Published: Sun 5th Nov 2017
Read Time: 11 minutes
Global Markets Update - October
US equities performed strongly in October, gaining over 2%. This was helped by strong corporate earnings and the biggest rise in retail sales for over two and a half years, despite the tragic shooting in Las Vegas at the start of the month – which saw a lone gunman massacre 58 people. The shooting caused a rise in the share prices of gun manufacturers, which is not uncommon following mass shootings, as investors believe there will be an increase in sales before any potential gun control legislation is put in place. Productivity growth, however, has been poor and now remained stagnant for 10 years, putting question marks over the ability of the US to maintain sustainable economic growth.
UK markets performed solidly in October, despite the weak economic data, Tory infighting and continued Brexit uncertainty. Indeed, the FTSE 100 hit an all-time high on the 12th of the month. This can partly be attributed to strong global growth, as the FTSE 100 is largely international and only 25% powered by domestic sales. Additionally, there has been increasing progress with Brexit talks as German newspaper Handelsblatt reported that the EU could offer a two-year transitional deal, and European Chief Negotiator Michel Barnier said he was ready to speed up Brexit talks. This positive news on Brexit helped in the pound’s recovery after it had suffered its worst week at the start of the month, since last October’s flash crash. The fall in the pound was led by plots within the Conservative Party to oust Theresa May, which caused great political uncertainty and significantly damaged the pound.
Economic data endured mixed fortunes this month. Productivity has now fallen for the second quarter in a row, down 0.1% last quarter. Surprisingly, productivity is now only 0.9% higher than it was a decade ago. Retail sales fell 0.8% this month, which suggests a slowdown in consumer spending. However, services data was positive, which is significant as the UK services sector accounts for most of the UK economy. GDP growth beat forecasters expectations to rise 0.4% last quarter, which is nothing to celebrate considering the IMF predicts that the global economy will grow by 3.6% in 2018. Inflation hit 3% in the month and analysts now strongly expect that interest rates will rise in November. However, critics believe that Mark Carney is only trying to prop up the pound, as inflation has been imported due to the weak sterling; a rise is not justified as there is no domestic inflation or pressure on real wages, despite falling unemployment and a growing economy.
October was a strong month for the European Union markets, with Germany’s and France’s main indices rising impressively by over 3%. This was helped by more evidence of a strong recovery in the Eurozone. The Eurozone grew by 0.6% in the third quarter of the year and there was positive news of lower unemployment and lower inflation. Service data across Europe rose, with the exception of Italy. Analysts believe this has been caused by the growth of export volume and an increase in output. Indeed, strong overseas demand led to German factory orders increasing by 3.6% in August. However, political turmoil in Spain loomed over the EU as the Spanish IBEX 35 lost 2.85% on 4th October. The situation appears to have stabilised as the Spanish government have instituted direct rule over Catalonia, and the IBEX subsequently recovered.
Japanese markets performed remarkably in October, as the Nikkei 225 climbed 8.13% over the month. This was helped by its 16-day win streak which ended on 25th October. This beat the previous 14-day win streak set in 1961 and led to a 21 year high. This was aided by Prime Minister Shinzo Abe being re-elected and maintaining political stability. Analysts believe that Japan is backed by strong fundamentals and that strength in the US stock market, a depreciation in the Yen, and an upturn in the global and domestic economy has helped Japanese equities perform strongly. Elsewhere in Asia, stocks performed strongly as Hong Kong’s Hang Seng rose by two and a half percent in the month, and South Korea’s KOSPI rose by over 5%. Tech companies boosted Korean markets as Samsung performed strongly despite ongoing corruption investigations.
Emerging Market Equities
The MCSI Emerging Markets Index had strong growth at the start of the month, followed by a dip from the 16th to the 26th. This is partly due to Chinese corporate debt being relatively high, household debt rising too quickly, and fears of a Minsky moment (a sudden collapse of asset prices after a long period of growth, sparked by debt or currency pressures). However, China has displayed strong growth of 6.8% in the 3rd quarter, which beat the government target, mainly due to strong private sector growth. Elsewhere, there were ongoing corruption scams in South Africa, with accusations of cronyism against Zuma and money laundering in South Africa by HSBC.
US 10-year Treasury Yield hit a 7 month high on the 25th, in response to the anticipated Fed rate rise, and pressure from the anticipated corporate tax cut by the end of the month. There was also ongoing speculation about who will supersede Janet Yellen as Fed chair early next year, which would affect future monetary policy and therefore the US treasury yield. In other words, the price of treasury bonds has fallen due to the inverse relationship between yields and the price of bonds. Bunds (German issued bonds) and gilts (generally issued by the BoE) also fell in price as investors await decisions from the respective central banks about monetary policy.
Cryptocurrency, Commodities, Alternatives
Bitcoin had an exceptional October, appreciating 43.9%, with derivatives marketplace operator CME Group announcing that it would launch a bitcoin futures product in the last quarter. However, this rise has led to more and more high profile names predicting that a correction is imminent, such as Credit Suisse CEO Tidjane Thiam. Ethereum has fallen to a 7-month low against Bitcoin, despite a slight increase in value over the month and many partnerships with Ethereum being announced.
Oil prices nearly reached a 2 year high on Halloween, rising to above 60 dollars a barrel. The WTI Crude Oil Index increased by 6.2% over the month. This is due to strong US demand for oil, along with several oil fields in Kirkuk (Iraq) being closed due to fighting. There has also been protest at Libyan oil fields, cutting supply even further.
The price of gold has not fared so well, losing about 1% over the month. This is partly due to a 90% investor confidence of a rate rise in the US at the start of the month. This rate rise would lead to a stronger dollar, and hence the price of gold has fallen. Silver tends to follow similar trends to gold (they are both used by investors to hedge against the dollar), and has shown similar price movements by falling a small amount.