By Jan Faure
Global markets were weaker in October while volatility increased as US election uncertainty weighed on investor confidence. A soft landing in the US has increasingly become the consensus view as economic data continues to show resilience in the US economy. This resilience primarily stems from the US labour market which continues to defy expectations for weakness.
With US growth prospects holding up better than expected, and Federal Reserve (Fed) officials striking a more cautious tone over future policy action, markets began to price in a slower pace of rate cuts. The cooling in rate cut expectations, alongside election uncertainty, pushed 2-year and 10-year US Treasury yields back above 4.0%. Compounding the sell-off were rising concerns that US fiscal deficits will continue to grow along with US government debt. The Global Aggregate Bond Index declined 3.4% for the month while global REITs retreated 4.5%.
In Europe, the European Central Bank (ECB) announced the third 0.25% rate cut for the year, taking the deposit facility rate to 3.25%. This was in line with expectations and highlights the more predictable path of European rate cuts relative to the US. Policymakers were emboldened by Eurozone inflation (CPI) falling to 1.7% in September, below the 2% target for the first time in over three years. The ECB acknowledged signs of weakening economic momentum in Europe, particularly in the manufacturing sector.
In equity markets, Japan’s Nikkei was October’s best performer, gaining 3.6% for the month. In the US, the S&P 500 declined by 1% while the tech-heavy NASDAQ Composite retreated 0.5%. The first estimate of US Q3 GDP growth came in at 2.8% (QoQ annualised), confirming that the US economy continues to grow at a healthy pace. Third quarter company earnings season began with strong results from the banking sector, while it was a more mixed picture for tech companies which added to market volatility.
In Europe, the Euro Stoxx 50 index declined 3.5% for the month as weak economic data, especially in Germany, marred sentiment. Equity markets in China and Hong Kong declined by over three percent despite recent support measures from the Chinese government meant to reinvigorate the stock market and rescue the property sector. The hope is that the broad range of stimulus measures introduced in September will improve consumer consumption and help alleviate the long running real estate crisis.
Looking ahead, the outcome of the US presidential election, with the potential for significant policy changes, are a source of uncertainty and has already contributed somewhat to the move higher in bond yields. Fixed income markets are likely to experience further volatility until the path for rate cuts becomes clearer. In equity markets, there is potential for the US election outcome to be delayed which would increase market volatility short-term. However, we view the election outcome as a positive catalyst for the US stock market no matter which party wins the election.
Table 1: Global Indicators – Local reporting currencies
