Market Update from the Global Asset Allocation Team – September 2021
Global equity markets churned higher in August, even as investors contemplated the fast-spreading delta variant, signs of cooling global growth, accelerating inflation, and the path for monetary policy. Investors welcomed some dovish-leaning remarks from Federal Reserve Chair Powell at the Jackson Hole Symposium late in the month, where he erred on the side of caution and patience. While policymakers are indeed gearing-up to scale-back the massive asset purchase program, the precise timing will hinge on the proliferation of the virus and its economic impacts. Chair Powell went even further and reiterated that while tapering could begin this year, policymakers won’t be in a hurry to begin raising interest rates thereafter.
Global equity markets were broadly higher in August, with the MSCI All Country World capping its seventh straight monthly gain. The S&P 500 led the global charge even despite a spike in COVID cases in some U.S. states. All sectors ended the month higher, with the exception of the energy space that lagged given the pullback in crude prices in August. The S&P/TSX also advanced thanks to a profound rebound in corporate earnings, but underperformed the global benchmark given its relatively higher energy exposure. Looking abroad, international developed stocks also thrived, while emerging market equities staged a rebound amid growing wagers that developing-market stocks will be well-positioned to benefit from the global reopening – though uncertainty around the Chinese regulatory environment and peak Chinese growth have clouded the outlook.
Fixed income markets posted negative results in August. Yield curves steepened, with longer-term bond yields rising by more than their shorter-term counterpart as Chair Powell’s measured comments underscored that the central bank won’t be quick to react to the recent spike in inflation. The U.S. 10 year treasury yield rose by 9 basis points to 1.31%, while the 2 year treasury yield rose by a more modest 3 basis points to 0.21%.
The US dollar was striving for direction and traded between gains and losses throughout the month. While initially edging higher as renewed risks to the outlook prompted investors to bid-up the safe haven currency, the dollar reversed course after Chair Powell pointed to a “dovish taper” in his Jackson Hole address. Still, the US dollar (DXY) ended the month marginally higher. By contrast, the Canadian dollar retreated on the back of the monthly slide in crude prices, while the surprise second quarter contraction in the Canadian economy also weighed on the loonie.
In commodity markets, crude oil swung wildly as the delta outbreak dampened the outlook for fuel demand. Oil declined over 7% during the month in its biggest monthly loss since October 2020. In early- September, OPEC and its allies ratified their plan for gradual production increases, with the cartel wagering that the market can absorb the extra flows as demand recovers and stockpiles get drawn down. Copper slipped as economic momentum in China eased, while gold held firm after Chair Powell signaled a cautious and pragmatic approach to the withdrawal of stimulus, while also reiterating that rate hikes are still a long ways off.