September 2019 Monthly Market Review
Equities posted broad-based gains in September, halting the late summer decline. In a trend reversal, value stocks outpaced their growth counterparts across regions for the month. September marked the second month in 2019 when value beat growth. However, growth stocks remained solidly ahead of value stocks across all regions on year-to-date basis. Yields rose for U.S. Treasuries longer than two years, with the curve steepening modestly after the initial inversions experienced in August.
Despite the strong gains in risk assets, there were initial signs of potential stress in the repurchase (repo) market. Normally, the repo rate trades at a small premium to the federal funds rate (FFR). In mid-September, however, the repo rate began to rise steadily in the early trading hours of September 17th. Essentially, a cash crunch caused repo rates to spike. This prompted the Federal Reserve to intervene. Ultimately, the Fed decided to maintain a presence in the repo market until at least October 10th in order to keep repo rates close to the FFR.
The intervention that took place in September stoked fears of a funding crisis, though it appears there were technical reasons for the rise in repo rates. Steps the Fed is considering include expanding its balance sheet to inject more reserves into the system and creating a standing repo facility so that emergency measures will not be needed, among others. For now, the issues in the repo market bear close watching but they do not indicate the start of a funding crisis.
The pressure felt in the repo market did not appear to bleed into other asset classes. Risk assets like equities continued to perform well. The outperformance of value was most pronounced in the U.S. and non-U.S. developed markets. In both regions, the financials and energy sectors were among the best performers. In emerging markets, value outperformance was more modest. Energy stocks helped the performance of the value index, while a sell-off in Chinese internet giant Alibaba was a headwind for emerging markets growth stocks.
Crude oil prices jumped a record 21% following the September 14th drone attacks that took out nearly 6 million barrels or 50% of Saudi Arabia’s daily crude production. In the days after the attack, oil prices pulled back sharply and remained volatile as the market assessed how long production would be sidelined. Despite the significant disruption and heightened tensions in the region, Brent crude prices finished the month where they started.
While this singular attack had a temporary impact, the apparent ease of the attacks raises the prospect that drone warfare on production could become more common in the Middle East. The attacks also cloud Saudi Aramco’s push to finally go through with its IPO plans in November. It is unclear what type of discount investors will assign to a company that is at real risk of having its key assets destroyed. This dynamic may provide some type of premium to producers with more secure production in Europe and North America.