Global risk-on sentiment boosted equity markets at the start of the third quarter, as expectations shifted from a US recession to a soft-landing scenario. However, this sentiment soured early in August due to signs of slowing growth in the UK, Europe, and China, as well as the Federal Reserve's (Fed) hawkish rhetoric, which outweighed any optimism. Ultimately, global equities delivered poor returns for the quarter, with the MSCI ACWI down 3.4% in US dollars and emerging market shares down 2.9%.
The US government bond yields continued to rise, providing competition for investments in shares and putting pressure on longer-duration equities. The 10-year US Treasury yield reached a 16-year high of 4.6%. Fiscal concerns and expectations regarding monetary policy have been key drivers, with the Fed's renewed hawkishness surprising investors. Similarly, the European Central Bank raised its key interest rate to 4% and emphasised its intention to maintain high rates for longer to combat inflation. Oil prices have risen to nearly $100 a barrel, marking a 28% increase this quarter, which poses a significant risk to inflation and, consequently, bond yields.
The subdued Chinese recovery relative to expectations has negatively affected global growth, driven by a depressed property market and slowing demand. This decline was reflected in equity returns, which decreased by 3.7% in US dollars over the quarter. Officials have implemented policy support measures to aid economic recovery and improve liquidity in the financial system.
Locally, the South African economy exceeded expectations, with real gross domestic product expanding by 0.6% in the second quarter. While this is encouraging, there are still various known challenges constraining economic growth, including energy and logistical constraints. As a result, and with inflation within the South African Reserve Bank's target range, the Monetary Policy Committee voted to keep the repurchase rate unchanged at 8.25% in September.
Commodity price weakness hindered returns from resource counters, which, along with industrial shares, pulled down the local equity index. The FTSE/JSE Capped SWIX delivered -3.8% for the quarter, bringing the year-to-date return to -0.3%. Financial shares outperformed the local equity market. Returns from bonds were modest, with the FTSE/JSE All Bond Index (ALBI) delivering -0.4%, underperforming both inflation-linked bonds and cash. The rand made a strong recovery in July before erasing all gains as concerns over global growth and risk-off sentiment boosted the safe-haven US currency. The rand ended the quarter 0.4% weaker against the US dollar.