2H September Global Market Recap
16th September 2021 – 30th September 2021
Macro: The September ISM Manufacturing PMI registered 61.1, showing expansion for a 16th straight month and rising at a faster than expected pace. Despite supply chain issues continuing to weigh on industrial growth, sentiment remains optimistic as downstream demand remains solid. The U.S. retail sales unexpectedly increased 0.7% in August despite concerns that the escalating delta variation and ongoing supply chain issues would hold back spending. The Federal Reserve kept benchmark interest rates at zero in its recent FOMC meeting but signaled that it may start tapering as soon as November. There were more FOMC policymakers expecting rate hikes next year.
China's official manufacturing PMI index fell for the sixth straight month in September, unexpectedly falling into the contraction zone for the first time since last February. The low reading was attributed to the weaker growth in high energy consumption sectors, accompanied by soaring price in raw materials and factory gate price for products. The People's Bank of China (PBoC) emphasized on maintaining healthy development of real estate markets, and the adoption of green-finance tools to increase stability of credit growth, as well as better coordination across fiscal, industrial, and regulatory policies on its 3Q21 Monetary Policy Committee meeting. However, it did not signal significant monetary loosening.
Stocks: The U.S. stock market experienced the worst month this year in September with all three major indexes registering losses. The S&P 500 closed 4.8% lower, the Nasdaq plummeted 5.3% and the Dow fell 4.3%. Rising rates, spurred by inflation fears and Fed’s signals that it would begin winding down its massive bond purchases soon, are among the top negative drivers for the market.
Despite strengthening fundamentals and rising optimism, the A-share market underperformed as compared to global markets. The Shanghai Composite Index has increased by 2.7% year to date, while the CSI 300 Index and Shenzhen Component Index have decreased by 6.6% and 1.1%, respectively. Policy risks and credit risks in the real estate sector are two of the main reasons for the underperformance. Concerns are compounded by the fact that China is presently experiencing one of the most major power outages in a decade, with provinces beginning to implement power rationing or rolling blackouts measures in September to fulfill annual target for energy consumption and energy intensity. However, recent policies are undergoing positive changes. The Chinese government has signaled its intent to address Evergrande’s debt issues, and National Development and Reform Commission of China (NDRC) has proposed several measures to resolve the power shortage issues.
Rates: The 10-year U.S. treasury yield increased by 17.85bps in the month as the Federal Reserve signaled to start pulling back on its massive debt purchases in November. The Bank of England left the door open for a potential rate hike as soon as November if necessary, and Norway delivered the first post-crisis hike among the G10 countries. PBoC’s governor Yi Gang mentioned that China will extend the time for implementing normal monetary policy as much as possible and there is no need for asset purchases.
Credit: Global major CDS indexes rose in the month as the Fed signaled their intent to scale back on its massive debt purchases, The Chinese government has signaled its intent to ring fenced Evergrande’s debt issues. The government bought out part of Evergrande’s stake in Shengjing Bank and pump 790 billion yuan ($123 billion) into the financial system over 10 days to ease liquidity. The total debt held by nonfinancial corporations shot up to $11.17 trillion and over 55% of U.S. GDP in 2020, as companies rushed to the bond market in early 2020 to take advantage of low borrowing costs.
FX: The Dollar Index rose by 1.7% and hit an all year high driven by the news the Fed may start tapering stimulus as soon as November. China plans to relax restrictions on domestic banks' ability to provide yuan-denominated loans overseas, a further step in its strategy to increase global use of the Chinese currency.
Commodities: Natural Gas prices surge by another 35.4% in the month, partially driven by a surge in demand. A cold European winter and spring also meant supplies had already been heavily depleted by the summer. The crisis has forced some fertilizer producers in Europe to reduce output, while Chinese power grids are rationing supplies to factories, which will curb production. In a worst-case scenario, Europe could face blackouts and China’s industrial users, including chip makers and aluminum smelters, may shut factories, with repercussions echoing around the globe. Brent and WTI crude oil prices rose by 7.6% and 9.5% as the OPEC+ group of producers stuck to its planned output increase rather than pumping even more crude. The CoreCommodity CRB Index has surpassed levels back in mid-2015 as the global economy recovery continues.