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October Markets

The nature of global markets in October was generally bearish, as most major asset classes and indexes suffered losses amid rising inflation, supply chain disruptions, energy crisis, geopolitical tensions and stronger US dollar. Only a few markets, such as cash and gold managed to post positive returns or remain flat.

US Market in October:

The S&P 500 index fell by 2.1% in October. The Dow Jones Industrial Average also dropped by 1.4%, while the Nasdaq Composite underperformed with a 3.6% loss.

The yield on the 10-year Treasury note rose to 5.02% at the end of October, the highest level since 2021. The increase in yields reflected the strong economic growth in the US, which expanded by 4.9% annualized in the third quarter, the fastest pace since late-2021.

The Federal Reserve decided to keep the federal funds rate unchanged at 5.25%. The Fed cited the easing of inflation pressures and the uncertainty about the economic outlook as the main reasons for its cautious stance.

Excluding food and energy, core CPI was 0.34% in October, slightly lower than 0.36% in September. The Fed expects inflation to moderate in the coming months, but remains vigilant of the risks of higher inflation expectations.

Eurozone Market in October:

The eurozone equity and bond markets experienced significant volatility in October 2023, as the European Central Bank (ECB) announced a series of policy measures to combat the persistently high inflation in the region.

The Eurozone equity market, as measured by the Euro Stoxx 50 index, fell by 2.6% in October. The eurozone bond market also faced downward pressure, as investors demanded higher yields to compensate for the expected erosion of their purchasing power. The 10-year German bund yield rose by 28 basis points to 1.23%, the highest level since July 2021. The peripheral European sovereign spreads also widened, reflecting the increased risk of a recession in some of the weaker economies in the region.

The ECB’s policy actions also had an impact on the exchange rate of the euro, which depreciated by 2.4% against the US dollar in October, reaching a 10-month low of 1.11.

UK Market in October:

The FTSE 100 index fell by 1.3% in October, its biggest one-day drop since August. The index was dragged down by losses in the energy, mining and banking sectors, as well as concerns over rising inflation and interest rates.

The UK 30-year government bond yield rose to a 25-year high of 5.1% in October. The bond prices fell as investors demanded higher returns to lend to the UK amid expectations of tighter monetary policy and higher public spending.

The UK consumer price inflation (CPI) remained at 6.7% in September. The CPIH, which includes the costs of owner-occupied housing, also stayed at 6.3% in September. The inflation rates were driven by higher costs of food, fuel, transport and recreation.

The Bank of England (BoE) announced a gilt market operation in late September to support the smooth functioning of the market. The BoE purchased £10 billion worth of gilts (UK government bonds) from the market through auctions that took place from 30 September to 14 October. The BoE did not change the Bank Rate in October, which remained at 0.75%.

Asia Emerging Market in October:

The Chinese 10-year government bond had a closing yield of 2.67% for October.The Shanghai composite closed at 3018.77 on October 31.

Asian emerging markets faced headwinds in October 2023, as the US Federal Reserve maintained its hawkish stance and the US dollar strengthened. Equity markets in the region declined by 3% in US dollar terms, with Hong Kong, China and Korea underperforming. Bond markets also suffered, as local currency yields rose and foreign investors reduced their exposure. However, some countries showed resilience, such as the Philippines, India and Singapore, which benefited from domestic factors and positive earnings growth.

Commodities:

The global commodities market faced increased uncertainty and volatility due to the escalating conflict in the Middle East, which threatened oil supply and demand.

Energy prices declined by 1.8%, led by coal (-12.5%) and oil (-3.4%), as OPEC+ producers withdrew some of their output and the war in Ukraine disrupted the natural gas market.

The performance percentages of Gold, Copper, Brent Crude and WTI for October 2023 are as follows:

The price of gold futures for December 2023 delivery was $1,823.40 per ounce as of November 1, 2023, which is a -0.8% change from the price of $1,838.10 per ounce as of October 1, 2023.

The price of copper futures for December 2023 delivery was $4.32 per pound as of November 1, 2023, which is a +5.9% change from the price of $4.08 per pound as of October 1, 2023.

The price of Brent crude oil futures rose by $4 per barrel after Hamas attacked Israel on October 7, 2023 as traders reassessed geopolitical risk.

