Bunch of challenges remain in the markets

Elections during volatile times
Central banks remain restrictive

Financial market prices moved down during September. The main factors which influenced the selloff were inflation data, strict and hawkish tone from the US Federal Reserve Bank. The US S&P 500 index (S&P 500 Total Return EUR Index), which represents major 500 US companies decreased by 6.85% during the month. Developed markets (MSCI World Total Return EUR Index) decreased by 6.90%. Emerging markets (MSCI Emerging Markets Daily Net Total Return EUR Index) did the worst and generated 9.39% negative return.

The main topics for the month remain the same as previous periods: politics, inflation, and central banks’ monetary decisions. The UK prime minister seat is not empty anymore. Liz Truss won Conservative Party leadership contest and became the UK prime minister. She replaced Boris Johnson who had to step down after various scandals. UK markets are flashing red in asset class with equities, gilts, corporate bonds and with pound. Liz Truss takes lead during extremely challenging times facing issues with local economy, energy prices, war and strikes in the public sector. Political topic ended with election in Italy were Giorgia Meloni won a majority in the parliament. She became the first female prime minister who will lead the most right‑wing government since World War II.

September was another month for monetary decisions by central banks. While inflation remains elevated and doesn’t calm down, central banks took it seriously. The European Central Bank (ECB) made unprecedented monetary‑tightening step. ECB lifted interest rates by 0.75%. Markets expected such decision, and it was already priced in. The President of the European Central Bank Christine Lagarde hinted that it is possible to repeat such move in the future, but also calmed down the markets by saying that 0.75% rate hike is not new normal for ECB. The US Federal Reserve Bank (FED) did not give up and lifted interest rates by another 0.75% in line with ECB. The rate hike by FED itself did not affect markets negatively much, but the comment by Chairman of FED Jerome Powell did. He said: “Higher interest rates, slower growth and a softening labor market are all painful. But they are not as painful as failing to restore price stability”. Jerome Powell sent the message to the market that FED will support restrictive monetary policy until the price stability is restored.

Interest rate hikes

Source: Bloomberg L.P

“House view” update

Luminor Investment management team decided to maintain lowered risk allocation budget and higher exposure to defensive sectors (utilities, energy, and consumer staples). High uncertainty about possible consequences of the war in Ukraine, tightening monetary policy, high volatility in the markets and slowed economic growth warrant such decision.

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