Backdrop

• Economics:  Inflationary pressures continued to loom large, with the US printing its highest core inflation rate since the 1980s.  In Europe, spiralling energy bills added to the inflation picture.  There were signs that the pace of recovery around the world was weakening, due, in part, to the spread of the Delta variant of COVID-19.  It also became increasingly apparent that supply constraints were tempering the economic recovery. A flurry of headlines served to highlight the critical state of the UK’s haulage industry, where longer-standing problems have been intensified by the consequences of the country’s exit from the EU. Globally, the supply of goods continued to be hampered by lockdowns in Asia and soaring shipping costs.
• Policy: With inflationary pressure building, central bankers began to warm investors up to the idea of nearer-term monetary tightening.  The US Federal Reserve indicated that it could start tapering its asset purchasing program by the end of the year.  The ECB also announced its intention to slow the pace of the Pandemic Emergency Purchase Programme over the quarter ahead.    The Bank of England held rates at 0.10%, whilst nudging up its forecast for inflation at the end of the year to 4% (more than twice its target rate).
• UK politics and events: The government announced its Health and Social Care Levy, resulting in Britain’s highest tax burden since the post-war era.  The tax rise broke a Tory manifesto pledge, but, with the country’s debt-to-GDP ratio exceeding 100%, the prospect of further public borrowing was rejected.  Several political heavyweights lost their jobs in a re-shuffle.  The quarter ended with chaos at the fuel pumps, with delivery shortfalls sparking a demand surge.  A sharp rise in the gas price caused some of the smaller energy supply companies to fail.  With a cacophony of negative headlines, a fall in the value of sterling and the spectre of stagflation looming large, there were fears of a “winter of discontent” ahead.
• Global politics:  In China, the regulatory crackdown broadened.  This is occurring under the banner of “Common Prosperity”, whereby the Communist Party is forcing through a redistribution of wealth and a clampdown on high earners.  Also in China, an unfolding liquidity crisis for troubled property developer, Evergrande, sparked fears of a “Lehman moment” for the country.  Democrats and Republicans clashed over the US debt ceiling, with time to avert a default running short.  The Prime Minister of Japan resigned abruptly after his popularity collapsed due to his handling of the pandemic.  The US, Australia and the UK agreed a security pact which was regarded as a thinly veiled strategy to counter Beijing’s influence in the South China Sea.  In Germany, the federal elections marked the end of Angela Merkel’s leadership.
• COVID-19: Due to concerns about the new school year, the vaccine roll-out was extended in the UK – controversially - to 12 to 15-year-olds.  Prime Minister Johnson also unveiled his winter plan for tackling the ongoing pandemic, including booster shots.  Around the world, situations varied according to the availability/take-up of the vaccine and the approach to controlling outbreaks.
• Climate and energy: European gas prices rose by over 30% due to lower supplies and a surge in demand as the world continued to awaken from its pandemic slumber.  With supply levels way below average, there were growing concerns about the consequences of a harsh winter.  The price surge resulted in the failure of some small energy suppliers in the UK, as well as the temporary closure of fertiliser units, leading to a shortage of carbon dioxide.  These events served to highlight our current dependency upon gas, as well as its crucial role in facilitating the shift away from coal and oil towards the panacea of a zero-carbon future.

Equity markets

• A strong start to September quickly gave way to a challenging and volatile month for equities.  Top of a growing list of worries was the prospect of quantitative tightening by central banks.  The US debt ceiling debacle added to investors’ nerves, as did lingering concerns about the Delta variant and the impact of inflation upon corporate margins.
•  With yields rising and inflation concerns to the fore, growth stocks, particularly in the technology space, were battered. Indeed, the Nasdaq had its worst month since March 2020.  Conversely, oil and gas stocks rallied amid the growing energy crisis.  Banks also responded positively to the backdrop of rising yields.
• The perilous circumstances surrounding Chinese property company Evergrande, as well as the ongoing regulatory crackdown by the government, rocked not only the local markets, but also contributed more broadly to equity investors’ sense of nervousness.
• The sell-off impacted indices around the world.  Whilst still in negative territory, the large-cap index in the UK outperformed, helped by a weaker sterling, the strength of energy stocks and a better month for banks.  However, it was a relatively tough month for mid and smaller-cap UK stocks.
• Broadly, growth indices underperformed value indices.

Bond markets

• With central bankers threatening to tighten monetary conditions, bond yields rose, making September the worst month for global debt markets since the pandemic-induced volatility of early 2020.  Indeed, the 10-year UK gilt yield touched 1% for the first time since 2019.
• UK gilts delivered a negative return, with longer maturities faring the worst.  Credit markets outperformed, with higher yielding and less interest rate sensitive bonds holding up better.
• UK index-linked bond prices also fell sharply after performing well in preceding months.

Commodity and currency markets

• It was a mixed picture in commodity markets.  While the oil price surged, copper and precious metals prices fell back.
• European gas prices surged to a level equivalent to a crude oil price of $170 per barrel; the actual price of crude at the end of September was around $75 per barrel.
• An index of global food prices climbed to multi-year highs, with power curbs affecting the harvest in China.
• The gold price fell, impacted negatively by higher yields and a stronger US dollar.
• The US dollar benefited from flight-to-safety moves, as well as the rising yield backdrop.  Sterling dropped amid scenes of empty fuel stations, food shortages and inflation/stagflation fears.
• Bitcoin was buffeted by China’s announcement that it would be illegal for cryptocurrency exchanges to provide services to Chinese users.