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Financial Market Review: Third quarter 2021

A quarterly review of results in the global equity, fixed income, currency, and commodity markets.

The views expressed are those of the authors at the time of writing. Individual teams may hold different views. The value of your investment may become worth more or less than at the time of original investment. For professional or institutional investors only.

Global equities (-0.3%) fell for the first time in six quarters. Markets contended with pandemic uncertainty, moderating economic growth, the imminent prospect of reduced quantitative easing and policy tightening, and persistent supply-chain dislocations that have amplified the risk of more sustained inflation. In Asia, the spread of the COVID-19 Delta variant shuttered factories and snarled traffic at several major ports, exacerbating supplychain disruptions and driving shipping costs and goods prices even higher. Mounting inflation forced many emerging markets countries to raise interest rates, while other central banks assessed plans for curbing their asset purchases. China’s regulatory crackdown on private education businesses and companies that handle large quantities of data pummeled the shares of Chinese technology stocks, sparking fears of more regulations for private companies. Then, a debt crisis at one of China’s largest property developers destabilized financial markets and fueled concerns about lasting damage to China’s credit conditions and its economy. An energy supply crunch is looming in Europe and Asia, as soaring prices for natural gas and coal are driving inflation higher and posing risks to the global economic recovery.

Global fixed income sectors generated mixed results in the third quarter. Sovereign yields drifted higher across many developed markets as major central banks laid the groundwork for policy normalization and started to reduce monetary stimulus at varying speeds. Most fixed income spread sectors outperformed, due to their income advantage, as spreads moderately widened. The US dollar strengthened versus most currencies.

Commodities (+5.2%) gained for the quarter, with two of the four sectors ending in positive territory.

Equities

United States

US equities (+0.6%) rose for the sixth consecutive quarter against a backdrop of accommodative monetary policy, robust corporate earnings, and strong demand for goods and services, while risk sentiment was pressured by anxiety about rising inflation, imminent policy normalization, moderating economic growth, and uncertainty about fiscal stimulus and the federal debt ceiling. Growth stocks outperformed their value counterparts for the quarter; however, surging Treasury yields sparked a sharp sell-off in shares of large technology companies at the end of September, triggering a powerful rotation into value stocks. COVID-19 cases fell sharply in September, although the proliferation of the Delta variant in July and August weighed on consumer confidence and dampened reopening momentum. The US Federal Reserve (Fed) trimmed its 2021 GDP growth forecast to 5.9%, from 7%, and delivered a clearer signal that it will begin to taper asset purchases later this year should economic conditions hold up. There was also a marked shift in its projections for future interest-rate hikes, with more members of the Fed anticipating that rates will begin to rise in 2022 amid forecasts for stronger inflation and employment. Markets were unnerved by uncertain prospects for additional fiscal stimulus and clashes between Democrats and Republicans over raising the government’s debt limit.

Economic data released during the quarter indicated the US economy is on firm footing, although the pace of growth moderated. Despite setbacks from the Delta variant and widespread employee shortages, the labor market significantly improved, with the unemployment rate dropping to 5.2% in August, jobless claims falling to a post-pandemic low, and wage growth in August accelerating 4.3% annually. Consumer and producer prices rose at a…

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