Recovery across the global markets continued during the third quarter, albeit at a varying pace as Central banks have now started to “think about thinking about tapering”. Driven by the fears of rising inflation combined with a slowdown in economic growth (a phenomenon called Stagflation), markets are facing a multitude of short term challenges as we head into the final quarter of 2021.
Developed equities continued to trend higher, however the majority of the gains accumulated during the quarter were erased by declines in September.
Yields in the U.S. and European government bonds were unchanged for the quarter as a drop in yields earlier in the quarter reversed in September following a hawkish (less accommodative) tone from the central banks and continuing inflationary pressure. UK Gilts in particular saw a significant rise in yields on increased expectations for monetary policy tightening. Amongst corporate bonds, high yield made positive returns.
Following increased demand in the wholesale gas market, commodities posted positive returns for the quarter, with energy being the best performing component helped by a sharp spike in the price of natural gas and oil. Gold on the other hand continued to trend lower during the third quarter.
Domestic equities rose moderately during the quarter with marked divergence in performance across sectors.
Despite a noticeable drop in September, UK small and mid cap equities performed well over the quarter. With inflationary pressures continuing to exceed expectations, coupled with supply bottlenecks constraining output, the Bank of England has struck a more hawkish tone, resulting in markets pricing in the probability of a rise in interest rates by December 2021.
After a strong start to the quarter, U.S. equities retraced significantly in September driven by concerns over rising inflation, moderating growth and debate over the U.S. debt ceiling.
European equities also posted slightly positive returns in Q3, with energy and Information Technology being the strongest sectors, whilst the consumer discretionary sector (luxury goods in particular) has been one of the worst hit during the quarter. The annual inflation in the Eurozone stood at 3.4%, up from 2.2% in July.
The Japanese equity market was pretty much range bound through July and August, before rising spectacularly in September. Emerging markets on the other hand declined heavily following a sell off in Chinese stocks, exacerbated by a strengthening U.S. dollar.
Looking ahead, if inflation proves to be longer lasting than anticipated, central banks may be forced to tighten at a quicker pace, posing greater challenges to the markets.
As always, from all of us here at Montage, stay safe and we will hopefully see you very soon.