Global stock markets have lost about $3tn in value this month, as a “witches’ brew” of gloomy Chinese economic data and surging US borrowing costs sours investors’ appetite for risk. September is on track to be the worst month for global equities since October 2020, when the coronavirus pandemic was raging across Europe and the US.
The MSCI All Country World index, which tracks stocks across 50 countries, has fallen 4.3 per cent this month, wiping out its gains for the third quarter. The S&P 500, the benchmark US index, has dropped 4.8 per cent in September, its biggest monthly decline since March 2020. The Stoxx Europe 600 has slid 3.6 per cent, while the FTSE 100 has shed 4.1 per cent.
The main drivers of the market sell-off are the slowing growth in China, the world’s second-largest economy, and the prospect of the US Federal Reserve scaling back its massive stimulus programme as inflation pressures mount. Both factors have raised concerns about the sustainability of the global economic recovery from the pandemic-induced slump.
China’s crackdown on property sector weighs on growth outlook
China’s economy has been hit hard by a series of regulatory crackdowns on various sectors, such as technology, education and property, that have dampened business confidence and consumer spending. The most acute problem is the looming debt crisis at Evergrande, China’s largest property developer, which has $300bn of liabilities and is struggling to meet its obligations.
Evergrande’s troubles have sparked fears of a contagion effect across the Chinese financial system and the broader economy, which relies heavily on the property sector for growth and jobs. The Chinese government has so far refrained from bailing out Evergrande, instead urging the company to resolve its own problems and protect the interests of homebuyers and investors.
The impact of China’s woes on the global economy is evident in the falling prices of commodities, such as iron ore, copper and oil, which are sensitive to Chinese demand. The Australian dollar, which is also closely linked to China’s fortunes, has dropped to its lowest level since December 2020 against the US dollar.
US Fed signals tapering of bond purchases by year-end
Meanwhile, in the US, the Federal Reserve has signalled that it will start tapering its $120bn-a-month bond-buying programme by the end of this year, as long as the economy continues to recover from the pandemic. The Fed’s bond purchases have been a key source of liquidity for the financial markets since March 2020, when they were launched to support the economy amid the Covid-19 shock.
The Fed’s announcement has boosted expectations that it will raise interest rates sooner than previously anticipated, possibly as early as next year. Higher interest rates tend to weigh on stock prices, as they increase borrowing costs for companies and consumers, and reduce the attractiveness of equities relative to bonds.
The prospect of tighter monetary policy in the US has also lifted the value of the US dollar, which has gained 2.7 per cent against a basket of its peers this month. A stronger dollar makes it harder for emerging markets to service their dollar-denominated debts and dampens their export competitiveness.
Investors brace for more volatility ahead
As September draws to a close, investors are bracing for more volatility in the coming months, as they face a number of uncertainties that could roil the markets. These include:
- The outcome of the debt ceiling negotiations in the US, which could result in a government shutdown or a default on its obligations if Congress fails to raise the borrowing limit by mid-October.
- The progress of the Covid-19 vaccination campaigns and the spread of new variants, which could affect the pace and shape of the economic reopening around the world.
- The earnings season for the third quarter, which will provide a glimpse into how companies are coping with supply chain disruptions, labour shortages and rising input costs.
- The political developments in Germany, where a closely contested election on Sunday will determine who will succeed Angela Merkel as chancellor and what kind of coalition government will be formed.
With so many factors at play, investors may find it hard to navigate the markets with confidence. As one analyst put it: “There is no clear direction for global equities at this point. It’s a bit of a coin toss.”
