Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Trick or treat: Markets ghoul out in October
Market Rewind
Saxo Group
Summary: October was a nightmare for global equity and bond markets, as geopolitical tensions in the Middle East, mixed corporate earnings, and a strengthening US dollar cast a spell on markets.
Global equities
Global equities (MSCI World) fell 3% in October, due in part to a strengthening US dollar, which made US exports and services more expensive for overseas buyers. Corporate earnings were mixed, with energy (-4.4%), finance (-3.7%), and technology (-0.9%) sectors underperforming. Growing geopolitical tensions also weighed on markets, with oil prices down 10.8%. Regional equities:
US -2.2%.Big tech stocks had mixed results in October, reflecting broader investor concerns about the impact of rising interest rates on corporate earnings. Many tech companies reported strong revenue growth in the third quarter, but their profits were squeezed by higher expenses, including interest costs. US technology stocks have struggled to move above their July high as the US 10-year yield has increased by 107 basis points, offsetting the higher economic growth rates over the same period. Amazon was able to overcome these challenges thanks to its strong cash flow and its ability to pass on higher costs to consumers. Meta, Microsoft, and Alphabet, on the other hand, were more vulnerable to the impact of rising interest rates.
Europe -3.6%.
European stocks fell 3.6% in October 2023, with the MSCI Europe index down 3.6%. Concerns about a recession in the Eurozone are renewed. S&P Global's purchasing manager figures point to a sharp slowdown in economic growth across the European region, as reported by Ft.com. The European Central Bank (ECB) kept interest rates unchanged at 4% in October, after 10 consecutive rate hikes. The ECB said it is too early to expect interest rate cuts, given high inflation and the risk of a recession.
Asia -4.2%.
Asian markets fell sharply in October, with the MSCI AC Adia Pacific index down 4.2%. Several factors contributed to this mixed performance, including the strength of the US dollar. The US dollar strengthened 0.5% in October (DXY Index), putting pressure on Asian currencies. Another factor that weighed on Asian markets is the slowdown in China's economy, which had a knock-on effect on other Asian economies. An interesting development is that the Chinese Communist Party is tightening control over China's financial industry, recruiting nearly 100 officials ahead of a landmark economic policy meeting this week (ft.com). The International Monetary Fund (IMF) finds that Asia is likely to see faster disinflation, but prospects for growth in coming years are dimming. Consumer spending has been strong in Asia this year, but there are already signs that the region's recovery may be running out of steam. The IMF expects growth in Asia and the Pacific to accelerate from 3.9% in 2022 to 4.6% this year, explained by the post-reopening recovery in China and stronger than expected growth in the first half of the year in Japan and India.
Emerging Markets -3.9%.
Emerging markets fell 3.9% in October. Within emerging markets excluding China, some of the best performers included India, Taiwan, and South Korea. India is benefiting from strong economic growth and a favorable demographic outlook. Taiwan is benefiting from a strong semiconductor sector and a weaker Taiwanese dollar. South Korea is benefiting from a strong export sector and a government stimulus package.
Sectors:
The energy sector dropped -4.4% and oil by -10.8% October saw a sharp escalation in geopolitical risk in the Middle East, a region that accounts for more than one-third of the world's seaborne oil trade. This had investors concerned, but the same sector also saw ginormous acquisitions in October, with bets from upstream companies that oil is here to stay. Global heavyweights such as Exxon bought Pioneer for a landmark USD 60 billion deal, and Chevron bought Hess for USD 53 billion. The future of oil remains unclear, and investors should be aware of the risks of energy markets, which tend to be volatile.
The financials sector fell 3.7%. Commercial banks had a more challenging month as they faced rising costs and slowing loan growth. High interest rates make it more expensive for consumers to pay back interest, increasing the risk of defaulting on their payments. However, interest rates can also be a beneficial factor behind investment bank performance. For example, JP Morgan's quarterly earnings report showed a 35% increase in net profit thanks to higher interest income.
Bonds
Global bonds -0.71%The bond market had a challenging October, with the 10-year US Treasury yield rising above 5%, the highest level since 2007. Strong global data, such as US GDP coming out stronger than expected, led to a renewed sell-off in global bonds. Strong growth may lead to concerns that inflation will remain elevated and has put further upward pressure on bond yields. A stronger US dollar, which has been strengthening against other currencies in recent months, also contributed to this month's decline (DXY +0.5%). The US dollar has been strengthening against other currencies in recent months, making US exports more expensive and making it more expensive for foreign investors to buy US bonds. Bonds may experience more volatility going into the year’s end, so investors should carefully consider their risk tolerance and investment objectives before making any investment decisions.
Check out the rest of this month’s performance figures here:
Sources: Bloomberg and Saxo
Global equities are measured using the MSCI World Index. Equity regions are measured using the S&P 500 (US) and the MSCI indices Europe, AC Asia Pacific, and EM respectively. Equity sectors are measured using the MSCI World/Sector] indices, e.g., MSCI World/Energy. Bonds are measured using the USD hedged Bloomberg Aggregate Total Return indices for total, sovereign, and corporate respectively. Global Commodities are measured using the Bloomberg Commodity Index. Oil is measured using the next consecutive month’s WTI Crude oil futures contract (Generic 1st CL Future). Gold is measured using the gold spot dollar price per ounce. The US Dollar currency spot is measured using the Dollar Index Spot, measuring it against a weighted basket of the following currencies: EUR, JPY, GBP, CAD, SEK, and CHF. Unless otherwise specified, figures are in local currencies.
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