The value of the Australian Dollar generally decreased against major foreign currencies, increasing overseas investment returns when measured in Australian dollar terms. International and Australian fixed interest markets posted negative returns as yields generally rose across all durations.

Central banks continued to raise their interest rate targets around the developed world in September, as policymakers attempt to bring down elevated inflation levels. During the month, Federal Reserve officials in the United States raised rates to 3.25% (up 0.75%), the Bank of England moved to 2.25% (up 0.5%), the European Central Bank increased to 1.25% (up 0.75%) and the Reserve Bank of Australia increased its interest rate by a fourth consecutive 0.5% to 2.35% (before increasing by another 0.25% in early October). These significant increases in the interest rate available on cash investments weighed on the prices of most other financial assets.

The United Kingdom’s Tory party elected its next leader, Liz Truss, in the wake of the resignation of her predecessor Boris Johnson. The new prime minister sparked panic in bond and currency markets after releasing her fiscal policy plan, which increased spending in the face of the severe cost of living crisis by cutting taxes, freezing energy bills, and announcing subsidies for certain industries. The inflationary implications of this package caused a large increase in yields on UK government debt and extreme weakness in the pound. This caused stress for British pension sector, and to avoid a disorderly market the Bank of England pledged unlimited purchases of long-dated UK government bonds to stem losses and prevent forced liquidations. This intervention, along with the Truss government moderating its unfunded tax cut plans, helped stabilise British markets late in the month.

In September Britain’s longest-reigning monarch, Queen Elizabeth II, passed away at age 96 at Balmoral Castle in Scotland. Her reign lasted over 70 years and saw 15 different British prime ministers from Winston Churchill to Liz Truss. Charles III, her eldest son, succeeded her on September 10th, the oldest newly crowned monarch in the nation’s history at age 73.

Japanese policymakers intervened in currency markets to prop up the flailing Yen during September, using foreign exchange reserves to buy Yen in the open market. The action, which hasn’t happened since 1998, reflects growing discomfort amongst Japanese officials about the rapid pace of decline in the currency, partly driven by flatlining interest rates in Japan whilst those in other countries have risen rapidly.

Aided by Western arms supplies and training, Ukrainian forces have reportedly made substantial progress in recapturing Russian-held parts of Eastern and North-Eastern Ukraine, in some cases causing a disorderly withdrawal of Russian forces. In response, Russian President Vladamir Putin announced the call-up of 300,000 military reservists to fight in the war to try and hold territory in Ukraine.

Russia also signed treaties to absorb four occupied regions in Ukraine, amongst widespread condemnation from the global community and despite some parts of the regions no longer being held by Russian forces. Unsurprisingly, referendums run by armed Russian forces in these regions,  came back overwhelmingly in favour of annexation. Furthermore, in possibly the largest escalation in nuclear tensions since the Cuban missile crisis, Putin threatened the use of nuclear arms to defend “Russian” territory. US President Joe Biden warned of a consequential US response if nuclear or chemical weapons are used in the conflict.

Equities

Major developed foreign equity markets produced negative returns in the month of September. Developed markets (excluding Australia) returned -8.9% on a currency-hedged basis (and -3.2% in Australian dollar terms, reflecting the fall in the value of the Australian dollar). The best performing of the major foreign markets was the United Kingdom (FTSE 100 Index) returning -5.2%. 

The Australian stock market (S&P/ASX 200 Index) generated a return of -6.2% during September, with all sectors experiencing negative returns. Healthcare and Consumer Staples were the top performing sectors, with returns of -5.0% and -5.8% respectively. Real Estate and Utilities were the worst performing sectors returning -13.7% and -14.9% respectively.

From a foreign developed market perspective, all sectors also produced negative returns. Healthcare was the best performer at -3.2%, whilst Communication Services and Information Technology were the worst performing sectors returning -11.2% and -11.6% respectively.

Bonds

The Australian government bond yield curve continued to shift upwards in September, resulting in negative Australian fixed interest returns for the month of -1.4% (Bloomberg AusBond Composite Index). The slope of the Australian government bond yield curve flattened somewhat in September as the two-year yield increased by 0.33% and the ten-year yield increased by 0.29%. As noted above, the cash rate set by the RBA increased by 0.5%, from 1.85% to 2.35% on 6 September.

Over the month of September, major developed global government bond yields broadly increased resulting in negative returns, with the Bloomberg Barclays Global Aggregate Index returning -5.1%. Notably, United Kingdom Government yields rose over 1.2% on both the two- and ten-year maturities, with the bulk of the increases occurring in the wake of the Truss government’s budget discussed above. United States interest rates also increased, by 0.79% on the two-year bond and 0.64% on the ten-year. 

Currencies

As is often the case in risk-off markets, the Australian Dollar fell against most major foreign currencies in September. The largest falls were seen against the traditional safe-haven currencies of the Swiss Franc, down 5.6%, and the United States Dollar, down 6.5%. 

Commodities

The price of WTI oil and Brent oil fell over the month, finishing down 11.2% and 8.8% respectively, as interest rate rises continue to weigh on the global economic outlook. The S&P GSCI Commodities index decreased by 8.7% for the month of September, with the price of natural gas futures notably falling 25.9% (having experienced a strong August and highly volatile environment in prior months). Of the precious metals, the price of gold decreased 2.9% and the price of silver increased by 5.8% in September. 

Performance of key markets over relevant time periods to 30 September 2022

Asset class	Index	Month* (% change)	FYTD* (% change)	1 year* (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-6.2%	0.4%	-7.7%
International Shares	MSCI World Ex Aust Unhedged A$	-3.2%	0.3%	-9.8%
International Shares	MSCI World Ex Aust Hedged A$	-8.9%	-5.2%	-17.5%
US Shares	S&P 500 Index	-9.2%	-4.9%	-15.5%
UK Shares	FTSE 100 Index	-5.2%	-2.7%	0.9%
Japanese Shares	Nikkei 225 Index	-6.9%	-0.8%	-10.0%
Australian Listed Property	S&P/ASX 200 A-REIT Index	-13.6%	-6.7%	-21.5%
Australian Fixed Interest	Bloomberg AusBond Composite Index	-1.4%	-0.6%	-11.4%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.1%	0.4%	0.5%
Currency	AUD/USD	-6.5%	-7.3%	-11.4%

*Percentage changes in returns are for periods over the month of September (Month), financial year to date 30 June 2022 to 30 September 2022 and the prior 12 months 30 September 2021 to 30 September 2022 (Prior 12m). Past performance is not an indication of future performance.

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