The quarter of strength before the quarter of volatility
Global equities rallied in Q3 buoyed by central bank rate cuts and easing inflationary pressures. Key drivers were interest rate reductions by key central banks including the US Federal Reserve and the European Central Bank, stronger-than-anticipated US economic indicators and government stimulus in China. However, geopolitical tensions, particularly in the Middle East and mixed economic indicators tempered the upside.
Global fixed income also performed strongly, driven by falling yields and spread compression. Most currencies appreciated against the US dollar. Commodities declined overall, with energy being the primary drag. Precious metals, agriculture and industrial metals however posted gains.
United States
US equities (S&P 500 Total Return Index) rose by 5.9% (the fourth consecutive quarter of gains) achieving a 21.6% year-to-date gain. The rally extended beyond mega-cap tech companies, with the equal-weighted S&P 500 Index outperforming the market-cap weighted version and value stocks surpassing growth stocks. Economic indicators showed a healthy US economy with Q2 GDP growing at a 3.0% annualized rate. However, concerns about slowing economic activity and a cooling labor market led the Fed to cut interest rates by 50 bps in September to facilitate a soft landing. This decision was supported by a steady decline in inflation. In September 2024, CPI slowed for the sixth straight month, reaching 2.4%, the lowest since February 2021, down from 2.5% in August. Annual core inflation (excluding food and energy) unexpectedly ticked up to 3.3% from 3.2% in the previous two months. The monthly core inflation rate stayed at 0.3%, matching August’s rate but exceeding the forecast of 0.2%.
Economic data suggested a slowing but still-healthy economy. The labor market cooled with fewer job openings and reduced hiring. In September nonfarm payrolls grew by 254,000 – the reading followed the 159,000 increase (revised from 142,000) recorded in August and surpassed the market expectation of 140,000 by a wide margin. The unemployment rate edged slightly lower to 4.1% in September from 4.2% in August. Consumer spending in September moderated but remained resilient, with retail sales increasing by 0.4% in September after a 0.1% gain in August and personal spending on goods and services advancing by 0.2% in August following a 0.5% gain in July. Despite a decline in mortgage rates, home sales were constrained by affordability and limited inventory. Manufacturing contracted modestly during the quarter, while the services sector returned to expansion after contracting in June.
Within the S&P 500 Index, 10 of the 11 sectors posted positive results for the quarter. Utilities (+19.4%) and real estate (+17.2%) were the best-performing sectors. Industrials (+11.6%) also outperformed, driven by aerospace & defence (+13.8%) and machinery (+13.0%). Energy (-2.3%) was the worst-performing sector, while information technology (+1.6%) and communication services (+1.7%) also underperformed.
Yields fell this quarter as inflation and growth slowed and expectations grew that the Fed would soon cut rates. The 2-Year Treasury yield dropped 111 basis points to 3.64%, and the 10-Year fell nearly 62 basis points to 3.78%. This decline boosted fixed income markets, as bond prices rise when yields fall. The Bloomberg US Aggregate Bond Index (Agg) surged 5.2% this quarter, its second-best performance since 1995.
The Fed’s dot plot indicates an additional 50 bps of rate cuts this year and 100 bps in 2025. Corporate earnings exceeded expectations, with Q2 earnings for S&P 500 companies growing by 11.2% year over year, surpassing the 8.9% estimate and the 10-year average of 8.4%.
As the election nears, it’s natural to wonder about its impact on investments. While political views can be passionate, data suggests they have minimal influence on long-term investment performance. Factors like corporate earnings and valuations are more significant. The U.S. economy’s strength remains steady, regardless of the election outcome.
Europe
European equities rose 1.6% in Q3. Eurozone Q2 GDP grew 0.2% QoQ but Q3 slowdown raised recession fears. Business activity contracted sharply in September as the HCOB Flash Eurozone Composite PMI fell below 50. Services growth slowed post-Olympics, while manufacturing, especially in Germany, worsened. Eurozone employment declined modestly, with job cuts reaching a 2-year high. Headline inflation eased to 1.8% YoY (below the ECB target). The ECB cut rates by 25bps to 3.5% amid a weakening economy and falling inflation. Central banks in Switzerland, Sweden, and the UK also eased policy. STOXX 600 Q2 earnings are forecast to rise 3.0% YoY.
Europe’s manufacturing sector shrank over the quarter with the HCOB Eurozone Manufacturing PMI dropping to 45.0 in September from 45.8 in June. Production, new orders, employment, and procurement activity all declined faster. In September, input costs decreased for the first time in four months and output prices fell. Services activity in September grew at the slowest pace since February but still saw modest expansion. The Economic Sentiment Indicator rose to 96.2 in September from 95.9 in June, with improvements in both industry and consumer confidence.
Germany’s (the largest economy in the Euro Zone) leading economic institutes downgraded the 2024 GDP growth forecast to -0.1% from 0.1%, citing structural adjustments in decarbonization, digitization, demographics, and international competition. In September, the manufacturing sector contracted at the fastest pace in a year, and the ZEW Indicator of Economic Sentiment hit a 12-month low.
In the UK, Sir Keir Starmer became prime minister after the Labour Party’s landslide victory, bringing political stability. The Bank of England lowered interest rates to 5% for the first time since 2020. UK equities recovered but lagged global peers. FTSE 250 and All-Share outperformed. Consumer confidence fell. Staples and utilities outperformed; energy underperformed.
