In the third quarter of the year, financial markets went through a phase of consolidation of year- to-date earnings. In detail, developed countries outperformed emerging countries. This was mainly because of the regulatory policies introduced by the Chinese government in several key sectors of China’s economy, such as technology and real estate.
The macroeconomic framework is still healthy, with global GDP growth expected at about +6% this year and corporate profits projected to rise even in 2022 at a growth rate of nearly 10%. In the period, the higher inflation reported both in the U.S. and Europe was particularly important. In August, in the United States, the consumer price index was +5.3% year on year, showing the highest growth since the great financial crisis of 2008.
In September, in Germany the same index neared +4%, for the first time since the 1990s. In light of the above, the debate within the boards of the central banks and, more generally, within the investor community was thus centred on whether or not these inflationary pressures could be regarded as temporary. In particular, the Fed decided to accelerate the unwinding of the stimulus measures introduced during the pandemic.
In the August bulletin issued after the meeting of its Board of Governors, the Fed stated that it could start tapering its 120-billion-dollar-a-month quantitative easing programme by the end of the year, and that the following monetary tightening could start earlier than expected. Half the members of the Board expects a first rise in interest rates to take place as soon as next year. As for the Eurozone, the European Central Bank has announced a “moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the second and third quarters of this year.” However, the 1,850-billion-euro-budget of the programme remains confirmed, as is its expiry, which will not occur before the end of March 2022. The main stock prices stabilised after the sharp increases occurred since year-start. In the quarter, the Eurostoxx50 index performed close to 0% and the S&P 500 was at about 3% in euros.
Emerging markets were characterised by negative yields, with the benchmark index ending the quarter at -6.5%, penalized especially by the Chinese market at about -17%. China’s marked underperformance was primarily due to the real estate crisis that hit the country, with particular reference to the real estate giant Evergrande. Due to its liquidity crisis, the company has proved unable to repay the 300 billion debt accumulated so far. Fear of global systemic contagion and of a “new Lehman Brothers” has caused turbulence on the markets, which then subsided when China issued partially reassuring statements about possible extraordinary liquidity injections. With regard to sectors, there was a first phase in which technological stocks overperformed cyclical stocks.
Then, in September, there was a sector rotation in favour of the latter, especially thanks to the traditional banking industry and the energy sector, which were driven by higher medium-to-long-term yields on government bonds and lower supply, respectively. On the bond market, yields on ten-year German and American bonds repositioned to near their June highs of -0.20% and 1.53%, respectively, following an initial decline. The steepening of the main global bond curves was due to the upwards revision of growth and inflation estimates, as well as the monetary policy choices made by central banks. Credit spreads remained substantially unchanged over the period, and the expected rate of global defaults stood at an historic low of around 1%. Yield spreads within the Eurozone remained stable.
In particular, the BTP-Bund spread went from 106 to 105 bps. In foreign exchange, the dollar appreciated against the euro by more than two percentage points, due mainly to statements by the Federal Reserve, which was more “hawkish” than the other central banks. In the third quarter of 2021, the general commodities index (BCOMTR Index) rose further, driven by the gradual easing of the health emergency, the resulting signs of a solid global cyclical recovery and the continuing criticalities on the supply side.
The energy sector, which is traditionally very sensitive to the performance of the economic cycle, was particularly positive. Within this sector, the natural gas segment stood out, driven above all by the slowdown of Russian production.
Industrial metals also performed positively, whereas agricultural commodities did not show particular movements. Precious metals declined, slowed by concerns about the beginning of Fed tapering.