The digest
The third quarter ended weak, with equity markets drifting lower on concerns around rising bond yields and the impact on inflation of continued higher oil prices. West Texas Intermediate crude oil hit US$95 a barrel last week, as OPEC production cuts constrained supply. Last week also felt noisy, with some volatility around quarter-end positioning into the end of the week.
On the week, the MSCI World Index declined 0.9%, the S&P 500 Index declined 0.7%, the STOXX Europe 600 Index declined 0.7% and the MSCI Asia Pacific Index declined 1.7%.1 For the third quarter, the MSCI World Index was down 4.4%, the MSCI Asia Pacific was down 3.6%, the STOXX Europe 600 Index was down 2.5% and the S&P 500 Index was down 3.6%.
Overall, it was tricky period across financial markets, with government bonds, corporate bonds and equities all declining. Commodities and the US dollar were the winners on the quarter. Historically, the third quarter has proven to be a weak time of the year for stock markets, and that has proven to be the case again this year. But on a brighter note, many market commentators are highlighting a more positive seasonality effect historically into year-end.
Week in review
United States
US equities declined last week. With the Federal Reserve (Fed) decision behind markets, and a couple of weeks until third-quarter earnings season, there is sort of a catalyst vacuum until around mid-October. In that context, focus turned to the move higher in US Treasury yields on the back of “higher for longer” interest-rate expectations, and with that, equities traded lower.
Quarter-end positioning moves were also a feature last week, with recent laggards seeing a bounce.
Fears around the impact on the US economy of the United Auto Workers union strike and a potential US government shutdown also weighed on market sentiment. Over the weekend, a shutdown was averted, with Congress agreeing to a temporary stop-gap measure. This ensures funding until 17 November, but notably did not cover further aid to Ukraine.
The US consumer is in focus, with US student loans repayments restarting this month after a three-year pause post-COVID. Federal student loan payments will come due starting on 1 October, which will likely constrain consumer spending.
In this environment, US investor sentiment in the CNN Fear & Greed Index went into “Extreme Fear” territory last week, although it ended the week in “Fear”.2
Europe
European equities traded much lower for most of last week but recovered some ground on Friday into month and quarter-end. Investor concerns around higher bond yields and potentially stickier inflation continued to weigh on risk sentiment through the week. European yields continue to push higher, and of note, the Italian 10-year yield hit a high of 4.955% on Thursday. The Italian government has said it will only meet European Union deficit rules by 2026, setting up a potential clash with Brussels. The spread between German and Italian yields is the highest since March.
On Friday, the September Eurozone Consumer Price Index (CPI) report came in lower than expected, which helped to buoy European stocks. The report could be signalling that the worst is hopefully over, and the European Central Bank’s monetary policy tightening has taken effect. The headline inflation rate fell to 4.3% in September down from 5.2% in the year to August. Year-on-year inflation fell across all major categories but, of note, energy prices were down 4.7% in September, whilst food, alcohol & tobacco, and non-energy industrial goods and services all showed deceleration.
Last week, cyclicals outperformed defensives. Basic resources stocks, construction and materials stocks were higher. whilst utilities and telecommunications stocks declined. It was a choppy week for real estate stocks, which ultimately closed lower.
It is noteworthy that London is close to overtaking France as the largest stock market in Europe once again. The combined dollar-based market capitalisation of primary British listings now stands at US$2.9 trillion versus France’s US$2.93 trillion, according to Bloomberg data.
European credit conditions
With European equity markets weaker in September, it is worth checking in on European credit condition for signs of stress. The most referenced measure for European Credit is the XOVER Index,3 which has widened a little, but not in an alarming fashion. However, some charts show pressure building on weak balance sheets in the region.
Asia
Equities in Asia were weaker across the board last week.
Japan
The Nikkei closed the week down 1.68% as the move in oil prices and concerns around interest-rate expectations in the United States weighed on the market.
The government released a new economic plan, to be signed off in October, which gave some hope to the market. The plan will be aimed at capital investment, wage growth, and investment in people, as well as further subsidies to help alleviate the impact of stronger oil and gas prices and will all be funded by a supplementary budget.
The yen weakened further, prompting speculation that the government would step in to support the currency, but Finance Minister Shunichi Suzuki announced that the government didn’t have a specific level which would trigger intervention.
The yield on the 10-year Japanese government bond touched its highest level in in over a decade at c. 0.779%, even with the government stepping in to support the bond market.
China
The Shanghai Composite Index was one of the better-performing markets in Asia last week, despite being closed on Friday for the Mid-Autumn Festival holiday.
Of note, this week the market is closed all week for the National Day holidays and reopens again on Monday 9 October.
