Market Analysis Oct 2021

The persistent upward trend in global stock markets persisted in October, propelled by upbeat corporate earnings and diminishing apprehensions regarding China's property market. These factors played a pivotal role in bolstering investor confidence.

Despite the stock market's positive performance, government bond yields experienced an increase. Central banks across the globe signaled their readiness to roll back monetary policy support in response to mounting inflation pressures. This shift reflected a growing emphasis on addressing inflation concerns.

Notably, the energy sector emerged as a major contributor to the overall market gains. The strength of this sector played a crucial role in driving positive movements in the broader commodities market.

It's essential to bear in mind that past performance is not a definitive indicator of future outcomes. The sectors, securities, regions, and countries mentioned here are intended for illustrative purposes only and should not be regarded as specific investment advice.

In October, US equities continued their upward trajectory, marked by positive earnings updates from a majority of companies. Notably, Caterpillar delivered favorable results. However, tech giants Apple and Amazon faced setbacks due to supply chain disruptions and labor shortages, respectively.

The economic landscape showed signs of a slowdown, with Q3 US GDP growth at an annualized 2.0% quarter-on-quarter, a decline from Q2's 6.7%. Despite this, consumer confidence remained robust. Supply chain disruptions appeared to have more impact on spending for high-value items like vehicles, rather than a decline in demand.

While economic activity underwent a moderation, the Federal Reserve remained committed to its plans to taper quantitative easing until mid-next year. The central bank held its view that the elevated inflation figures were transient. In October, the consumer discretionary and energy sectors demonstrated strong returns, while consumer staples and communication service sectors showed more subdued gains.

The Eurozone experienced gains in equities throughout October. Q3 corporate earnings results underscored strong demand, albeit accompanied by increasing cost pressures. The utilities, information technology, and consumer discretionary sectors were the top performers, whereas communication services and real estate sectors lagged.

The Euro area saw a surge in annual inflation, reaching 4.1% for October, up from September's 3.4%. The European Central Bank reiterated its stance that this inflationary surge was expected to be temporary. Q3 GDP growth for the Eurozone reached 2.2%, an improvement from Q2's 2.1%. Supply bottlenecks began impacting growth, as indicated by the flash composite purchasing managers' index (PMI) falling to 54.3 in October. This index measures economic expansion and is based on company surveys.

Discussion continued in Germany regarding the formation of the next governing coalition, likely to comprise social democrats, greens, and liberals, and be led by the current finance minister, Olaf Scholz. Jens Weidmann, head of Germany's central bank, the Bundesbank, announced his departure from the position at the year's end.

October witnessed gains in UK equities, driven by robust Q3 corporate earnings reports. Financials, particularly banks, performed well, with expectations of proactive measures from the US Federal Reserve and the Bank of England (BoE) to address inflationary pressures. Internationally focused sectors led the gains, including large-cap banks influenced by short-term market interest rate increases in the US.

Certain UK large caps exposed to China rebounded, reversing their prior underperformance. However, domestically oriented segments such as housebuilders and small and mid-cap (SMID) equities experienced lagging performance due to concerns about an earlier interest rate hike by the BoE. The retail sector faced supply disruptions stemming from Covid-19 infections, and concerns about potential restrictions further weighed on sentiment.

Despite indications of economic momentum and optimistic economic outlooks within the Budget, sentiment remained subdued.

The Japanese stock market encountered a 1.4% decline in October, with investors assessing the potential implications of new Prime Minister Kishida ahead of the general election. While negative global news and China-related concerns emerged in the first half of the month, the strength of the US markets offered support to Japan. The yen weakened against the US dollar, reaching levels last seen in late 2018.

The election outcomes for Prime Minister Kishida were generally modest, with the ruling Liberal Democratic Party maintaining a solid majority. Expectations shifted toward a fiscal stimulus package, including direct cash handouts to households, to stimulate consumption recovery in early 2022.

Across Asia ex Japan equities, the month began with rallies attributed to positive earnings guidance and a decline in new Covid-19 cases across many countries. However, rising energy prices and inflation concerns tempered investor sentiment. Tensions between the US and China on various issues, including Covid-19 and cybersecurity, also had an impact on market returns.

Responding to rising inflation pressures, government bond yields experienced an upward trend as central banks indicated their preparedness to reduce monetary policy support. The US 2-year Treasury yield increased from 0.28% to 0.50%, while the 10-year yield rose from 1.49% to 1.56%. Economic momentum showed signs of deceleration as the anticipated commencement of policy tapering by the Federal Reserve approached.

In the UK, the 2-year gilt yield rose from 0.41% to 0.71%, while the 10-year yield increased marginally to 1.03%. Expectations persisted that the Bank of England would lead other major central banks in raising interest rates.

Across Europe, inflation surged to levels last seen in 2008, prompting the European Central Bank to reiterate its belief that the elevated inflation would likely be short-lived. The German 10-year yield rose from -0.19% to -0.09%, with the 2-year yield experiencing a similar increase. Italy's 10-year yield saw a more significant rise, reaching 1.13% in late October.

US investment-grade (IG) corporate bonds achieved modestly positive returns, while euro IG bonds posted negative total returns (in local currency), largely aligned with government bonds. High-yield (HY) bonds faced negative returns and underperformed government bonds, reflecting broader market volatility. The emerging market (EM) government bond market remained relatively flat, as gains in IG offset slight declines in HY. EM corporate bonds experienced a modest decrease. Local currency EM bonds underwent a decline, and currency performance varied.

Convertible bonds benefited from the tailwind of equity markets, with the Refinitiv Global Focus index, measuring balanced convertible bonds, advancing by 1.6%. Overall, the convertible bond market displayed varying valuations, driven by shifts in preferences for US convertible bonds.

October unfolded as a month characterized by continued global stock market gains, despite concerns about inflation and China's property market. Positive corporate earnings reports, tempered inflation concerns, and various economic indicators contributed to the complex interplay of market dynamics. The upward trend in government bond yields and evolving central bank policies highlighted a delicate balance between addressing inflation and supporting economic recovery. Additionally, sector-specific performance variations and geopolitical factors added layers of complexity to the investment landscape. As markets remain subject to volatility and the dynamics of global events, navigating investment decisions continues to require a comprehensive understanding of various factors shaping the financial world.