Investors Are Asking This Question: Are We Back To Back To Square One?

Ela Karahasanoğlu

-It was an explicit risk-off market sentiment throughout September with jittery equity and bond markets. However, it wasn’t the traditional markets that made the news; it was the skyrocketing oil prices on the back of the ongoing production cut by Russia and OPEC+. The abating recession fears didn’t help oil prices either as any concerns related to reduced oil demand was also off the table.

–Higher oil prices means higher inflation which means higher likelihood of higher rates. This naturally weighed not only on equities and bonds but also on emerging markets and crypto currencies. Adding to the market jitters was the looming US government shutdown on October 1st and no obvious sign of a deal in sight to avert it.

-Global stock markets, bonds as well as some of the crypto currencies and gold suffered from the negative market sentiment due to rising oil prices despite some economic news in the US and Europe that pointed to soft landing as opposed to a full blown recession. For example, the European Union (EU) unemployment rate announced on August 31^st which was 6.4% (same as end of June and early August) and the US unemployment rate of 3.8% (vs. 3.6% in July and 3.5% in August) announced on September 1^st pointed to relatively stable and healthy labour markets.

–Crude oil continued its climb in August on the back of reduced risk of global recession and the pre-planned production cuts by Russia and OPEC+. As of September 27^th first month futures contract for US crude oil WTI was up by 12% on the month. While this was a decent size return what really spooked the markets was the fact that oil spiked over 30% over the preceding three months, fueling the risk of inflation rearing its ugly head again.

–Fearing the increased risk of recession, equities dropped in September. As of September 27^th the US equity index S&P 500 and European stock index Euro Stoxx 50 were down by -5.2% and -3.9% for the month, dragging their year to date returns to 11.3% and 8.9% respectively. The global equity markets suffered from the negative sentiment as well with the global equity indicator MSCI All Country World Index (ACWI) and the emerging market index MSCI EEM both down by -4.6% and -3.5% on the month respectively.

–Gold didn’t fare well in September. Over the same time frame the first month futures contract for Gold was down by -3.8% on the month, but managed to hang onto its gains from earlier in the year and delivered 3.5% return year to date. Similar to August, crypto markets continued to lose steam. As of September 27^th Bitcoin was slightly up on the month with 0.9% gain while Ethereum was down by -3.3% on the month. Despite their weak returns over the last few months, Bitcoin remained 58.7% and Ethereum 32.9% up on the year.

–Turkish stock market continued to be one of the few equity markets up on the month. Turkish stocks gained 3.7% in local currency terms (1.8% in US dollar basis) as of September 27^th. This brought the index’s year to date return to 49% in local terms and 2.6% in US dollar basis. Could this be a turning point in the markets? Answer: maybe…

–You may be asking “What should we do then?” The answer is simple: diversify the investments and the risk. This means investing across different markets, geographies and instruments. Reminding our readers of the famous Warren Buffet saying, make sure you are not caught swimming without your swimsuit when the tide goes out.

As reported by Europe’s Earth Observation Agency Copernicus, it was a record hot summer with extreme heat waves impacting North America, Europe and Asia. In June, July and August were 0.66 degrees Celsius above the average between 1991 and 2020. In fact this August turned out to be the warmest August and also the second-warmest month on record (the first one was July). The experts seem to think that we will continue see more frequent and intense extreme weather events in the future. Anyone doubting climate change may consider reviewing the facts.

It wasn’t just the weather that was boiling, the markets had an eventful month too. It was an explicit risk-off market sentiment throughout the month with jittery equity and bond markets. However, it wasn’t the traditional markets that made the news; it was the skyrocketing oil prices on the back of the ongoing production cut by Russia and OPEC+. The abating recession fears didn’t help oil prices either as any concerns related to reduced oil demand was also off the table.

Higher oil prices means higher inflation which means higher likelihood of higher rates. This naturally weighed not only on equities and bonds but also on emerging markets and crypto currencies. Adding to the market jitters was the looming US government shutdown on October 1st and no obvious sign of a deal in sight to avert it.

MOST MARKETS SUFFERED FROM NEGATIVE MARKET SENTIMENT

Global stock markets, bonds as well as some of the crypto currencies and gold suffered from the negative market sentiment due to rising oil prices despite some economic news in the US and Europe that pointed to soft landing as opposed to a full blown recession. For example, the European Union (EU) unemployment rate announced on August 31^st which was 6.4% (same as end of June and early August) and the US unemployment rate of 3.8% (vs. 3.6% in July and 3.5% in August) announced on September 1^st pointed to relatively stable and healthy labour markets. US ISM non-manufacturing purchasing manager index (PMI) painted an improving economic environment with a reading of 54.5 which was higher than 52.7 reported in August.

