Quilter Cheviot|Weekly Comment

Equities end Q3 lower as rates rise further

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Most major stock markets ended September lower, with global benchmarks posting negative returns for the week (-0.9%), month (-4.1%) and third quarter (-3.3%), although they remain firmly higher year-to-date (+10.5%). The chief cause of recent equity weakness is a rise in yields and government bond yields in the UK, US and Eurozone all pushed higher on the week.

UK blue chips dropped 0.9% on the week but outperformed peers on the month, rising 2.4%. A drop in the sterling to US dollar exchange rate has been one of the reasons for the relative strength in September and it ended last week near a six-month low at 1.22. Government bond markets came back under pressure with a 20 basis point increase on the week taking the 10-year gilt yield to 4.44%, meaning it ends the month 8 basis points higher. The Office for National Statistics (ONS) revised higher UK first quarter growth to 0.3%, 20 basis points higher than the previous estimate.

The latest leg up in yields has come about despite relatively positive progress on the inflation front and there was more good news in this regard last week. Eurozone consumer prices increased in September at their slowest pace in two years, coming in at 4.3% annually. Hawkish comments from European Central Bank (ECB) officials showed that despite the improvement in price pressures they feel the job is not yet done. Government bond yields pushed firmly higher on the week, as the German 10-year yield flirted with 3% – its highest level in a decade.

The latest US core personal consumption expenditures (PCE) came in at its lowest level in two years with a print of 3.9% year-on-year. Although most keenly viewed inflation metrics are moving in the right direction, they remain well above central bank targets and the current rally in the oil price is causing some concern for future readings.

Shares on wall street declined for a fourth consecutive week, ending down 0.7%. Although the weekly drop was smaller than the global average, the monthly fall of 4.8% was larger. The US 10-year Treasury yield hit a new cycle high above 4.60% last week, easing slightly into the weekend to close at 4.57%, up 13 basis points. The higher-for-longer narrative really emanates from the US, as future expectations for the Fed funds rate have been revised higher by interest rate markets in recent weeks on the back of ongoing strength in economic data, in particular the labour market. Increased Treasury issuance and quantitative tightening (QT) are also likely playing a role.  

Shutdown avoided, for now

The US has narrowly avoided a full government shutdown amid political deadlock over demands for cuts on public spending. President Joe Biden welcomed a deal which was approved with only 3 hours left till current funding expiring. The shutdown would have meant four million government employees would go unpaid and key functions would come to a halt (for example, collecting labour market data).

President Biden signed the short-term funding bill, which was passed by Congress. This bill will keep the government open only until November 17th. Given the relatively short extension the news is not likely to have a lasting positive impact on financial markets and means that uncertainty will linger for a while yet. Prolonged political uncertainty is not good news for a Treasury market that is already grappling with the prospect of higher rates for longer and the stepping back of one of its largest buyers.

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