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September Investment Review: Eye of the Storm

By Haith Nori

September has seen significant increased levels of volatility return to Global Markets once more. Central Banks in Europe, the UK and the US all scheduled meetings in September following the Jackson Hole meeting. Liquid Natural Gas (LNG) deliveries have taken a turn for the worst with Nord Stream 1 in Germany being closed by Russia, sending energy prices higher in Europe. China have been selling Russian LNG back to Europe at a much larger cost. More and more ships have been able to leave Ukrainian shores delivering agricultural products to African, Asian and European countries. The UK has appointed a new Prime Minister Liz Truss at the beginning of September. Global tensions between countries continues as the US have made a deal of $1.1billion weapons sale to Taiwan, angering China and Russia are buying rockets and weapons from North Korea. Furthermore, China has once again been entering into local lockdowns in the Chengdu and Shenzhen areas due to its zero Covid policy. Queen Elizabeth II, the United Kingdom’s long reigning monarch sadly passed away on September 8th, seeing the country in mourning, the cancellation of key sport events, and pushing the BOE base rate decision back a week later out of respect.

Inflation has been the hot topic on all Central Bank’s minds, and they have taken drastic action. Markets have reacted negatively surrounding the meetings which were scattered throughout September. On Thursday 8th September the ECB confirmed a 75 basis point rate hike to 1.25%, which was the largest since its creation in 1999, signalling further rate hikes to come. On Tuesday 13th September the US released CPI data for the 12 months ending in August of 8.3%, slowing down for the second consecutive month (9.1% in June and 8.5% in July). However, the rate of decline was lower than expected and US markets reacted negatively closing down c.4%, having their worst day since June 2020. In the UK CPI data was released on 14th September dropping to 9.9% for the 12 months ending in August from 10.1% in July ‘offering some respite to households and the Bank of England after inflation hit a 40-year high the month before’[i]. On 21st September the FOMC made the decision to increase interest rates in the US by 75 basis points, for the third consecutive time taking the target range to 3%-3.25% being the ’highest the fed funds rate has been since the global financial crisis in 2008’[ii]. The Bank of England has also raised interest rates by 50 basis points on 22nd September raising the rate to 2.25%. Many anticipated a 0.75% rate hike from the BOE but this came as ‘the bank said it believed the U.K. economy was already in a recession, as it forecast GDP would contract by 0.1% in the third quarter, down from a previous forecast of 0.4%’ [iii]. The Swedish Central Bank (The Riksbank) has also surprised markets with a historically hawkish 100 Basis Points interest rate hike which is its biggest in three decades. The Bank of Japan (BOJ) has maintained ultra-low interest rates to support the country’s fragile economic recovery but intervened in the currency markets on 22nd September to buy Yen, deploying some of its $1.3 trillion in reserves, for the first time since 1998. The Yen strengthened against the Dollar c.2% after the announcement.

After August’s dramatic increase in bond yields both the UK 10 year Gilt and the US 10 year Treasury yields continue to trade over or nearing 4% which is looking attractive given it is near to overtaking the yield on equity markets. The US 10 year Treasury has reached a level not seen since 2011 breaking the 3.5% mark. The strength of the US Dollar continues to rage on in the foreign exchange markets and it is on track to have its best year since 1984. Sterling has decreased against the Dollar hitting its 37 year low ‘after the new U.K. Government announced a radical economic plan in a bid to boost growth’[iv], including a number of tax cuts. The BOE stepped in to buy £65 billion of UK long dated gilts to help stable the gilt market ‘after the new government’s tax cut plans triggered the biggest sell-off in decades’[v].

Raising interest rates though, whilst being effective to control inflation, may not be able to reduce the ever growing price of LNG and hence energy, especially in Europe. With Russia closing Nord Stream 1 on Monday 5th September which delivers LNG into Germany, initially stating indefinitely, caused a phenomenal increase in the cost of energy. Gazprom’s Deputy Chief Executive Officer Vitaly Markelov claimed they would not resume shipments until Siemen’s Energy repairs faulty equipment.  Furthermore, Nord Stream 2 has experienced various leaks further depleting the supply of LNG and Poland, Denmark and Germany are not ruling out sabotage. China, having excess LNG, saw an opportunity to sell Russian LNG back to Europe at a higher cost being the Expensive Middle Man. To further muddy the waters, Russia offered China their LNG in both Yuan and the Ruble. With the new appointment of Liz Truss as Britain’s Prime Minister, she has initially stated she will combat the cost of energy in the UK by putting a freeze on energy bills at £2,500 until October 2025. Ships began to set sail from Ukraine from August 1st, by the end of August more than 50 ships had left Ukraine, and now over 200 have left successfully delivering to African, Asian and European countries carrying c.5.3 million tonnes of agricultural products. At least we can see one area improving in the hope of reducing global hunger and effectively reduce food prices!

Overall, September which has notoriously been one of the worst months for Global Equities, has seen great levels of volatility return. Global equities fell 9.46% in dollar terms during the month closing out the quarter 6.58% lower. We still believe a focus on diversification across asset types, styles and strategies remains of critical importance to portfolios. Central Banks are still taking aggressive action to try and combat inflation with most stating the end is still not in sight. Bond yields continue to increase in value, the price of Brent Crude is trading at c.$90 per barrel, and Sterling continues to decrease against the dollar.

[i] www.reuters.com/world/uk/uk-consumer-price-inflation-falls-unexpectedly-2022-09-14/

[ii] https://edition.cnn.com/2022/09/21/economy/fed-rate-hike-september/index.html

[iii] www.cnbc.com/2022/09/22/bank-of-england-raises-rates-by-50-basis-points-in-seventh-consecutive-hike.html

[iv] https://www.cnbc.com/2022/09/23/british-pound-plunges-to-fresh-37-year-low-of-1point10-.html

[v] https://www.reuters.com/markets/europe/bank-england-buy-long-dated-bonds-suspends-gilt-sales-2022-09-28/

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