Markets paused for breath in October, as investors became more concerned about longer term inflation. Momentum faded for the US stock market, but weakness was visible globally, exacerbated by the impact of the stronger dollar and growth concerns for investors. Japan was a notable outperformer.
Fixed income markets also retreated in the month as government bond yields surged, especially in the UK, where the 10-year gilt rose to a 12-month high of 4.5% following the government’s fiscal plans announced in the Budget.
UK
- UK shares were down 2% for October (FTSE All Share Index). Domestically exposed smaller companies were particularly under pressure, albeit AIM saw a small bounce when fears of the removal of IHT relief were alleviated.
- The labour market remains tight, with the unemployment rate falling to 4.0% and pay growth remaining high at 4.9% year-over-year in August.
- September’s headline inflation declined significantly to 1.7% year-over-year and below the Bank of England’s 2% target, with core inflation at 3.2%.
- The Budget caused a repricing in long-term government borrowing costs in anticipation that UK interest rates will need to be higher for longer to offset more persistent inflationary pressures.
- Deterioration in the longer-term macro-economic outlook was reflected in sterling weakness (albeit against a strong dollar), despite positive near-term UK economic data such as inflation hitting the 2% target.
- Data from Halifax in October showed that house prices rose 0.2% over the month to hit a record high of £293,507, surpassing the previous peak of £293,507 in June 2022.
Global
- Developed market equities posted a positive return of 2.0%. Growth stocks outperformed their value counterparts, up 2.3% on the month.
- US shares ended lower in October amid uncertainty ahead of the Presidential Election and ongoing doubts about the path of interest rates.
- Japanese stocks were the top performer despite concerns that the need for tighter policy and a stronger yen could impact export-oriented companies, as well as political uncertainty created by recent election results.
- The European equity market posted a decline of -1.7% following more evidence of a weakening economic backdrop, with Germany at the epicentre. Data indicated continued declines in industrial and car production.
- Emerging markets declined by -1.4%, pressured by a strong US dollar, profit taking in India and volatility in Chinese equity indexes due to uncertainty over the efficacy of the support measures.
Fixed interest
- Global bonds (Bloomberg Global Aggregate GBP Hgd) ended the month down (-1.9%) following increased uncertainty regarding the pace of global interest rate cutting, specifically in the US after headline CPI fell less than expected.
- Since the US Federal Reserve’s 0.5% rate cut in September the US 10-year yield has continued to rise, given strong economic growth and reflationary fears.
- The European Central Bank cut interest rates by 0.25% in October. However, the uptick in inflation and business activity contraction in October may imply less likelihood of rapid rate cuts to come.
- UK bond yields spiked towards the end of the month as the extent of additional borrowing required to fund the Budget was revealed. UK inflation showed a much bigger decline than expected during the month.
- In credit markets, global high yield produced the strongest total return, although still marginally negative over the month in GBP terms.
Other
- Oil prices were choppy, as macroeconomic concerns and risks of falling demand were weighed against the geopolitical tensions in the Middle East. Overall, the commodity index increased by 0.4% in October.
- Gold surged over 6% in October, an enigma in markets from higher real rates and therefore a higher opportunity cost for investors. Given the macro backdrop, investors continue to see the asset class as an important safe haven.
- Bitcoin reached $73,620, a new all-time high during the month, and US spot exchange-traded funds saw their second highest monthly inflows.
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This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
