Market Overview

Global equity markets fell last week, registering the largest weekly drop in US equity indices since June. The catalyst for the drop was the release of higher-than-expected inflation numbers for August. Fears for more aggressive hiking of interest rates by the US Fed and its effects on economic growth had spooked investors, with some expecting to raise 100-bps in its next meeting this Wednesday. The vast majority still believe that the rate hike will remain a 75-bps increase this week- with the Fed target policy rate to reach 4-4.25% by the end of the year.

While the labor market remains resilient for now, a global recession is inevitable ahead and makes sense to underweight equities. Central banks across the globe are expected to follow suit from the Fed with decisions to hike rates expected across the Euro Area, Japan and the UK.

Meanwhile, Europe continues to race to secure energy supply as winter nears. Germany has taken over Russian energy company Rosneft Germany’s three oil refineries to ensure energy supply.  Together, the three refineries run by Rosneft Germany provide approximately 12% of the country’s total refining capacity. After relying on Russian oil for the last 40 years, replacing Russian crude is the number one priority for the country. Italy is preparing its own energy plan with Mario Draghi pushing through an energy aid package to families and businesses worth about 13.5 billion euros before the elections.

The meeting between Vladimir Putin and Xi Jinping at a regional summit in Uzbekistan last week where the Russian President lauded the “friendship between Russia and China” and their “strategic comprehensive partnership” displays the increased polarity in world views with Russia and China acting as counterweight to the US. Investors can expect more volatility in the market ahead.

Commodities, FX and Bonds

The substantial increase in borrowing costs as interest rates hikes would have negative implications for companies with high leverage that have benefitted from the low costs of borrowing. It makes sense for investors to avoid high-yield bonds and favor investment grade bonds linked to lower leverage. The inversion of the yield curve between the US 10 year and US 2 year widened last week- generally a lead indicator of a recession ahead.

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