The timing of interest rate hikes against the backdrop of prolonged inflation was the key focus of markets in October.
Markets retained a razor-sharp focus on all commentary from global central banks that could signal earlier interest rate hikes than anticipated. Incoming inflation data has remained stubbornly elevated, leading to an increase in bets from the bond and money markets that lift off would be sooner than preferred by most central banks. While some argue that market pricing is too aggressive, there are several fault lines in the system that could see inflation at higher levels for longer. Strong demand and a lack of supply drove energy prices to record highs in October, while raw materials and supply constraints kept pricing pressure elevated, most notably in car prices, given ongoing semiconductor shortages. US inflation was 5,4% year on year (yoy), while inflation in the Eurozone rose to its highest level in thirteen years, at 3,4% yoy. Several central banks, including Norway, New Zealand and Poland, have announced their first interest rate hikes, but it was Brazil that caught the eye in October. Although it was the sixth interest hike for 2021, Brazil acted with an eye-watering 150 bps interest rate hike, the biggest in decades.
First estimates of third-quarter growth data confirm a slowdown across several major markets, reflecting slower growth momentum and the impact from a resurgence in Covid-19 infections over this period. US GDP fell short of expectations, growing at 2%, (annualised) over the quarter, while real GDP growth in China eased to 4,9% yoy from 7,9% yoy in the previous quarter. The Eurozone showed marginal improvement in quarterly growth, with fewer restrictions across member states adding to an improvement in activity.
Equity indices made new highs in October, despite a market that remains alive to inflationary pressures and the upcoming withdrawal of liquidity. The S&P 500 gained 7,0% in October, while the technology heavy Nasdaq 100 gained 7,9%, supported by a credible start to the US third-quarter earnings season, with more than 80% of companies that reported, beating expectations. After a stand-out performance in the previous month, Japan reversed much of the prior month’s gains, declining 4,0% in October. Risk-taking did not quite extend to emerging markets, with the MSCI Emerging Markets Index gaining a modest 1,0%. Chinese markets showed signs of stabilisation, delivering 3,3% growth over the month as investors took stock of the restructuring progress in the property market. With this backdrop, the MSCI World Index advanced 5,7%, brining returns over the year to 19,9%.
Global bond markets traded under duress for much of the month, with yield curves flattening as investors price in earlier rate hikes against inflation data that has yet to show signs of moderation. With some volatile trading sessions, the US 10-year bond yield increased modestly over the month, touching 1,7% at one point. These trends provided a headwind for interest rate sensitive assets, especially those exposed to shorter-dated bonds where possible interest hikes were most vividly reflected. In US dollar terms, the Bloomberg Barclays Global Aggregate Bond Index returned -0,2% in October.
The European Union’s (EU’s) €12 billion inaugural green bond reportedly garnered demand of more than €135 billion, delivering the world’s largest green bond deal to date, as it surpassed the UK’s £10 billion debut the previous month. This provides a solid foundation for the EU, with more to come from Europe’s €800 billion Recovery Fund, with on average a third of debt earmarked for green bonds to support sustainable projects.
Heading into November, world leaders gathered in Scotland for COP26 (the 26th Conference of Parties), to discuss and deliberate climate goals and funding for sustainable solutions. With ambitious goals for both countries and companies, sustainable funding looks set to become an interesting and growing part of capital markets – offering private capital ways to contribute to green energy, sustainability and other social goals.
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