How did the financial markets do?
Equities
- US equities: US share prices fluctuated sharply, but recovered after a decline. The S&P 500 reached a new record high in August. This was the best August since 2021. However, share prices fell again after the interest rate hike in September. Chip manufacturers, major technology companies, energy companies and companies less sensitive to economic changes were the main drivers of stock market movements.
- European equities: European equities performed less well in Q3. In early August, stock markets in Germany, France and Italy reached new record highs. Share prices fell in September due to higher energy prices and interest rates. As a result, Europe saw slower growth than the US.
- Emerging market equities: Emerging market equities had a volatile quarter. These are equities in countries whose economies are still developing. In late July, many investors in Asia sold their shares, causing share prices to fall sharply. The South Korean stock market is particularly sensitive to AI developments. Two major technology companies, Samsung and SK Hynix, make up a large part of the Korean share index, so sharp rises or falls in their share prices tend to have a major impact on it.
- Real estate equities: After a strong first half of the year, the shares of listed real estate companies fell. These are companies that invest in such properties as offices, shops and homes. Real estate companies are sensitive to changes in interest rates. When interest rates rise, borrowing becomes more expensive. As a result, these companies become less attractive to investors. This led to lower prices in Q3.
Bonds
- Government bonds: Government bonds had a weak quarter. Bonds are loans to parties like governments and companies. Investors receive interest for this. Long-term government bond yields rose to their highest level in years. In the United States, 30-year government bond yields reached their highest level since 2007.
- The rise in yields was driven by persistently high inflation, concerns about government debt and the large volume of new bonds in the market. As yields rise, new bonds become more attractive, for they yield more interest. As a result, existing bonds with lower yields are worth less. Bonds with longer maturities in particular lost value this quarter. The turmoil in the US bond market was so severe that the US government intervened to support the market.
- There was also uncertainty in the European bond market. Investors were concerned about how much the French government was spending and borrowing. As a result, France had to offer a higher interest to borrow money than, for example, Germany. This led to lower prices for European government bonds.
- High-risk bonds: Short-term bonds and higher-risk bonds performed relatively better than long-term government bonds. This was because they are less sensitive to rising yields or already offer higher yields. Those higher yields helped offset some of the decline in value.