After starting the week in negative territory, market sentiment recovered over the week, with equities rallying and bonds partially offsetting recent declines. While volatility is expected to remain over the coming weeks, investors generally remain positive on the outlook, with positive expectations for corporate earnings contributing to a favourable backdrop for risk assets.
The improvement in investor sentiment was partly driven by a temporary deal to raise the US debt ceiling until December, coupled with the Non-Farm Payrolls job report data that was announced on Friday. In the Non-Farm Payrolls data, the US economy added 194,000 jobs throughout September, the lowest so far this year and well below the forecast of 500,000. Although missing expectations is typically negative for risk assets, investors are hopeful that the lower-than-expected jobs data could delay the Fed’s announcement of tapering asset purchases. While the reduction in central bank support is expected to begin over the next six months, analysts believe a delay in the tapering of asset purchases could reduce the chances of withdrawing monetary policy too soon. Despite volatility remaining a key feature over the week, the OBI portfolios benefitted from an improvement in market conditions, eroding some of the losses experienced in the week prior.
Looking at equity market performance over the week, Asian equities were the biggest beneficiary due to favourable data flows. Firstly, Chinese equities benefitted because of their increasingly attractive valuations caused by their heavy selling over regulatory and Evergrande news flows earlier this year. In addition, resource-rich regions within Asia benefitted from the rally in commodity prices, with further gains expected later this year. Japanese equities, which were last week’s worst-performing region, also rose throughout the week in anticipation of the nation’s general election at the end of the month.
US equities were buoyed by the extension added to the government’s debt ceiling towards the end of last week, as well as the possibility that the Fed may delay its tapering of asset purchases by another month. Since the start of this week, US companies have also begun announcing their latest earnings reports, which have so far indicated that consumer demand remained strong throughout the third quarter.
European and UK equities also rebounded over the past week, with investor pessimism about inflation and potential interest rate rising waning from highs observed over recent weeks. Vladimir Putin’s announcement that Russia could increase exports of natural gas to Europe helped improve sentiment for the region, while earnings optimism has also led to improvements in asset prices within the region.
As observed last week, demand for nominal bonds continued to fall into this week given the upward revision to inflation forecasts through to the year-end. The four nominal bond sectors monitored fell in similar proportion to last week, while Index-Linked Gilts continued to consolidate on last week’s gains.
Moving on to the performance of the portfolios, OBI 3 to 8 all edged up throughout the week by between 0.17% and 0.28%. Performance improved as equity markets recovered from recent lows, however the fall in non-equity sector prices acted as a drag on portfolio performance somewhat. Portfolio gains were less than those observed in equity markets as a result of the diversification between equity and non-equity assets, while our elevated cash levels helped to mitigate excess volatility throughout the week.
Positioning Update
Overall, while we are encouraged to see a recovery in sentiment over the week, we remain cautious in our positioning given continued headwinds over potential policy movements, the impact of supply chain issues and a slowing pace of recovery, and anticipate further market turbulence in the coming weeks. As a result, we have maintained our elevated cash levels over the week and continue to watch markets closely for a material improvement in the short-term outlook.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
Key Events We Are Watching This Week:
- Friday 15th: US Consumer Inflation Expectations
- Wednesday 20th: UK Inflation Rate
This Day in History
At the Battle of Hastings, fought on this day in 1066, King Harold II of England was defeated by the invading army of William, duke of Normandy, in the Norman Conquest, establishing Normans as rulers of England.
Thank you for reading, have a great week!
Jason, Gina & Ben
