At the close of business last Friday, global equities were lower on the week amid rising equity, fixed income, and currency volatility. The yield on the US 10-year note was little changed on the week at 3.74% but rose to just above 4% at midweek. The price of a barrel of West Texas Intermediate crude oil rose $1.50 to $80.50 while volatility, as measured by the Cboe Volatility Index (VIX), rose to 32 from 29 a week ago.
September proved once again to be the most volatile month for investing. What had been expected was the start of the change in global central banks’ monetary policies, from ultra-accommodative to tightening. What was unexpected was that the pivot and market expectations would be toward an ultra-restrictive monetary policy in the form of above-average interest rate increases.
Further, the conflict in Ukraine and its impact on energy and food prices, along with China implementing a zero-COVID policy and its added impact on supply chain disruptions, have also been unexpected but material pit stops.
The silver lining to this cloud is that we’re likely closer to some clarity on further Fed policy action, and once that happens, markets may turn back to focusing on individual company fundamentals, which would be a positive for active security selection.
CANADIAN ECONOMIC NEWS
A good number of employers in Canada are not only embracing a combination of working from home and part of the week in the office, but they are also transitioning to a 4-day work week. Data suggests the 4-day work week results in happier employees and that it boosts productivity.
US ECONOMIC NEWS
US economic data continued to hold up better than expected as new homes sales rose a shocking 28.8% in August from July, core durable goods orders rose 1.3% last month and weekly jobless claims continued to slide, falling to 193,000 from a downwardly revised 209,000 the prior week. The consumption portion of Q2 US GDP was revised to 2% from 1.5%.
EUROPEAN ECONOMIC NEWS
UK central bank intervenes in bond market
About 48 hours after saying it would not adjust monetary policy until at least its November meeting in response to British Prime Minister Liz Truss’s plan to slash taxes and regulations during a time of high and rising inflation, the Bank of England was forced to buy 30-year gilts after a freefall in prices and a precipitous rise in yields. The yield spike raised financial stability concerns as UK pension plans and their intermediaries were hit with margin calls they could not meet amid long-gilt selling linked to liability-driven investment strategies. At a time when the BOE was preparing to shrink its balance sheet, it instead had to set up a program in which it will buy up to £65 billion in long-term bonds until mid-October while postponing quantitative tightening. These actions raised doubts about the bank’s credibility. UK rates and the pound stabilised after the intervention.
After falling to a record-low exchange rate of $1.0350 on Monday, the pound bounced back to $1.11 on Friday, but markets remain wary that what appears to be a short-term fix won’t work. On Thursday, Truss addressed the crisis for the first time, blaming global factors for the market turmoil, not the dramatic fiscal expansion that her government has proposed. Also this week, UK policymakers received a scolding from the International Monetary Fund in which it called the prime minister’s fiscal stimulus inappropriate given the inflation pressures in the economy. Additionally, Moody’s warned that the policy shift could negatively affect credit ratings.
JAPAN, CHINA, and EMERGING MARKETS ECONOMIC NEWS
Purchasing managers’ indices in China gave off mixed readings in September. The official manufacturing PMI rose to 50.1 from 49.7 while the services reading came in at 50.6, down from 52.4 in August. The Caixin manufacturing PMI fell to 48.1 from 49.5.
Despite sluggish global demand, Japan’s industrial output rose 2.7% in August, dwarfing expectations.
On Friday, the Reserve Bank of India raised its base rate 0.5% to 5.90%.
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