By Jan Faure
Global markets declined in October on concerns of the long-term impact that higher-for-longer interest rates will have on global economic growth. Geopolitical tensions were also in focus with the Israel-Hamas conflict dominating headlines. This added to volatility in oil markets while boosting the safe-haven appeal of precious metals.
In the US, both the S&P 500 and NASDAQ Composite posted a third consecutive month of declines, easing 2.2% and 2.8% respectively. In Europe, the Euro Stoxx 50 index declined 2.7%, while the UK’s FTSE 100 fell 3.8%. The European Central Bank (ECB) maintained interest rates at 4% in October, as expected. It now widely believed that the ECB has reached the end of its interest rate hiking cycle.
Across Asia, Japan’s Nikkei 225 declined 3.1% and the Hang Seng fell 3.9% as China’s property market woes weighed on Hong Kong’s equity market. Reports of new US restrictions on AI chip exports to China further dampened market sentiment towards Chinese equities. Global market volatility increased, driven by both economic growth concerns and geopolitical tensions, particularly the conflict in the Middle East that rattled energy markets.
Spot gold rallied 7% in October due to increasing demand for safe-haven assets amid the outbreak of conflict between Israel and Hamas. This clearly demonstrated the effectiveness of gold as a hedge against geopolitical risk. The yellow metal’s demand has been hampered this year as high interest rates and moderating inflation attract investors to the positive real returns available in bond markets (conversely, physical commodities like gold have zero yield).
The US Federal Reserve maintained their hawkish stance during the month, keeping bond yields at elevated levels. The benchmark US 10-year Treasury yield breached 5% for the first time since 2007. The Fed continued to stress the need for monetary policy to remain tight to bring inflation back within its 2% target range. While much has been said about the dangers of the inverted yield curve in the US, it does present investors with a rare opportunity to invest in high-yielding short-dated bonds, which are traditionally lower risk.
US economic data has been consistently better than expected, dispelling fears of any hard landing. Earlier in October, US Payrolls data was more than double expectations, while the unemployment rate held steady at 3.8%. Retail sales in September advanced for the sixth consecutive month, highlighting a resilient US consumer. Third quarter GDP expanded by 4.9%, surpassing expectations and marking the highest growth rate since 2021. Consumer spending played a significant role in this growth, accounting for 2.7% of the total 4.9%. While this strong economic growth is positive, it also supports the Fed's narrative of maintaining rates higher for an extended period, which carries the risk of an economic backlash if not managed carefully.
Elevated geopolitical tensions have contributed to a pickup in risk aversion, with a broader regional escalation of the Israel-Hamas conflict remaining a key concern. The market impact of this conflict underscores the importance of alternative assets like commodities, which have uncorrelated returns to traditional markets, in an investment portfolio as a means of hedging against unconventional risk.
Table 1: Global Indicators – Local reporting currencies
