Out of the Cauldron into the Fire
With the summer very much over, unless something material changes it is downhill to a particularly nasty global recession, with the UK skirting ever closer. All markets have been falling, oil is back at $80 and there has been a particularly vicious global bond rout. The original Dr Doom, Dr Roubini, has described what he sees coming as a “long, ugly recession” and this was weeks before Kwasi Kwarteng, the British Chancellor, even announced his carnage inducing unfunded £45 billion tax cut package that has so badly ravaged GBP (which ultimately rebounded), bonds and equities, and resulted in a red card warning from the IMF.
There are no two ways about it, unless a miracle occurs, this is the direction of travel and was increasingly written in red across markets during September. The problem is that to fight inflation by aggressively raising rates, as set out by the Fed’s Jerome Powell, also encourages recession. It doesn’t help that we are also talking ourselves into a recession. In fact, the only person talking down recessionary fears appears to be Janet Yellen, who said that financial markets are “functioning well”, a view I am sure few people subscribe to.
A sliver of light this month in these dark days has been the slowdown in inflationary growth, with the oil price dramatically down from the previous few months. But there was no let-up in major central bank action, as the bulk of central banks raised rates, with the chief outlier being the Bank of Japan. For large parts of the month, the market was waiting for the Fed to act, with some of the more hawkish commentators calling for a full 1.0% hike but ultimately it was kept to the telegraphed 0.75%, with further rises to follow. The Bank of England followed suit with a 0.5% increase to 2.25%, a 14 year high, and the Swiss raised their rates by 0.75 percentage points, closing the door on seven years of negative interest rates. Earlier in the month, on 8 September, the ECB announced its biggest interest rate rise since 1999, with all three of the ECB key interest rates being raised by 75bps. Christine Lagarde initially said that there are more than two more to come, but less than five, only to add later in the month that “we will do what we have to do,” pointing to further increases at the “next several meetings.”
What the Bank of England is set to do next is causing much head-scratching and angst, with Paul Marshall, founder of Marshall Wace, accusing it of being behind the curve. Let’s face it, the credibility of all central banks is being questioned and all have been behind this curve. Aggressive action is pretty much across the board and is now expected, although the Bank of England having to go into the market to buy bonds - and save the UK pensions sector - was definitely not on the cards. Thank you ‘Kami-Kwasi’ economics! Against this backdrop, the global bond selloff was led by UK gilts and in the US, Treasury yields returned to levels not seen for more than a decade, with the two-year hitting a high of 4.34% and the 10 year broke through 4%, taking it back to 2008 territory.
The 21 September marked a dark day geopolitically, for this was the day Putin announced he was mobilising reserves and not ruling out the use of nuclear weapons. Dark words, yet the Ukraine and markets (excluding Russian) appeared to take this in their stride as just words from a desperate pugilist on the ropes and markets were largely unmoved.
Equities were volatile through much of the month. For many, it was a case of buckle up and hope for the best, although for a large part it was heading down. Markets were largely risk off sitting on a knife edge, driven by sentiment dictated by recessionary worries, rate rises, inflationary numbers and activities in China and Russia. This was reflected by sharp market drawdowns and by close this was the worst month for the S&P 500 since March, down almost 10%, while the Nasdaq fell just over 10%. Given so much of the new stemmed from the UK, it was perhaps surprising that the FTSE 100 only fell 3.6% month, with the DAX only marginally worse, down 4.1%. While in Japan, the Nikkei 225 was down 6.2%.
Energy markets, all too often the catalyst for market concerns, saw prices falling, which was perhaps surprising as Russia turned off Nord Stream gas flows. But then the unprecedented Nord Stream explosion saw gas prices once more rise, raising concerns about the safety of Western underwater infrastructure. But by the end of the month, natural gas was down just over 26% and TTF, the European benchmark, down 21.3%. While oil fell on slowing growth concerns, with WTI and Brent down over 10% for the month.
Currencies were all about the strong USD and in the headlines, at least, GBP falling to USD 1.03, its lowest ever point on 26 September after the Chancellor unveiled his damaging tax package. By the end of the month, GBP had fallen 3.8% and EUR 2.4% against the USD on energy and recessionary concerns, with the EUR dropping below par. But it was the AUD and NZD that fared worst of all against the USD, down 6.4% and over 8% respectively.
The VIX, always a useful gauge where the market is positioned, shot up at the start of the month and, in particular, on 23 September when it breached the all-important red flag of 30 and stayed there for the remainder of the month. Without doubt there is fear in the air.
In crypto, conversations in the early part of the month were about the Ethereum merger, as it changed the way it validates transactions on its ledger that reduces its electricity footprint from 8.GW to 85MW. This development is a seismic development that moves it from ‘proof of work’ to ‘proof of stake’. According to the Financial Times, this move was being closely watched by hedge funds. On the day, the currency itself fell over 8% and bitcoin just over 2%. But by the end of the month this had become a sidebar, as crypto struggled to gain traction, weighed down by inflationary and central bank concerns. On 13 September alone, ethereum dropped 7% and bitcoin almost 10%, taking it back down to just above $20,000. This fall continued and by 23 September bitcoin was once more treading water around the $18,500 marker before rising at the end of the month to around $19,300, a fall of around 4% for the month, while ethereum plummeted by 16.5%.