In September, the equity markets remained caught in the trap of the sluggish momentum that began in August: global equities lost nearly 2% in euros at the end of the month (i.e. 4% in dollars; we will return to the currency effect later). We are therefore immersed in a global environment that is rather hostile to risk-taking, for which there are many reasons: rising rates, a rise in oil prices and the dollar, not to mention the usual adverse seasonal effect on the markets.
In regional terms, developed markets were more affected than emerging markets. The sell-off was more pronounced in the US than in Europe, in a month when bond markets were again the epicentre of the turmoil.
Indeed, the US 10-year yield rose from 4,10% to nearly 4,60% and its German counterpart also saw a significant increase from around 2,50% to 2,90%. At the same time, the announced cuts in oil production caused prices to soar, extending the upward movement that began in July to reach USD 95 per barrel at the end of the month.
In addition to limited supply, demand was robust this summer, particularly for transport. In the coming months, however, demand could be more affected by sectors sensitive to economic growth, which could ease upward pressure on oil prices.
Finally, the appreciating greenback is the last feature of the current market environment, and can be seen as symptomatic of risk aversion. The resilience of the US economy in the face of a febrile European economy has strengthened the dollar. In addition, the rate differential dynamic has once again become favourable for the dollar against the euro.
This triple upward movement in rates, oil and the dollar undermined equities.
On the economic front, the fall in inflation in the eurozone was the best news of the month: inflation fell from 5,2% year-on-year to 4,3%, and core inflation fell from 5,3% to 4,5%. On the other side of the Atlantic, US growth is holding up well for the moment. The third growth estimate for the second quarter is 2,1%, with one downside, however: consumption is lower than in previous estimates.While consumption has so far been buoyed by wage increases and savings that trace back to the cheques distributed to deal with economic setbacks linked to the pandemic, the narrative has now been reversed. Covid-related savings have almost completely disappeared and wage growth is no longer as strong as a few months ago.
In short, the economic environment is becoming more complex as monetary policy remains tight. Moreover, the unattractive valuation levels on equities versus bonds lead us to recommend a low-risk allocation.
We therefore recommend a slight underweight on equities versus bonds. In terms of sectors, we highlight Consumer Staples and Utilities, which show some stability in earnings during complex economic periods. On the bond front, we are focusing on sovereign bonds, which are becoming more attractive with the end of the cycle of central bank rate hikes. Although central banks are still highly vigilant with regard to inflation, which has not yet stabilised at 2%, the latter is at much less frightening levels than it was a year ago. With the impact of rate hikes, we should enter a more sluggish growth regime that will likely lead to lower inflation.
