• October 4th, 2021
• By Midsilver Investment Limited

During the review period, the behavior of risky asset and sovereign bond markets presented contrasting indications. While global equity indices experienced an upward trend, with stocks from emerging market economies (EMEs) gaining momentum in September, corporate spreads were markedly narrow, supporting extremely favorable financial conditions across many regions. In stark contrast, government bond yields in advanced economies (AEs) witnessed a sharp drop. Despite a slight tightening in anticipated monetary policies, this decline suggested growing investor concerns regarding the future economic landscape. Simultaneously, the US dollar began its ascent, retracing some steps only towards the quarter's end.

The stock market landscape echoed the varied pace of recovery across nations. Anticipated earnings growth buoyed AE benchmarks. However, the heightened costs for insuring against significant stock price plunges pointed to increased apprehensions among investors regarding extreme market downturns. Mainly influenced by diminishing growth forecasts and stricter regulatory actions, Chinese equities saw a decline for most of the period, only to rebound later.

The corporate credit sector showcased a consistent appetite for risk. Spreads remained remarkably narrow based on historical patterns, although they briefly widened for firms at the lower end of the credit spectrum. Particularly, US high-yield entities witnessed a surge in issuance.

AEs observed a flattening of yield curves. In the wake of historically high inflation figures, future US policy rate expectations, as gauged by the markets, increased, bolstering the short end of the yield curve. Contrarily and somewhat unexpectedly, the long end saw a significant downturn. The exact reasons remain debated, but likely contributors include government bond acquisitions by central banks and certain non-US investors, the reversal of leveraged positions, and perceived economic risks.

EMEs encountered a myriad of challenges. Beyond the unpredictability tied to the Covid-19 pandemic's trajectory, two primary concerns emerged. Firstly, the upward trajectory of anticipated policy rates in the US offset the typically beneficial impact of dropping long-term US yields on portfolio inflows. Secondly, investors were unsettled by specific country-related events. These encompassed a muted growth forecast in China—leading to a drop in sovereign yields—and heightened inflation figures in several regions. This was especially evident in Latin America, where local currencies considerably depreciated in comparison to the US dollar.