Worst Month of the Year for Stocks and Bonds

This week saw another decline in stocks and bonds as investors embraced the US Federal Reserve's narrative from last week, suggesting that interest rates could remain elevated for an extended period. This comes as the US economy has demonstrated significant resilience this year, leading to expectations that tighter monetary policy might be necessary for a longer duration.

Wall Street’s benchmark S&P 500 stock index fell 0.74% for the week, extending its losing streak to four weeks. Hence a drop of over 5% in September, steering it towards its first quarterly loss this year. The retreat in the US bond market also gained pace amid increasing oil prices, a strong dollar, and a significant fiscal deficit. Long-term Treasury yields reached their highest levels in over fifteen years. Benchmark 10-year yield gained 14 basis points, increasing to 4.58%.

In continental Europe, Germany’s 10-year bond yield climbed to its highest point since 2011 (2.84%, up 10 basis points week-over-week), dragged higher in the wake of the U.S. move. Earlier this month, when the European Central Bank raised interest rates, President Christine Lagarde said that it might take a break from its tightening cycle. However, she indicated this week that the policy rates would need to be upheld for a significantly extended period to effectively combat inflation. European stock indexes dropped for the second consecutive week (MSCI EMU down 0.97%).

In Asia, China’s Shanghai Composite index fell about 0.70%, while Hong Kong’s Hang Seng index lost 1.37% amid worries about a greater meltdown in China’s property market following Evergrande Group's decision to scrap a meeting with creditors. The group said it won’t be able to issue new debt due to an ongoing government investigation into one of its units. Concerns over China saw Korea’s Kospi lose 1.72% while Japan’s benchmark Nikkei 225 slipped 1.68%.

Energy holds up best among the S&P sectors

Oil prices edged higher (WTI crude up 0.84%), rebounding from their first weekly decline in a month as traders shifted their attention back to the potential for reduced supplies in the future. Yet industry data from the American Petroleum Institute released on Tuesday showed U.S. crude oil stockpiles rose by 1.586 million barrels in the week that ended September 22nd, against expectations for a small drop, after a 5.25 million barrels draw in the previous week.

The energy sector gained 1.27% week-over-week. Materials edged up 0.17%. The other S&P sectors finished the week in the red. Rate-sensitive utilities were the worst performer, sinking 6.99%.

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