Over the weekend, the China Caixin Purchasing Managers Index (PMI) Composite came in at 50.9, vs. 51.7 prior, while the China manufacturing PMI came in at 50.6, and the China PMI Services at 50.2.
Some investors are speculating that the government may announce further policy support during the upcoming holiday period, including a new financial stability fund and relaxing the foreign ownership cap for equity investments. Currently, foreign ownership is capped at 30% for single stocks and 10% for a single foreign shareholder. While nothing has been confirmed yet and the discussion looks still in a nascent stage, the news would not be a total surprise.
Sector-wise, semiconductors gained on a new product launch from Huawei covering its consumer electronics products, which reportedly saw strong demand.
Also, there were various reports that China Reform Holdings Corp, a state asset manager, is planning to launch a development fund worth at least CNY100 billion to invest in strategic emerging industries. It is expected to start operating within the year.
Hong Kong
Hong Kong’s equity market posted its fourth straight weekly loss and its biggest quarterly retreat in a year, with the Hang Seng closing the week down 1.37% as the debt crisis at property giant Evergrande intensified, triggering a broader concern about the sector.
Chinese developers fell, as sentiment was dampened after Evergrande missed payments and the chairman was taken into police custody, but the sector regained some ground on Friday on the news that Shenzhen will relax the floor for mortgage rates on first-home purchases.
The week ahead
As we enter the fourth quarter, there are several noteworthy events to keep an eye on this week. From a US perspective, highlights include a speech from Fed Chair Jerome Powell, JOLTS data and September employment data published on Friday. In Asia, there are several market holidays due to Golden Week in China. However, we do have monetary policy meetings in Australia, New Zealand and India. In Europe, PMI data may give insights to the health of the European economy.
Monday 2 October
- UK Nationwide House Price Survey; UK S&P Global/CIPS Manufacturing PMI
- Riksbank Monetary Policy Minutes
- Switzerland PMI Manufacturing
- Spain Unemployment Change; Spain HCOB Spain Manufacturing PMI
- Italy HCOB Manufacturing PMI; Italy Unemployment Rate
- France HCOB France Manufacturing PMI
- Germany HCOB Germany Manufacturing PMI
- Eurozone HCOB Eurozone Manufacturing PMI; Eurozone Unemployment Rate
- US S&P/Markit Manufacturing PMI; US Construction Spending & Manufacturing (Institute of Supply Management)
Tuesday 3 October
- France Budget Balance YTD
- US JOLTS job openings
- Reserve Bank of Australia policy meeting and interest-rate decision
Wednesday 4 October
- Spain HCOB Services PMI
- Italy HCOB Services PMI
- France HCOB Services PMI
- Germany HCOB Services PMI
- Eurozone HCOB Services PMI; Eurozone Retail Sales & PPI
- UK S&P Global/CIPS UK Services PMI
- US ADP employment; US S&P/Markit Services PMI; US Factory Orders
Thursday 5 October
- UK Decision-Maker Panel Survey; UK New Car Registrations; UK S&P Global/CIPS Construction PMI
- France Industrial & Manufacturing Production
- Spain Industrial Production & Output
- Germany HCOB Construction PMI; Trade Balance SA
- US Challenger layoffs; US Continuing & Initial Jobless Claims
Friday 6 October
- Germany Factory Orders
- France Trade & CA Balance
- Italy Retail Sales
- US September Employment Report; US Consumer Credit
- Reserve Bank of India policy meeting and interest-rate decision
Views you can use
What’s next for gilts and the United Kingdom?
Gilt prices have been struggling this past year due to surging inflation and interest-rate increases. David Zahn, Franklin Templeton Fixed Income’s Head of European Fixed Income, shares his outlook for the UK economy and why he thinks now is a good time to consider investing in gilts. Read more.
Japanese equities—A force awakens
From inflationary tailwinds for earnings growth to corporate reforms that unlock shareholder value, multiple regime shifts are underway to restore the appeal of the Japanese equity market, according to the Templeton Global Equity Group team. Read more.
Stress testing the foundations: Analyzing the vulnerability of US banks to falling commercial real estate values
The commercial real estate sector’s continued challenges could potentially impact US banks. Franklin Templeton Fixed Income’s Shawn Lyons discusses the ongoing commercial real estate crisis and how US banks are safeguarding themselves against these issues. Read more.
Growth opportunities in emerging markets
Emerging markets offer dynamic growth opportunities for investors, from consumer goods to logistics to technology. Find out more from Franklin Templeton Emerging Markets Equity’s Chetan Sehgal. Read more.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
___
1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
3. The Xover Index comprises 75 equally weighted credit default swaps on the most liquid sub-investment grade European corporates. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.