Markets were mixed over the course of September, with pressure from the bond market feeding through into risk assets. The Federal Reserve paused its rate hiking cycle in September, as US inflation data came in broadly in-line with market expectations, with Core CPI running at 4.3% year-on-year. Inflation has moderated so far in this hiking cycle, without weaking the labour market or consumer strength so far. However long bond yields rose over the course of the month, as markets digested more issuance from the US treasury, as well as rhetoric from central banks that interest rates will need to remain higher for longer.
The positive correlation between equity and bond markets is a worry for investors, as it is a reminder of the change in market regime seen in 2022, however in the most recent period, the scale of these drawdowns has been lower and comes at a time when growth appears to be slowing and inflation normalising.
Equity markets were mixed in September, with global indices modestly down. Both the UK and Emerging Markets were positive performers over the month, with our holding in the Pacific North of South funds outperforming broader emerging market indices.
Fixed income fell over the course of the month, as yields moved higher across global markets, although UK bonds were more resilient. We continue to be underweight duration and defensively positioned in fixed income and have further reduced our exposure to long duration bonds over the month.
Diversifying assets added value over the month, with strategies across trend and risk premia generating strong absolute returns. A holding in the US Curve Steepener generated positive returns; this strategy goes long shorter dated fixed income and short the long end to take advantage of the normalisation of the inverted shape of the yield curve.
Fixed income was a slight negative over the course of the month, with Fitch downgrading US creditworthiness from AAA to AA+, citing concerns about US debt policy and political functioning. This, combined with the announcement of more debt issuance in the US led to bond yields moving higher, particularly at the longer maturity end of the US debt curve.
Finally, in a month where both equities and bonds returns were negative, diversifying assets generated positive returns over August