Quarter in Review Q3 2021

Key themes

  • Equity markets dip – Equity markets were marginally down over the quarter as a late September drawdown brought an end to a seven-month winning streak for global equities.
  • China fears – Negative news flow from China appeared unending through the quarter. News of the drag of the delta variant gave way to regulatory crackdowns, negative policy decisions, and then fears of contagion from a large corporate default within the Chinese property sector.
  • Inflation concerns – Persisting supply bottlenecks against a backdrop of rising demand and labour shortages are putting upward pressure on inflation readings.
  • Tapering surprise – the Fed indicated tapering of asset purchases will probably begin in November and conclude in the second half of 2022, which was earlier than expected.

Markets snapshot

  • The MSCI AC World equity benchmark fell -0.3% (+1.4% in euro terms).
  • The US rose 0.4% (2.7% in €), as a strong Q2 earnings season and planned infrastructure spending offset more hawkish Fed rhetoric at its September meeting.
  • Europe gained 0.2% (0.5% in €), as vaccine delivery and growth remained strong.
  • Japan outperformed, rising 5.3% (7.1% in €) on expectations of increased fiscal stimulus post the election of a new Prime Minister through the LDP leadership change.
  • Emerging-market equities underperformed, falling -6.6% (-5.8% in €) impacted by a regulatory crackdown in China as well as fears over contagion risk from a default by a large Chinese property developer, Evergrande.
  • The ICE BofA Merrill Lynch Eurozone > 5-year sovereign bond benchmark was flat over the quarter with the German 10 year yield rising 1bp to -0.20%.
  • European investment-grade corporate bonds rose 0.1% with global high yield credit rising 0.2%.
  • The euro fell to 1.1571 against the US dollar which benefited from the slightly more hawkish Fed, higher US yields and the more ‘risk off’ investment environment.
  • Commodities rose 5.2% despite deteriorating economic sentiment as energy prices moved higher. European gas prices have risen 4/5x in 2021 due to stronger demand and lower than normal supplies. Oil prices rose at a slower pace than in previous quarters with West Texas Intermediate increasing 2.1% as increased demand for oil reversed course in July on fears that the spread of the delta variant could slow the demand recovery just as more supply hit the market.
  • Gold fell -0.8% as a strong US dollar, higher US Treasuries and strong hints of Fed tapering weighed on prices.

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