the tapering of Federal Reserve asset purchases might have in the coming months.
Over the month, the MSCI AC World Index declined by -4%. Among the majors, the best performing market was the UK (-2.4%), while the US (-4.7%) and Japan (-4%) saw the sharpest declines. At the margin, cyclical sectors outperformed, led by materials (-0.6%) and energy (-2.6%), reflecting a rise in commodity prices, while the weakest areas were utilities (-6.1%) and consumer staples (-5.6%).
In terms of style, growth (-3.6%) outperformed value (-4.3%), while smaller companies (-3.9%) performed in a similar fashion to large cap stocks (-4%).
Fixed income markets saw yields rising (i.e. prices falling) across the board, with particular weakness in emerging markets where many investors have concerns about the impact of the impending change in Federal Reserve asset purchases and the economic slowdown occurring in some of the group’s largest countries, such as China, Brazil and Russia.
Overall, riskier bonds (be they longer dated, or weaker credits) tended to fall a little more than lower risk bonds. As such, the JP Morgan Global Government Bond Index fell -0.3%, the BarCap Global Corporate Bond Index declined -0.5% and the Merrill Lynch Global High Yield Bond Index slipped -0.5%. However, the return that really stood out within the fixed income sector was that of the JP Morgan Emerging Market Global Composite Bond Index, which lost -7.3%, largely due to adverse currency movements, but also due to a general rise in the yields demanded by investors.
Unlike equities and bonds, commodities bucked the trend as they rose over the month. Having been quite weak for much of this year, commodities were perhaps overdue a bounce, as the Dow Jones UBS Commodity Index rose 1.4%. Gold was particularly strong, rising 4.3%, although worries that tensions in the Middle East could disrupt supply lines also allowed crude oil to advance by 1.7%.
After a relatively quiet summer, September brought with it a number of events that have the potential to impact markets: the Fed’s tapering announcement; Merkel winning the German election; it seems quite likely at the time of writing that the US will take some kind of military action against Syria, following the use of chemical weapons.
These, and other issues, have been weighing on sentiment, and even though we expect economic news flow to remain broadly positive, we also suspect financial market volatility will be higher as we move into the fourth quarter.