China
Towards the end of Q3, hope revived in China’s equity markets after a quiet July and August. Despite occasional positive data the economy remained under pressure with the property sector’s decline persisting. Investors were disappointed by the lack of major policy changes at the late-July Third Plenum conference. August’s volatility was driven by weak domestic data and global impacts from a struggling US economy and the yen carry trade. However, late August brought signs of improvement and news of SOEs issuing special bonds to buy unsold property inventory. China’s September 2024 CPI was 0.4% YoY, below expectations and August’s 0.6%.
The quarter ended on a high note with Beijing’s coordinated stimulus plan, including an RMB 800 billion (~USD 112 billion) injection from the PBoC to boost capital markets. The PBoC also cut the main policy rate to 1.5% and reduced the reserve requirement ratio for lenders by 0.5%. In the property sector, mortgage down payments for second homes were lowered from 25% to 15%, with further mortgage rate cuts instructed by the PBoC. Larger cities eased restrictions on home purchases to boost sales.
While capital market sentiment improved, concerns about the economy’s trajectory persisted. The call for increased fiscal spending and rate cuts raised expectations for further stimulus. Despite weak economic activities and corporate earnings revisions, the MSCI All China Index rallied 23% in September, ending just under 23% for the quarter.
Emerging Markets
Emerging markets (EM) equities rose by 6.8% for the quarter, led by Asia (+7.3%), followed by EMEA (+5.2%) and Latin America (+4.6%).
Asia: Taiwan’s (-1.7%) economy grew by 5.06% in Q2, driven by strong exports on account of greater demand for electronics used in cloud-based data centers and AI, leading to a positive 2024 GDP forecast of 3.8%.
India: India’s (+7.9%) GDP grew by 6.7% in Q2, slower than expected but still strong. India’s September 2024 CPI inflation was 5.49% YoY, higher than 3.65% in August. However, the inflation was within the Reserve Bank of India’s (RBI) medium-term target of 2-6%. RBI expects GDP to grow by 7.2% in t2025. With a robust economy and stable currency, interest rates are anticipated to decline slightly in the next six months.
EMEA: Increased conflict in the Middle East heightened regional war risks. Saudi Arabia (+5.9%) began unwinding production cuts despite low oil demand. South Africa (+9.7%) cut interest rates amid falling inflation and a modest GDP improvement. The UAE (+12.0%) saw gains with interest rate cuts by 50 bps and an improved 2024 GDP forecast of 4%, up from 3.9%
Latin America: Brazil’s (+5.8%) GDP grew by 1.4% in Q2, prompting the central bank to raise interest rates by 25 bps due to inflation concerns. Mexico’s (+3.6%) relations with the US and Canada were strained by a controversial judicial bill, leading to interest rate cuts by 25 bps amid falling inflation and tepid economic growth.
Australia (+7.4%): Interest rates remained at a 12-year high due to persistent inflation and a strong job market. Q2 GDP grew by only 0.2%, the weakest annual growth since the 1990s recession excluding the pandemic.
Japan (-5.9%): The BOJ raised interest rates to 0.25% and plans to reduce bond purchases. Q2 GDP growth rebounded to 3.1%, and CPI rose 2.4% YoY in September, down from 2.8% in August.
Hong Kong (+23.8%): Soared after China announced its largest stimulus since the pandemic. Q2 GDP grew by 3.3%, but domestic demand concerns persisted. Hong Kong cut rates by 50 bps, as expected, to maintain its currency peg to the USD. Annual inflation eased to 2.2% YoY in September, down from 2.5% in August.
Singapore (+12.2%): Q2 GDP accelerated to 2.9%, leading to an improved 2024 GDP forecast of 2.6% from 2.4%. Interest rates remained unchanged. Singapore’s core inflation rose to 2.8% YoY in September, above forecasts.
New Zealand (+1.3%): The central bank cut interest rates earlier than expected amid economic slump and impending recession.
Commodities
Energy prices fell 12.2%, with heating oil (-15.7%), gas oil (-14.9%), gasoline (-12.9%), and crude oil (-12.0%) declining due to potential OPEC+ production increases and weak oil demand in China. Natural gas dropped 6.5% despite Tropical Storm Helene’s impact on shipping.
Industrial metals rose 2.4%, supported by the Fed’s rate cut, China’s stimulus, and increased demand for electric vehicles. Zinc (+5.0%), aluminium (+3.8%), copper (+2.2%), and nickel (+1.0%) gained, while lead fell 6.9% due to high inventory.
Precious metals rallied 12.3%, with gold (+12.9%) and silver (+6.3%) benefiting from rate cuts and strong demand.
Agriculture & livestock advanced 3.3%. Cocoa (+25.4%) and coffee (+22.8%) prices surged due to weather impacts. Lean hogs (+14.2%) rose on lower feeding costs. Soybeans (-3.0%) and wheat (-1.4%) declined on a better-than-expected production outlook, while feeder cattle (-2.4%) dropped due to rising corn prices.
Currencies
The US dollar declined against all other G10 currencies and most EM currencies due to anticipation of the Fed joining the global policy-easing cycle. The BOJ’s rate hike also contributed, reversing the yen carry trade. The Canadian dollar gained slightly but underperformed its G10 peers.
Among EM currencies, Asian currencies like the Malaysian ringgit and Indonesian rupiah led gains amid increased cash flows, while the South African rand appreciated significantly reflecting gains in key economic sectors. However, the Turkish lira and Mexican peso underperformed due to high inflation and economic slowdown concerns. Indian rupee slightly weakened (-0.6%) against USD due to FPI outflows and RBI intervention.
