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Article | 04 November 2022 | Investments
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MARKETS
Equities
Global equities rebounded over October with the MSCI World Index rising 7.1%. European stocks were among the strongest performers (EuroStoxx 50 +9.0%), helped by a drop in gas prices. In the US, the S&P 500 Index rallied 8.0% but the Nasdaq Index lagged (+3.9%) following disappointing earnings and guidance from several high profile tech companies. Emerging markets underperformed developed market stocks, dragged down by weak returns in China (MSCI China -16.8%) where a resurgence in Covid-19 infections added to concerns over China’s policy stance, as well as news that the US had imposed restrictions on the export of semiconductors to China.
Bonds
Global bonds were mixed. US Treasuries sold off on expectations that the Federal Reserve will implement another 75 basis point hike in early November (10-year US Treasury -1.9%). European bonds held up better (German 10-year -0.2%), helped in part by the UK government’s fiscal policy U-turn. Corporate bonds generally outperformed sovereign debt, particularly high yield bonds which benefitted from investors’ greater appetite for riskier assets (US high yield +2.6%; European high yield +1.8%).
Currencies
The British pound recovered sharply, rallying against all major currencies, as the new UK government ditched the majority of Liz Truss’ plans for growth. The euro also appreciated against the US dollar but the Japanese yen depreciated further, falling to a 32 year low. The Bank of Japan reportedly spent the equivalent of U$43 billion in October in an effort to prop up the yen.
Commodities
Oil prices rallied, with Brent crude rising 7.8% over the month to close at US$94.8 a barrel, on news that Opec plus other major oil producers were planning to cut production. European gas prices slid back to levels last seen prior to Russia’s invasion of Ukraine as unseasonally warm weather reduced demand, further helping Europe to fill up its gas storage facilities ahead of winter. Wheat lost ground, despite a late-month rally when Russia rolled back on an agreement to allow Ukraine to safely ship its grain.
Market volatility
Volatility eased as financial markets breathed a sigh of relief that the UK had abandoned its controversial fiscal plans in favour of more sustainable policies. Overall, the Vix index decreased 18.2% over the month to close at 25.9.
Responsible investing
As global leaders head to Egypt in November for the COP27 summit, the UN warned that existing Paris climate efforts were “woefully insufficient” and that the world was falling behind the emissions reductions needed to keep global warming to just 1.5C. There was better news from Brazil, however, where Luis Inacio Lula da Silva narrowly beat incumbent Jair Bolsonaro in the presidential election, boosting hopes that the Amazon’s deforestation will be halted.
IN
BRIEF
In China, Xi Jinping was re-elected president for a historic third term at the Communist Party’s 20th National Congress. Hopes of a change in policy stance were dashed when President Xi appointed loyalists focused more on national security and zero-Covid than the health of the economy and market stability. The president also emphasised the unification of China and Taiwan as a key goal.
The International Monetary Fund issued a stark warning over the health of the global economy, saying it saw rising risks of a recession in 2023. Hopes rose that the deteriorating economic outlook might cause central banks to be less aggressive in raising rates to smother inflation. Canada and Australia both implemented smaller-than-expected rate hikes in October.
Financial markets breathed a sigh of relief when short-lived UK prime minister Liz Truss’ unfunded tax cuts and spending plans were almost completely reversed. A new government (the second in six weeks) is led by ex-chancellor Rishi Sunak.
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RADAR
The US mid-term elections take place in November. Polls suggest that the Democrats are on course to lose control of the House of Representatives, as concerns over inflation and recession outweigh objections to the reversal of the Roe vs. Wade ruling.
The next raft of central bank meetings will be closely watched for signs that policymakers are becoming less aggressive in raising rates. The US Federal Reserve is widely expected to raise rates by a further 75 basis points at its November meeting on 2 November and any change in rhetoric will be closely analysed.
The US economy returned to growth in the third quarter, expanding 2.6% on an annualised basis. The expansion was mainly due to trade effects, but, with inflation remaining high, attention will be focused on whether US consumers cut back on spending over the crucial holiday period.
