Middle East tensions drove up oil price spikes, while global markets faced declines. Explore how these developments may shape investment strategies and financial market dynamics.
A complex backdrop
Geopolitics gained further prominence with an attack by militant group Hamas on Israel. Conflict is ongoing in the region, notably in Gaza, with escalating casualties. Given the potential for regional impact in the Middle East and supply disruption, the oil price spiked and traded erratically over the month, while safe-haven assets like gold increased by 7,3%. European gas prices increased by 23,3% in October as concerns extended to related sectors, with damage to a gas pipeline in Finland and ongoing strikes in Australia exacerbating supply chain concerns stemming from the Middle East.
China recorded 3rd-quarter GDP growth of 4,9% yoy, surprising to the upside and offering the prospect that policymakers’ ongoing efforts to shore up the economy have delivered some stabilisation with upside potential. Time will tell how enduring the recovery is. The People’s Bank of China (PBOC) kept the policy rate unchanged but added liquidity support for the banking sector. Chinese authorities announced fiscal stimulus, which will see the budget deficit increase to 3,8% from 3,0%. Headline inflation in the country also moderated to 0,0% yoy, prompting concerns of deflationary trends.
United States (US) data confirmed ongoing resilience in the economy. The US printed 3rd-quarter GDP growth of 4,9%, with a strong showing from the consumer, which was echoed in credible retail sales figures. Labour market data across various regions highlighted an underlying resilience, most notably in the US. While there is evidence of cooling conditions in wage data and other categories, the headline data still served as a hawkish input for bond pricing. With evident divergence in growth between regions, Eurozone GDP contracted by 0,1% over the 3rd quarter. The European Central Bank (ECB) kept interest rates on hold at 4,5% in October, transitioning to a pause.
Higher fuel prices saw US headline inflation steady at 3,7% yoy in September, ahead of market expectations for a decrease, while core inflation moderated to 4,1%. Data for the US personal consumption expenditure price index (PCE) was recorded at 3,4%, with the annual rate for core PCE (the US Federal Reserve’s preferred measure of inflation) slowing to 3,7%. Near-term inflation expectations ticked up in tandem with recent upside surprises, while longer-term expectations remain anchored. With bond yields moving higher, commentary from US policymakers has been more balanced recently, reflective of the impact of high bond yields on financial conditions at this progressed stage of the tightening cycle.
Global bonds as well as developed and emerging market equities suffered further drawdowns in October as volatility picked up and risk appetite languished on geopolitical tensions and tight financial conditions. The S&P 500 lost 2,1% over the month, while declines across Europe and Asia were more meaningful. Despite a constructive GDP print, domestic Chinese assets suffered further losses as challenges in the property sector remained front and centre, with property developer Country Garden facing its first default on a dollar-denominated bond. The Hang Seng Index declined by 3,8%, while the MSCI Emerging Markets index traded down 3,9%.
The majority of developed market sovereign bond yields increased over the month, perpetuating the pressure from the prior month and scaling new cycle highs. The Bloomberg Global-Aggregate Bond Index lost a further 1,2% in October, bringing the losses year to date to 3,4%. US bond yields traded under pressure over the month, reflecting hawkish sentiment.
The US 10-year bond yield breached 5,0% in October, a level last seen in 2007. Credit spreads widened, leaving investment grade and high-yield bonds under pressure. With an unsettled backdrop, the US dollar gained a marginal 0,4% over the month, bringing the year-to-date appreciation to 3,0% on a trade-weighted basis. While the word ‘resilience’ has become somewhat overused to describe the year thus far, it aptly sums up economies defying the challenging backdrop, high inflation and climbing interest rates. Unfortunately, trends continue to point in a different direction, with 4th-quarter global economic gauges trending lower, especially in Europe and the United Kingdom.
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