Market Commentary
Most equity markets lost ground to close out the 3rd quarter. The S&P 500 finished 0.4% lower, while the small-cap Russell declined by 5.3%. The Nasdaq Composite, supported by decent performance from the megacaps, ended the month 1.9% in the green. London’s FTSE 100 fell 2%, while the Euro Stoxx 50 declined 3.4%. In the East, Hong Kong’s Hang Seng index continued its poor run, down 3.3%. Japan’s Nikkei was a standout performer, finishing the month 1.2% higher.
The US payrolls figure for August came in well ahead of expectations, and together with stubbornly elevated inflation, this meant the Fed had very little option but to deliver a hike. Interestingly, this led to the long end of the yield curve declining, as the market was reassured of the Fed’s independence amid continued pressure from the Trump administration to lower rates. This political pressure, along with a budget deficit that has been ballooning for several years, led yields on US Treasuries (the return investors demand to be compensated for providing these loans to the government) to reach levels not seen in more than two decades. The yield on the US 10-year and 30-year bonds, respectively, has now risen by 18.4% and 13.7%, respectively, over the last 3 months.
Graph 1: French Inflation Accelerates More Than Anticipated
Source: Bloomberg; Insee, INE, Eurostat
Adding to fiscal concerns is the inflation outlook, given the ongoing energy crisis in the Middle East. Despite a large share of supply leaving the Strait of Hormuz, Brent crude oil still rose by 14.4% during the month, or 42% over the last 3 months. The bigger issue, however, is refined petroleum products such as diesel, the backbone of multiple industries, which have risen even more. The cost of this will inevitably feed through to consumers. This is already being felt in Europe, where inflation in France, Europe’s 2nd largest economy, saw a sharp increase this month, with energy costs up 21.2% from a year ago.
Data released at month-end, including PCE figures and a weaker-than-expected jobs print, will likely give the Fed room to pause the current hiking cycle and assess new data.
There was also greater volatility in the AI space this month, following concerning statements from both OpenAI and Anthropic. OpenAI scrapped the release of its latest model after testing revealed troubling levels of deception and unauthorised activity. An open letter from Anthropic’s CEO warned of the need for regulation and a slowdown in development to prevent AI slipping beyond human control and potentially causing catastrophic harm. This was unwelcome news for investors who have been betting on the massive pool of Capex backing the AI buildout, leading to volatile moves in equity prices. Donald Trump said no slowdown was needed, only a “strong and high IQ” president. So we are all perfectly safe, I guess…
South Africa
Local markets did not fare any better, with the JSE All Share index down 5.8% (7.6% in USD terms). As expected, a stronger USD put pressure on commodity prices, which in turn dragged share prices lower.
On a positive note, local inflation rose slightly less than expected, but not enough to prevent the SARB from hiking rates, leaving the benchmark borrowing rate at 7.25%.
James Hayward BEng (Civil) CFA
James Hayward (JD) is a Fund Manager at Flagship, a specialist global asset manager, where he manages global investment strategies, with a particular focus on global equity research and portfolio construction. He joined Flagship in 2021 as an equity analyst and has played an integral role in developing and implementing the firm’s investment process.
Before entering investment management, James worked in engineering and the fintech start-up industries. During this period, he pursued further studies in investments. He developed a strong analytical foundation and problem-solving approach, which supported his move to Flagship in 2021 as an equity analyst.
James holds a Bachelor of Engineering degree in Civil Engineering from Stellenbosch University and is a CFA Charterholder.
