This market commentary covers the third quarter (Q3) of 2022 which saw heightened volatility in bonds, equities and currencies.
The tough trade-off between fighting inflation and maintaining economic growth has been a key challenge for central banks as they have continued to increase interest rates.
The US Fed funds rate now stands at 3.25%, up from 1.75% at the beginning of the quarter, while the UK base rate is currently 2.25% compared with 1.25% previously.
The mini-Budget in the UK triggered high market volatility as investors worried about how a combination of huge tax cuts and the energy price cap are to be funded. The Bank of England had to intervene with the temporary purchase of long-dated gilts, although the proposed tax cuts are also likely to mean more gilt issuance going forward
Equity markets remained under pressure during Q3 with further losses across all major indices.
The US’s S&P 500 lost -5.3% over the quarter (-24.8% YTD). The tech-heavy Nasdaq index fared somewhat better but still finished the quarter down -4.1% (32.4% YTD)
In the UK, the FTSE 100 lost -3.8% in Q3 (-6.6% YTD), despite the index’s heavy exposure to the energy sector. Weaker sterling was also a positive for dollar-earning companies
In Europe, the Eurostoxx 600 lost -4.8% (-20.5% YTD).
While such volatility in equity markets is not that unusual, bond market movements have been especially dramatic.
The 10-year US Treasury finished the quarter yielding 3.8% compared with 3.0% at the start, meaning a fall in bond prices (as bond yields rise, prices fall). The change in UK gilt yields was even more extreme, with the 10-year gilt finishing the quarter at 4.1% compared to 2.3% at the start.
As one of the largest-ever increases in yields in such a short period, this underlines investors’ concerns for the UK.
The Bloomberg Barclays Global Aggregate index lost -6.9% for the quarter (-19.9% YTD) reflecting the widespread tightening of monetary policy around the world. As our previous market commentaries have pointed out, negative yearly returns for the index are extremely rare. However, the current poor performance illustrates the strength of the current interest rate hiking cycle.
In the UK, rising gilt yields translated into a -14.2% fall in the FTSE Actuaries UK Gilt index over Q3, bringing the total loss for the year to -28.0%. For context, such returns and volatility are usually associated with emerging market economies rather than a G7 country like the UK.
The pound also continued to lose strength against the US Dollar, dropping -8.3% over Q3 (-17.5% YTD) and finishing the quarter at $1.11. Against the Euro, sterling finished the quarter lower by -2.0% (-4.2% YTD) at euro €1.14.
In commodities, oil prices have begun to soften, finishing the quarter down -24.4% (13.1% YTD) at $87.96 per barrel. Natural gas ended the quarter up 24.7% (81.4% year-to-date) but considerably lower than its August peak. Gold traded down by -8.1% (-9.2% YTD) finishing the quarter at $1,661 per ounce.
Despite poor market returns in Q3, our Managed portfolios remain ahead of their respective benchmarks and have been protecting investors from further downside for 2022.
Returns are quoted on capital returns and exclude dividends
YTD - Year-to-date
Quarterly figures: 30/06/2022 to 30/09/2022
Year-to-date: 31/12/2021 to 30/09/2022