Major global equity and bond markets fell in October as risk-off sentiment took hold. The “higher for longer” market narrative continued – backed by fresh economic data prints released during the month. Meanwhile, the Israel-Hamas conflict stoked fresh fears of further geopolitical uncertainty in an already “deglobalizing” world. The escalation also increased potential risks to the current global inflation trend.
Developed market equities (MSCI World) dropped –2.9% over the month, reducing year-to-date (YTD) returns to 8.3%. Emerging market equities (MSCI World EM) fared worse, falling by –3.9% m/m, with the move pushing the index into negative territory year-to-date (-1.8% YTD). Commodities (Bloomberg Commodity Index, +0.3%) managed to eek out a positive return on the month, driven by surges in both gold and oil prices on the back of the conflict in the Middle East. Global bond markets (Bloomberg Global Aggregate) ended the month -1.2% lower. The U.S. 10-year Treasury yield pushed above 5% for the first time since 2007, speaking to the “higher for longer” narrative, while credit spreads widened across both investment grade and high-yield bond markets.
During the month of October, a wave of data emerged, exposing the robustness of the U.S. economy. This included a robust jobs report, healthy retail sales figures and a notable 4.9% annualized GDP growth in the third quarter (a substantial increase from Q2’s 2.1% pace). U.S. headline inflation surpassed market expectations, with the figure holding steady at 3.7% y/y in September, contrary to forecasts of a slight slowdown. However, September’s core personal consumption expenditure (PCE) – the Federal Reserve’s preferred inflation gauge – slowed to 3.7% y/y (the lowest reading since May 2021). For the third consecutive month, U.S. markets registered losses, the Nasdaq fell by -2.78% m/m, the S&P 500 declined by -2.20% but maintained a 9.23% YTD increase, while the Dow Jones dropped -1.36% for the month (-0.28% YTD).
The European Central Bank (ECB) left short-term interest rates unchanged in October. After ten consecutive rate increases, the ECB kept its key deposit rate at 4.0%. ECB President Christine Lagarde highlighted the expectation of ongoing weakness in the eurozone economy for the remainder of the year as cracks continued to emerge in the economic outlook. On a related note, various ECB officials drew attention to the inflationary risks arising from the increase in oil prices due to the Middle East conflict. In the United Kingdom, September’s inflation figures exceeded consensus expectations, with increases in services, core, and headline inflation – making the prospect of “higher for longer” rates increasingly likely.
In China, the third quarter brought positive surprises in GDP, with improved industrial production and retail sales. However, ongoing challenges in the real estate sector and reports of new U.S. restrictions on AI chip exports to China continued to weigh on market sentiment. China’s housing market faced its steepest decline in nearly a year in September, raising concerns about the effectiveness of Beijing’s efforts to revive the sector. To support the economy, China injected a record amount of liquidity into its financial system through short-term monetary tools. However, investor concerns outweighed positive developments, with the Shanghai index ending the month -2.95% lower.
In South Africa (SA), headline inflation increased from 4.8% y/y in August to 5.4% y/y in September, in-line with estimates. The primary driver of the uptick in headline inflation was the surge in petrol prices, while annual food inflation remained relatively steady. Core inflation, which excludes volatile factors, decreased from 4.8% y/y to 4.5% y/y, surpassing the consensus forecast of 4.7%. Seasonally adjusted retail sales figures for August showed a year-over-year decrease of 0.5%, following a downward revision from a 1% year-over-year decline in July.
The SA stock market grinded lower over the month, with the FTSE/JSE All Share Index falling by -3.77% m/m, pushing its YTD move deeper into negative territory (-4.65% YTD). South African 10-year government bond yields dipped -0.13% over the month, providing some relief to bond holders who have so far faced a turbulent 2023. The rand strengthened by +1.5% against the U.S. Dollar in October but remains down -8.6% YTD.