Justas Daujotas. September review – what happened in the financial markets? | Business

There was also no lack of significant events in the bond market. Short-term U.S. Treasury yields fell, but longer maturities rose. After a gap of more than two years, the 10-year bond is outperforming the 2-year bond. Given market participants’ aggressive rate cut forecasts this year, the move reflects a return to more realistic expectations rather than a greater fear that inflation will be significantly higher over the long term.

Pension funds of Luminor investment management used the tactical decision to supplement their portfolios with healthcare sector shares in September. The sector has shown solid earnings growth this year and has historically outperformed the market following the first rate cut by the US Federal Reserve. Given the growing uncertainty ahead of the US presidential election and the poor seasonality of October, the healthcare sector looks like a great shelter.

All eyes on central banks

The Fed kicked off its rate-cutting cycle with a bang on September 18. by cutting the key interest rate by 50 basis points to 4.75 percent. level. The Fed made the decision that most market participants expected, with Fed Chairman Jerome Powell admitting that rates would likely have been cut in July if inflation data for that month had been released a few days earlier. The main message for market participants is that after a strong start, the Fed will continue to moderate monetary policy, and its members unanimously believe that in order to achieve 2%. annual inflation will manage to maintain economic growth.

Along with the decision on interest rates, the Fed also shared somewhat more pessimistic macroeconomic forecasts. The Fed lowered this year’s US GDP growth trajectory from 2.1 to 2 percent and raised the unemployment rate from 4 to 4.4 percent. At the time, inflation expectations for this year fell from 2.8 percent to 2.6 percent, giving more hope that interest rates will fall.

Market participants were not surprised by the decision of the European Central Bank (ECB). The ECB reduced the key interest rate for deposits by 25 basis points to 3.50 percent. and predicts that inflation in the region will reach 2 percent. level will return at the end of next year. The ECB, on the other hand, gave no indication of further action. Looking at the latest readings from the S&P Eurozone Purchasing Managers’ Index, it appears that more economic stimulus is needed. The region contracted in September after a seven-month hiatus, driven by weak German and French industries.

The Bank of England paused and kept its key interest rate at 5 percent. The bank was not convinced by the latest data on slowing inflation, and its head Andrew Bailey said that with inflation remaining at 5.6 percent. will not be able to liberalize monetary policy faster. The decision pushed sterling to its highest level since 2022 against the US dollar. – the currency has appreciated by more than 7% since the beginning of the year.

New stimulus package in China

The Chinese market, which had been dormant for some time, drew attention to itself at the end of September when the central government announced the largest economic stimulus measures since the start of the COVID-19 pandemic. The statement released by the Politburo differed from previous ones in its precise language regarding stimulus measures and in its call for further liberalization of monetary policy.

China’s central bank cut short-term and one-year interbank lending rates. This decision was followed by a 50 basis point lowering of the bank reserve requirement, which encouraged more lending, and reduced interest rates for housing loans. The desire to breathe new life into the still languishing real estate sector was reflected in the reduction of the down payment for the purchase of a second home from 25 to 15 percent. purchase price.

China’s Ministry of Finance will also issue up to 284 billion yuan by the end of the year. special bonds in the amount of US dollars, the funds of which will be directed both to the promotion of consumption and to covering the worst-looking debts of local municipalities. The entire fiscal stimulus package should lift annual GDP growth by 20 basis points and approach 5 percent. growth target.

Along with a stronger push to stimulate the country’s economy, new measures to promote the stock markets were also introduced. Institutional investors will be able to take advantage of swaps with the central bank, which will allow them to purchase up to 71 billion euros with collateral. shares worth US dollars. Listed companies will have access to 40 billion. US dollar central bank lines of credit for purchasing equity capital. 113 billion is also being considered as the next step. stabilization fund in the amount of US dollars for the purchase of local shares. The size of this fund would be equal to about 1 percent. Chinese stock market values.

The stock market reacted extremely positively to the efforts of the central Chinese government. In the penultimate week of September, the Shanghai CSI 300 index grew by almost 16 percent. (the best week since 2008), Hong Kong’s Hang Seng – 13 percent, and the Nasdaq Golden Dragon China index, which includes shares of technology companies listed in the US and more accessible to foreign investors – as much as 24 percent. On the other hand, a return to the long-term growth trend may be difficult due to rising geopolitical tensions. However, judging by the measures provided to local investors and the extremely low positions of foreign investors, a rotation of several months to the Chinese market, reminiscent of 2022. October-2023 January period, should not be too surprising.