November saw another round of interest rate hikes in the US and the UK, while markets bought into the possibility of global central banks starting to relax and China easing zero-Covid-19 restrictions.
Buying into possibilities
Pared with high volatility and another round of policy hikes, November saw risk-taking back in vogue as markets weighed the likelihood of global central banks taking their foot off the pedal and China easing its restrictive zero-Covid policies. This prompted lower bond yields and a US dollar that depreciated by c.5,0% on a trade-weighted basis.
The US Federal Reserve (US Fed) hiked interest rates by 75 bps, bringing interest rates to 4,0% – the highest level since 2008. Guidance for more hikes to come saw markets adjust expectations for a terminal rate above 5,0%, although with an increased probability that the December move may be a smaller 50 bps. Headline inflation in the US surprised to the downside at 7,7% year on year (y-o-y) from 8,2% previously, lending support to the possibility of a smaller interest rate hike in December.
With an emphasis on weak growth expectations, the Bank of England (BOE) also hiked interest rates by 75 bps, but signalled that they were close to the peak of this interest rate cycle. The UK mini-budget painted a grim picture for the underlying economy and consumer, proposing a 'balanced plan for stability' using both expenditure cuts and increased taxes to achieve fiscal consolidation.
The Eurozone expanded by a mere 0,2% over the third quarter. Sentiment indicators in Germany and other parts of Europe surprised to the upside from low levels; and although forward-looking activity indictors showed marginal improvement, they broadly still suggest weak demand and output in the region. Inflation printed another high of 10,6% y-o-y in October, but a deceleration of producer prices in Germany (a decline of 4,2%) and a preliminary Eurozone consumer price index (CPI) print for November of 10,0% y-o-y suggest that inflation in Europe may finally be taking a turn.
The anticipation of slower global growth in 2023 outweighed the impact from the OPEC+ production cuts that were due to be implemented from November, with the Brent crude oil price declining by 9,9% over the month. Although the OPEC+ meeting early in the month yielded no further changes to production, a host of dynamics in December could, however, play a role in future price movements, including the implementation of European sanctions on imports of Russian seaborne crude oil and a price cap of $60 per barrel for countries such as India and China still allowed to do so via waivers.
From the lows in the previous month, markets continued to recover in November. Developed market equities rose across the board, with noteworthy double-digit figures being recorded from several local European bourses. Despite some fluidity around the situation, local Chinese markets rallied on the easing of certain Covid restrictions, with the Hang Seng gaining 27,5%. This supported a healthy rally in emerging markets, with the MSCI Emerging Markets index advancing 14,8%.
Global bond markets rallied, with the US 10-year bond yield ending the month at 3,7%. The Bloomberg Global Aggregate Bond Index advanced by 4,7% over the month, improving the decline year to date to -16,7%.
Easing into the new year?
On 11 November, the Chinese government announced new zero-Covid regulations, with 20 measures aimed to ease or optimise current restrictions. This included an easing of quarantine measures and restrictions on international travel. A resurgence in infections, however, meant that further restrictions were put in place again towards month-end. Increased efforts to increase vaccination of the elderly alongside further policy easing and support for the property sector left markets feeling encouraged despite the fluid situation. This comes in the wake of incoming data that suggests a continued slowdown in the Chinese economy. The Chinese government has maintained its commitment to containing the virus, but continued economic decline and increasing unrest may well prove to be the catalyst for a new or transitionary approach, even if 'living with Covid' is not yet within reach.
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