Market Update from the Global Asset Allocation Team – October 2021
After an extended period of calm, volatility resurfaced in September. In what was an erratic month, mounting fears about slowing global growth, elevated inflation, and regulatory upheavals emanating from China emerged at the same time investors braced for policymakers to wind-down ultra-accommodative monetary policies – which when taken together dampened sentiment and roiled financial markets. In an unprecedented development, both stocks and bonds generated negative results in September, reinforcing the case for private alternatives in a well-balanced portfolio.
Global equities experienced some turbulence in September, with the MSCI All Country World shedding over 4%. The environment of rising bond yields reignited the rotation in favor of cyclicality and value, with both energy and financial sectors outperforming their defensive-growth peers by a wide margin. Consequently, the growth-heavy S&P 500 led the decline and posted its worst monthly loss since the onset of the pandemic. The value-levered S&P/TSX also edged lower, albeit more modestly as robust performance in the energy space helped to counter widespread underperformance elsewhere. Weakness also extended to overseas markets, with both international developed and emerging market indices posting some notable losses in September.
Fixed income markets also posted negative results, with some hawkish-leaning rhetoric from major central banks sparking a selloff. At the September monetary policy gathering, the Federal Reserve set the stage to begin scaling-back its asset purchases later this year, while officials also brought forward their projections for rate liftoff, with participants now equally split between 2022 and 2023. In response, yield curves steepened in a bearish fashion, with the 10 year treasury yield breaking above key resistance levels and rising 18 basis points to 1.49%, while the 2 year yield rose 7 basis points to 0.28%. Canadian bond markets followed suit, with the 10 year government bond yield soaring 29 basis points to 1.51%, while the 2 year yield advanced 11 basis points to 0.53%. The Canada FTSE TMX bond index declined -1.4%, while the U.S. aggregate bond index lost -0.89%.
The US dollar rose to a one-year high. The counter-cyclical currency thrived amid September’s financial market turmoil, with unnerved investors bidding up the safe haven. The Canadian dollar retreated amid underlying dollar strength, but managed to hold fairly firm around 79 US cents given the powerful rally in crude oil prices that helped to underpin the loonie.
Finally, oil gained close to 10% as an energy shortage from Europe to Asia sent prices soaring to levels not seen since 2018. However, other commodities such as industrial metals and gold stumbled on the back of rising interest rates and a stronger greenback. Specifically, gold posted its biggest monthly loss since June as the prospect for monetary policy normalization sent rates higher and weighed on the non-interest bearing metal. Copper pulled back after China’s factory sector contracted for the first time in 19 months, adding to signs of a slowdown in the world’s top metal-consuming economy.