September 2022 Market Insights
September saw a significant sell-off in financial markets.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in September?
September saw a significant sell-off in financial markets as the risk of a global recession heightened and the war in Ukraine escalated, thereby exacerbating the region’s energy crisis. Inflation remains elevated and will push central bankers to continue raising interest rates and as such, increase the likelihood of a global recession and negatively impacting employment.
No developed markets avoided the sell-off with each of them ending the month in negative territory. Hong Kong markets were the weakest with the HSCEI Index and the HSI Index, down 13.85% and 13.69% respectively (local prices).
A weaker AUD (-6.89% versus the USD) dampened AUD losses in the Trends and indices
Global recession becoming a real possibility
Inflation remained high in August at 8.3% coming in higher than expected, removing hopes of a nascent slowdown, and triggering another 0.75% interest rate hike by the Federal Reserve.
It’s the fifth straight month of hikes and the third consecutive month of 0.75%. Federal Reserve Chair Jerome Powell reiterated that it would not hesitate in tightening monetary policy further to curb inflation. Officials predicted that interest rates would reach 4.4% by the end of 2022 and 4.6% in 2023.
This is causing investors to fear that such aggressive rate hikes will likely cause more damage to the U.S. and world economy, leading to a possible global recession.
U.K. is likely in a recession
The U.K. and Europe are facing significant headwinds in their economies as growth is slowing, inflation remains high causing debts to also rise and the war in Ukraine continues to impact energy supply and prices.
Households are struggling under such inflationary pressure and the gradual increase of interest rates. This caused both the British Pound and the Euro to weaken against the USD, with the Euro reaching parity with the USD for the first time since 2002.
The European Central Bank hiked interest rates by 0.75% and its President, Christine Lagarde hinted that this could be repeated in October. European Commission President, Ursula Von Der Leyen said it may need to raise €140 billion to cap revenues of low-cost power producers and as part of a series of steps to manage the energy crisis.
The U.K. has likely slipped into recession. Its new Prime Minister Liz Truss announced a historically large and unpopular tax-cut package (the largest in 50 years), with criticism from within the U.K. but also by the International Monetary Fund and the U.S. Biden administration.
It placed added pressure on the British Pound and forced the Bank of England to intervene over concerns the country’s pension funds. After weeks of pressure, her government was forced to backtrack from these fiscal policies.
Finally, the Bank of England raised rates by 0.50% to 2.25%. Fitch anticipates that the U.K. interest rate will rise from 2.25% to 4.25% by December 2022 and 5.0% by 2023.
Chinese economy has several headwinds
China’s biggest banks lowered their benchmark deposit rates across the board for the first time since 2015, in a coordinated move to improve lending and encourage economic growth.
However, the correction to China’s commercial real estate market may have at least another two years according to HSBC while Chinese homebuyers are now boycotting the market. Chinese households are expected to shift US$18.1 trillion from property into financial products over the next nine years, according to CLSA.
Tensions between Beijing and Taiwan are also impacting sentiment amongst investors with Chinese and Hong Kong markets remaining weak.
Japan intervened to support the yen for the first time since 1998, seeking to slowdown already 20% decline against the USD this year. The Bank of Japan is insisting on its negative-rate policy even as other economies are lifting rates.
Australia not immune from ‘September Effect’
September in Australia saw footy finals, a surprise public holiday, the scrapping of mandatory isolation periods for COVID-19, another interest rate rise, continued record high levels of retail spending and the reintroduction of the fuel excise (increasing petrol prices by at least 22c a litre).
The markets did not defy the "September Effect", with the S&P/ASX 200 index ended last month down 6.17%, after suffering declines across every sector. The September slump saw the benchmark index give up most of the gains recorded in July and August, ending the quarter only 0.4% higher.
While the Aussie economic picture remains a bit brighter here than in the rest of the world, the risk of recession is ever present.
The combination of high and rising inflation, a plunge in share markets, falling commodity prices and low confidence and weakening housing indicators all suggest weaker economic conditions.