Volatility came back during first month of Autumn

  • ECB expects faster growth
  • Fed soon will probably start scaling back asset purchases 

September brought bigger fluctuations in financial markets. World equity index1 lost 2.4% of its value and bonds2 dipped bit more than 1%. Market participants tried to evaluate newest US Fed and European central bank (ECB) statements and investors were spooked by financial troubles of Chinese real estate developer. Also everyone’s attention was focused on newest inflation data in order to see if recent spike in prices is indeed “transitionary”, the way central banks are expecting it to be.

In mid-September ECB kept interest rates unchanged, but adjusted the size of asset purchases under the Pandemic Emergency Purchase Programme (PEPP). ECB will now conduct the purchases at “a moderately lower pace than in the previous two quarters”. ECB President Christine Lagarde called it, “a recalibration”. It is expected, that central bank will buy securities from 60bn to 70bn euro per month until the end of the year. Also ECB revised upwards GDP growth projections for this year to 5%, from 4.6% in June. Regarding inflation, the ECB expects inflation to rise further this autumn, but to decline next year. Latest projections show, that this year headline inflation should come in at 2.2%, 1.7% in 2022 and 1.5% in 2023, from 1.9%, 1.5% and 1.4%, respectively.

Inflation in eurozone and US

Source: Bloomberg LP

One important development took shape in September. US policy makers moved towards agreeing on new taxes. New draft showed that they would scale back the more ambitious tax increases sought by Biden, but still it will be a significant unwinding of the tax cuts enacted by Republicans under former president Donald Trump four years ago. New proposal offers to increase the top tax rate on Americans earning over 435,000 USD from 37% to 39.6%, it also calls for a new corporate tax rate of 26.5% for large profitable businesses, up from the current rate of 21% but lower than President Biden’s original proposal of 28%. This could impact earnings for many S&P 500 companies and willingness to invest in the market by wealthy individuals.

In the U.S., employers and economists expected an increase in job applications as pandemic supports that included $300 per week for jobless Americans, extended benefits for the long-term unemployed and special aid for the self-employed expired Sept. 6. But the flood of job seekers has not materialized and this could have negative influence for companies seeking new workers as US Job openings are rising. Meanwhile Fed said that it would likely begin reducing its monthly bond purchases as soon as November and signaled, that interest rate increases may follow more quickly than previously expected.

US companies are hiring, but people are not rushing to get back to work

Source: Bloomberg LP

Financial markets also reacted to possible default by China's second biggest property developer Evergrande, which owes about USD 300 billion to its investors. Market participants are concerned about possible fallout from a messy collapse. On one hand a lot of analysts believe, that developer’s collapse could trigger property crash in China, but others can see it as a “Lehman moment” – liquidity crunch event, which could freeze the whole financial system and spread globally. There are still no signs, that Chinese government will step in and save the company, but central bank took steps and injected cash to contain the situation.

“House view” update

Increased volatility in the markets and few indicators prompted deterioration in our models. Small correction in the markets was widely expected, but long term rebound in global economic activity and still present financial stimulus warranted us to remain Neutral. Nonetheless we are continuously assessing the situation in the markets and will make adjustments if needed.

1MSCI ACWI Net Total Return EUR

2Bloomberg Barclays Global Aggregate Total Return hedged EUR



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