On the other hand, similar to August there were still some signs of softening in parts of the larger economies. One concern for market players continued to be the fact that inflation (CPI) which includes energy and food prices still remained elevated. Indeed, the CPI for EU came out at 5.2% (vs. 5.3% on August 31^st) and that of US was 3.7% (vs. 3.2% in August).

The market reaction to the CPI data was subtle but the sentiment turned visibly sour as West Texas Intermediate (WTI) crude oil tipped over $90 on September 15^th.

Source: Nymex, Bloomberg

Consequently crude oil continued its climb in August on the back of reduced risk of global recession and the pre-planned production cuts by Russia and OPEC+. As of September 27^th first month futures contract for US crude oil WTI was up by 12% on the month. While this was a decent size return what really spooked the markets was the fact that oil spiked over 30% over the preceding three months, fueling the risk of inflation rearing its ugly head again.

EQUITIES AND BONDS DROPPED IN TANDEM

Fearing the increased risk of recession, equities dropped in September. As of September 27^th the US equity index S&P 500 and European stock index Euro Stoxx 50 were down by -5.2% and -3.9% for the month, dragging their year to date returns to 11.3% and 8.9% respectively. The global equity markets suffered from the negative sentiment as well with the global equity indicator MSCI All Country World Index (ACWI) and the emerging market index MSCI EEM both down by -4.6% and -3.5% on the month respectively.

As we noted in our previous issue, the annual Jackson Hole Economic Symposium by the Federal Reserve Bank of Kansas City hosting the leading central bank heads dampened the market mood. This was because some of the heavyweight central bankers, such as U.S. Federal Reserve (FED) chair Jeremy Powell and the European Central Bank President Christine Lagarde underlined their goal to “beat inflation” and for that they will keep the interest rates as high and as long as necessary. In September markets feared rates may remain higher even longer than originally envisioned as oil prices inched towards $100.

This came as no surprise to the bond markets which were already expecting not only the nominal rates but the inflation to remain elevated in the medium to long term as well. The global government bond yields saw an increase (this means  bond prices dropped as interest rates and bonds are inversely related) to better adjust for the “higher for longer” theme. As of September 27^th Bloomberg Global Aggregate Bond Index, the benchmark for global government bonds, was down by -1.8% on the month. Similarly Bloomberg Global Corporate Bond and High Yield Bond Indexes were also down on the month losing -1.9% and -1.1% respectively. This brought their year to date returns to 1.4% and 5.5% respectively.

IN SEPTEMBER GOLD HAD A WEAK PERFORMANCE TOO

Gold didn’t fare well in September. Over the same time frame the first month futures contract for Gold was down by -3.8% on the month, but managed to hang onto its gains from earlier in the year and delivered 3.5% return year to date. Gold prices have been partially buoyed by the strong global central bank demand for the precious metal since higher interest rates put a dent in the US Treasury returns.

CRYPTO MARKETS CONTINUED LOSING GROUND

Similar to August, crypto markets continued to lose steam. As of September 27^th Bitcoin was slightly up on the month with 0.9% gain while Ethereum was down by -3.3% on the month. Despite their weak returns over the last few months, Bitcoin remained 58.7% and Ethereum 32.9% up on the year.

TURKISH MARKETS CONTINUED TO SURPRISE ITS INVESTORS

Turkish stock market continued to be one of the few equity markets up on the month. Turkish  stocks gained 3.7% in local currency terms (1.8% in US dollar basis) as of September 27^th. This brought the index’s year to date return to 49% in local terms and 2.6% in US dollar basis. The reason for the monthly performance in US dollar basis being lower than the one in local terms was due to 1.9% appreciation in greenback against Turkish Lira.

IS THIS A TURNING POINT IN MARKETS?

Could this be a turning point in the markets?

Answer: maybe…

Should oil price continue to hike, recession may be inevitable for global markets. With a FED and other heavy weight central banks sworn to fight inflation, we may be in the elevated rates environment much longer than most have envisioned.

You may be asking “What should we do then?” The answer is simple: diversify the investments and the risk. This means investing across different markets, geographies and instruments. Reminding our readers of the famous Warren Buffet saying, make sure you are not caught swimming without your swimsuit when the tide goes out.

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Finance Expert

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/