Market Analysis Oct 2019

US equities rallied as positive developments emerged in the US-China trade negotiations, resulting in optimism surrounding a potential mini trade deal outline. The Federal Reserve's third interest rate cut of the year also contributed to the positive market performance. Despite this, the gap between a truce and a comprehensive trade deal remains significant, with potential escalations, especially given the US election period. Impeachment proceedings against President Trump added an additional layer of uncertainty.

Economic data in the US presented a mixed picture, with the unemployment rate hitting a 50-year low of 3.5% in September, while consumer confidence weakened. Sectors such as healthcare, information technology, and communication services outperformed, while energy, utilities, and consumer staples faced challenges due to expectations of a tougher demand environment.

Eurozone equities saw gains as economically-sensitive sectors performed well. Sectors such as consumer discretionary, industrials, and materials were among the top performers, benefiting from improving trade outlook hopes. Defensive sectors like consumer staples and utilities faced some weaknesses during the month.

The consumer discretionary sector witnessed strength, particularly in the automobiles & components sub-sector. Despite earlier concerns over demand, companies such as Volkswagen and Daimler posted positive results for Q3. However, AB InBev, a consumer staples firm, experienced a share price decline due to a reduction in its annual profit forecast. Technology also had an overall positive return, although Nokia faced challenges after suspending dividend payments.

Economic indicators showed growth figures for Q3 surpassing recession worries. The eurozone's GDP growth reached 0.2% quarter-on-quarter, with France at 0.3% and Spain at 0.4%. Inflation, however, decreased to 0.7%. The flash composite purchasing managers' index (PMI) slightly increased to 50.2 in October from 50.1 in September, indicating some expansion, though the manufacturing sector PMI still suggested contraction.

UK equities faced challenges due to a significant rebound in the value of sterling. This rebound weighed on large-cap companies with international exposure, resulting in a 1.9% drop in the FTSE 100. Smaller domestic-focused companies provided support, leading to a slightly more favorable outcome for the FTSE All-Share, which recorded a 1.4% loss in October.

Domestically-focused UK companies benefited from the decreased risk of a 'no deal' Brexit by October 31. An agreement on a revised withdrawal deal between the UK and EU, coupled with an extended Brexit deadline until January 2020, eased concerns. The UK also prepared for a general election on December 12. Since 2016, domestically-focused companies have been outperforming those with international exposure.

In October, the Japanese market gained 5.0%. The yen fluctuated against major currencies, influenced by potential central bank actions, but ultimately ended the month virtually unchanged against the US dollar.

Japan's economic data reflected a divergence between a strong service sector and weak manufacturing. The impact of the consumption tax increase on October 1 remained uncertain, with early signs of pre-tax increase demand. The effects of the tax hike on consumption remained unclear. Corporate profit revisions also showed signs of stabilizing.

Government bonds faced declines as yields increased, indicating improved market sentiment and a preference for riskier assets. The US Treasury yields retreated towards the end of the month, with the Federal Reserve's interest rate cut indicating no further expected cuts in the near term. The 10-year US Treasury yield held relatively steady at 1.69%, though it briefly peaked at 1.85%. Meanwhile, corporate bonds outperformed government bonds, driven by tighter spreads. High yield bonds benefited from income returns, while emerging market bonds posted positive total returns.

Convertible bonds, as measured by the Thomson Reuters Global Focus index, gained 1.2% in US dollar terms, with US valuations becoming more expensive.

Please note that past performance is not indicative of future results, and this information is provided for illustrative purposes only. The mentioned sectors, securities, regions, and countries are not recommendations for trading.