Sabco® Investment's Monthly Market Report - October, 2022

Sabco® Investment's Monthly Market Report - October, 2022

In October, financial markets responded to a challenging combination of slower growth, mixed corporate earnings, persistent inflation, and central bank actions. As a result, there was significant volatility, but stock prices ultimately rose considerably.

During the first half of the month, weaker economic data clashed with inflation figures that surpassed expectations once again in Europe and the United States. This led to fluctuating market expectations regarding the future path of interest rates set by central banks. Almost daily, there were sharp price swings influenced by technical factors like short covering, contributing to the overall volatility. Hopes of a "Fed pivot," signifying a slower pace of rate hikes by the Federal Reserve, were fuelled by the Canadian central bank's decision to raise its policy rate less than anticipated. This acted as a signal for equity markets to rally strongly in the second half of the month.

The release of third-quarter corporate earnings also played a role in price movements. Notably, some major technology companies such as Alphabet, Microsoft, Meta, and Amazon, as well as companies from other sectors like Boeing, reported disappointing results or provided a bleak outlook for the current quarter. Consequently, their share prices experienced sharp declines. These companies carry significant weight in stock market indices, but the S&P 500 remained resilient.

Chinese stocks had been underperforming due to a weak economic outlook, and in October, their underperformance became more pronounced following the 20th Communist Party Congress. The congress indicated a likely increase in government control over the economy and tighter regulation. Geopolitical tensions between the US and China, including a ban on high-tech supplies from the US, escalating COVID-19 outbreaks, and extended lockdowns, further weighed on share prices.

Bond yields reached new highs for the current cycle in October. US 10-year yields rose to 4.25% (the highest since 2008), while German yields reached 2.45%. The hopes of a "Fed pivot" drove equity prices higher in the latter part of the month and resulted in a decline in bond yields compared to their recent peaks (-30 basis points for US and -35 basis points for German 10-year yields). Italian government bond spreads stabilized and slightly decreased from their recent peak of 250 basis points following the parliamentary elections in September.

In the UK, the Bank of England had to intervene in the bond market once again, purchasing bonds to stabilize financial markets after doing so in late September. By mid-October, 10-year bond yields rose above 4.5%. The ongoing market turmoil eventually led to the resignation of UK Prime Minister Truss and Finance Minister Kwarteng. The newly appointed Prime Minister Sunak abandoned the previously announced tax cuts. As a result, the 10-year yield fell to 3.5% by the end of the month.

Eurozone corporate bond spreads remained relatively stable throughout the month.

As anticipated, the European Central Bank raised its policy rate by 75 basis points, bringing the deposit rate to 1.5%. President Lagarde's comments were perceived as less stringent compared to previous meetings. This positive interpretation was based on the acknowledgment of significant progress in normalizing monetary policy. However, concerns about a potential recession, the lack of unanimous decision (some members preferred a 50 basis points rate hike), and the absence of any mention of the central bank's balance sheet deleveraging initiation tempered the optimism.

Following the Australian central bank's decision to raise interest rates less than expected in early October (25 basis points instead of the anticipated 50 basis points), the Bank of Canada surprised by also opting for a smaller rate hike. Instead of 75 basis points, they announced an increase of "only" 50 basis points. The central bank chairman emphasized that although the interest rate cycle was ongoing, there was increased focus on the deteriorating economic situation. The Bank of Canada, along with the Federal Reserve, had been among the central banks initiating the interest rate cycle early in the year and taking the most aggressive actions.

The Bank of Canada's move opened up the possibility of revised hopes for interest rates set by the Federal Reserve. These hopes were not primarily cantered around the early November meeting (expected to result in a 75 basis points hike) but rather on indications of a slower pace of rate hikes in future meetings.

Expectations of a less steep interest rate path by the Federal Reserve led to a slight weakening of the dollar, bringing it closer to parity with the euro. Weaker US economic data further reinforced this trend. Additionally, both the Japanese and Chinese governments sold dollars to support their weak domestic currencies, which limited the dollar's advance. In October, both the renminbi and the yen weakened further against the dollar, with the renminbi reaching its lowest level since 2007 (7.3) and the yen hitting its lowest level since 1990 (150 against the US currency).

After experiencing a significant decline in September, the pound managed to recover a substantial portion of its losses in October. The new Prime Minister Sunak reversed the tax measures introduced by his predecessor Truss, which helped restore market confidence.

Emerging market currencies remained relatively stable due to the stagnant dollar. The Brazilian real experienced significant currency fluctuations due to the country's presidential election but ultimately ended the month with minimal net change.

Brent oil prices briefly rose to $98 per barrel in October before experiencing a slight decline. OPEC+ announced a production cut of 2 million barrels per day, effective from November, which exceeded expectations. However, the actual amount removed from the market was approximately half of the announced figure, as some countries produced less than their allocated quotas. OPEC+ implemented the production cut to cushion the expected weaker demand resulting from a global economic slowdown. It may also indicate that if a price cap against Russian oil comes into effect in December, other OPEC+ members will not step in to compensate for any shortfall. European gas prices continued to decline, briefly dropping below 100 euros/MWh for the first time since June, down from 190 euros at the end of September. This decline was driven by warm weather conditions in Europe and replenished winter stocks, alleviating upward price pressure.

Industrial commodity prices remained relatively stable in October after their recent weak performance. The price of gold fluctuated in response to bond market movements and closed slightly weaker for the month.