Worst month since beginning of pandemic
The S&P 500 finished September down 4.8% - its worst month since March 2020 when it fell 12.5% - and is now up +14.7% this year. The Nasdaq dropped even more at -5.7% and the Russell 2000 fell a relatively modest 3.1%. Rising yields on Fed tapering plans, rising inflation and a decelerating growth outlook hurt sentiment. Commodities rallied strongly to near this year’s highs as supply constraints and shrinking inventory increasingly lag demand.
Treasury yields rise amid tightening expectations
Source: MSCI, IBES, Refinitiv DataStream, August 2021.
ETF volumes and systematic players (CTAs) strongly dictated price action in the second half of September compared to single stock investors. Broker data shows hedge fund positioning is still light, however money market funds have plenty of dry powder to deploy. Mutual funds remain on the side lines but could step in to add ahead of the start of earnings season in mid-October.
Expectations flip in Europe
Europe’s seven-month run of consecutive higher returns ended with September down 3%. There was a wide spread between the best and worst performing sectors (energy +4%, mining -6%. Covid ‘winners’ were down 10%.
Risk assets are coming under pressure given the record rally in cyclicals, upcoming Fed tapering, tough comparable months for the second half of 2021, and flattening growth. In recent weeks, economic data has missed expectations, the earnings upgrade cycle has stalled, global analyst net revisions have turned negative and the market posted its first 5% pullback.
Positive momentum in equity inflows this year came to a stop in Q3 with the end of September seeing the biggest outflow all year. Expectations have flipped compared to the first half of 2021 - the surprise now would be a series of earnings growth beats rather than misses.
The IPO calendar continues to be packed with global equity issuance totalling $1.2 trillion this year. Europe kept pace with around a 20% share of the volume, with $230 billion being raised - the highest since 2014. European private capital raising continues to break records.
Asia weighed down by China
MSCI Asian Pacific ex Japan declined 4.3%, in line with global and emerging market indices. HK/China, Thailand, and Korea were the worst performers in the region. In Hong Kong, half of the Hang Seng China Enterprises index’s third quarter decline of 18% came from four internet stocks Alibaba, Kuaishou, Meituan and Tencent.
In China, slowing property sales and power shortages hurt the production of key materials including steel, cement, aluminium and chemicals.
Beijing also stepped up its interventions, with the State Council pledging to “stabilise commodity prices via market-driven measures”. Downside risks in China have increased against the backdrop of slowing activity and rising concern that recent regulatory policies will further weigh on growth.
Evergrande’s credit stress sparked concerns among offshore investors over spill over risks, although onshore investors were less concerned with the A-share real estate index rising 5% in September compared to its Hong Kong-listed mainland counterparty losing 4%.
Onshore vs offshore investor reactions to Evergrande
Source: MSCI, Refinitiv DataStream, 4 October 2021. Learn more : Equities Outlook October 2021 - A bottleneck in headwinds (fidelity.be)
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