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What's moving markets
The great bond yield reset that occurred through 2022 and into 2023 failed to dampen the losses seen in global equity markets throughout October. A risk off sentiment gripped markets given heightened geo-political uncertainty and a realisation we’re in a higher for longer interest rate environment.
The tragic events witnessed in the Middle East caused an initial commodity price spike with the oil price rallying on the prospect of a widening conflict in the region and the potential consequence for supply. This was short lived as oil prices declined by month end. There was, however, a flight to safety in gold with the price of the precious metal briefly reaching $2,000.
The UK headline inflation rate stood still at 6.7% year-on-year in September, as a slower rise in goods prices were offset by a slight pickup in services inflation. Labour costs are driving this with wages growing at 7.8% year-on-year and costs being passed directly onto the consumer. The latest headline UK three-month average unemployment rate increased to 4.2% (previously 4.0%), perhaps signalling costs pressure for UK businesses. Despite the pause in the inflationary slide, the data release in October should be supportive given energy base effects. However, for the time being, it’s unlikely we’ll see any cuts from the BOE until there’s a sustainable decline in services inflation.
A mixed picture in the Eurozone
Eurozone inflation eased to its lowest level in two years in October and the headline consumer price index rose 2.9%, down from the 4.3% recorded in September. However, the Euro-area economy shrank by 0.1% in Q3 following a 0.2% rise in Q2 - marking the first contraction the bloc has seen since the Covid pandemic.
It’s a mixed picture - the German economy is stalling, but France and Spain are managing to eek out gains. Clearly tighter financial conditions are weighing on demand in the Eurozone, with demand subdued and the manufacturing sectors continuing to contract.
The US saw the 10-year treasury yield cross 5% for the first time in 16 years, propelled by factors including:
- expectations the FED will maintain raised interest rates
- expectations of a sharp increase in the federal deficit
- more signs of a strengthening economy
- a healthy, albeit perhaps a cooling, jobs market
The US economy demonstrated surprisingly strong annualised GDP growth, accelerating to 4.9% and double the Q2 pace. Consumption contributed 2.7% to the headline print, owing partly to the continuing strength in the labour market.
Chinese GDP also expanded by 4.9% year on year in Q3, surprising and beating forecasts. The sustained stimulus from the Chinese government seems to be offsetting the continuing property crises and weaker trade. But it's not all good news. The official PMI index fell to 49.5 in October from 50.2 in September. At the same time, the stress in the property sector is clear to see as Chinese property developer Country Garden, defaulted on a dollar-based bond.
Asset class implications
The uniform rise in developed market government bond yields in October lead to broad based bond market declines in October. The FTSE Actuaries UK Conventional Gilts All Stocks index declined by 0.36% as the BOE predicted the need to continue with higher interest rates , at least in the immediate future. We also saw investment grade and high yield bond spreads move wider on a worsening economic outlook. The ICE BofA Global Broad Market Index declined 0.74%.
In the UK, the FTSE All Share fell by 4.09% as higher interest rates started to take effect – falling consumer confidence is filtering through to the domestic market as the higher for longer narrative grows stronger.
The FTSE USA declined by 1.68% over October as the large tech names dominating the index reported a mixed earnings. Manufacturing heavy Germany is especially feeling the deteriorating economic outlook as the FTSE World Europe Ex UK fell 2.9%. Despite the positive GDP surprise in China, there was no sustained rally in Emerging Markets. Instead we saw a decline of 3.23% on the month.
We’ve probably reached peak rates in developed market economies now, although we should remember that a month is a very short time in investing, and it’s possible there may be some inflationary shocks still to come . For now, it looks like the desired effects of rate rises are taking their toll which should help as headline rates continue to decline. Rate cuts are on the horizon, and I think we can expect to see them in Q2 or Q3 of 2024.
There’s still some pockets of valuation , and some areas of the market look incredibly cheap. Although things feel a little uncomfortable at the moment, patience is historically well rewarded.
|FTSE Actuaries UK Conventional Gilts All Stocks||-0.36||-1.73||-4.44||-5.76||-30.16|
|ICE BofA Global Broad Market||-0.74||0.14||-4.53||-4.07||-16.87|
|IA UK Direct Property||-0.27||-0.65||0.22||-2.82||2.92|
|FTSE All Share||-4.09||-4.78||0.26||5.89||39.38|
|FTSE World Europe ex UK||-2.99||-6.36||4.33||11.98||32.47|
|FTSE Asia Pacific ex Japan||-3.62||-6.56||-4.96||5.92||-1.81|
Source: FE Analytics, GBP total return (%) to last month end
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Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.