The third quarter of 2023 closes in an environment still marked by high geopolitical tensions, with the “usual” conflict in Ukraine and aggressive cartel policies implemented by some oil producers, Saudi Arabia above all, which are limiting supply by cutting production. The main economic consequences of these dynamics are significant increases in energy prices, which fuel inflation expectations, leading to restrictive monetary policies and anticipations of interest rate hikes.
At the level of financial markets, the correction that began in August continued during the month of September, with an acceleration of the decline after the Fed meeting on 20 September, where it was decided to keep rates unchanged, but the possibility of a further rise by the end of the year was left open. What influenced the markets the most was the prospect of a scenario of interest rates at current levels for a prolonged period of time, while the markets were already anticipating a phase of reduction from the middle of next year. Another situation that generated volatility in the markets was the risk of a shutdown of federal activities in the United States, which was avoided, at least momentarily, thanks to a measure signed in extremis that formally postponed it for 45 days, granting a new window of time for negotiations.
The US took the black jersey of the worst performers with the S&P 500 index down -5% and the Nasdaq -5.79%. Weighing on the performance of the technology index was the negative performance of the main tech stocks with Apple down -8.80% followed by Amazon (-7.67%), Google (-3.9%) and Microsoft (-3.66%). On the other hand, the oil and healthcare sectors were positive. Limited damage instead in Europe, with the Euro Stoxx 50 index closing the month at -2.50%. The German DAX index performed similarly at -2.80%, while Italy’s FTSE MIB index was slightly better at -1.40%. The Swiss market also performed weakly, with the SMI index losing -1% over the month. On the Asian side, Chinese activity weakened again in September. The small economic recovery seems to have come to a halt and as a result, market performance also suffered with the Chinese CSI 300 index at -2.70% and Hong Kong’s Hang Seng index at -3.10%. Similar trends for the Nikkei, which closed the month of September at -2.60%.
In our view, the medium-term scenario remains unfavorable for equity market performance, with the possibility that the correction phase is not yet over. There are still many factors that play against taking an exposure to financial markets. Given the large and rapid rise in rates in recent months, bond valuations are very attractive, making this asset class a good ally for navigating these months of high volatility.