Conclusion:

Overall, the general feeling in the market around the world is gloomy in wake of a possible recession in some countries. The strengthening of the US dollar had a negative effect on the markets outside the US. However, some sectors as well as some markets in Asia remained largely unaffected by the developments in the US.

Insights Into the Strength of the Consumer

Consumer sentiment measures how optimistic or pessimistic consumers are about the economy and their own finances. One of the main reason for the drop in consumer confidence is the continuous rise in inflation, which depletes the purchasing power of consumers and makes goods and services more expensive.

Consumer sentiment is also closely related to the economy as consumer spending is a major component of GDP and a key driver of economic growth. Consumer confidence influences their decisions to save or spend their income. When consumers are confident, they tend to spend more on goods and services, which boosts the aggregate demand and stimulates the economy. When consumers are pessimistic, they tend to save more and spend less, which reduces the aggregate demand and slows down the economy.

Consumer Sentiment/ Confidence Index

The consumer sentiment index is based on surveys of randomly selected households. It is a leading indicator of economic activity, as consumer spending accounts for a large share of GDP.

Consumer sentiment can affect people’s spending and saving decisions, which in turn can have an impact on the overall economic activity. An average consumer can use this to understand the general mood of the public and plan their own financial actions accordingly.

According to a University survey, consumer sentiment fell to 63.8 in October 2023, down from 67.9 in September and above 59.9 in October 2022. This means that consumers are less confident about the economy than they were a month ago, but more confident than they were a year ago. The main reasons for the decline in October were the rising inflation, the stock market volatility, and the uncertainty about the pandemic and the government policies. The survey also found that consumers expect the inflation rate to be 5.7% in the next year, the highest level since 1982.

The average consumer can think about how he feels about the current and future economic conditions, how it effects him in terms of standard of living and how does he evaluate the effectiveness and fairness of government policies. This can help any average consumer take more informed and rational decisions.

The current consumer sentiment index is one of the lowest, This can lead to consumers feeling more anxious and pessimistic about the economy and their future financial situation, and thus reduce their spending on discretionary items. This may adversely affect the sales and profits of many businesses, especially those that rely on consumer demand. Consumers may also be more inclined to save money, pay off debt, or postpone major purchases, such as home renovations or vacations.

Consumer Spending and Savings

Traditionally, consumer spending should decrease and savings should increase after a central bank has been hiking rates. This is because higher interest rates make borrowing more expensive and saving more attractive, thus reducing the demand for goods and services.

According to the latest data from the World Bank, global spending at the end of October 2023 were $78.6 trillion, up by 4.2% from 2022, while savings stood at $25.4 trillion, down by 3.1% from 2022.

Central bankers are watching the market cautiously, as consumer spending cooled in October, which indicates a slowdown in demand and recovery. While in previous months, Consumer savings declined cumulatively , reducing the cushion for future spending and shocks. Consumer income also fell, which reflects the fading impact of fiscal stimulus and the labor market slack.

Higher consumer spending means higher demand, thereby increasing prices and inflation. While the world looks at inflation and china faces contracting GDP, the US may find the sweet spot between inflation and deflation , called the soft landing.

Labour and Wages Market

Traditionally, after a central bank has been hiking rates, the labour market should experience a slowdown in hiring, wage growth, and consumer spending, as borrowing becomes more expensive and demand for goods and services declines. This should also reduce inflationary pressures in the economy.

The labor and wage markets have improved since the pandemic, with more jobs, lower unemployment, and higher employment-to-population ratio. In the current labour and wage market, consumer sentiment, although low at this point, is poised to be positive in the coming times.

Conclusion

As we can see, the world is facing complex challenges in terms of inflation and deflation. While China is facing deflation and the rest of the world is expecting inflation, US is balanced comfortably between the two, although there is a chance of inflation. Consumer spending in the US decreased over Christmas cost and increased energy bill.

The central bankers will increase interest rates if facing inflation too much and will decrease interest rate if there is a chance of deflation.

Israel/Palestine Conflict - Impact on Markets

The conflict between Israel and Hamas is a complex and long-standing one, involving issues of land, identity, religion, security, and human rights. Israel was established in 1948 after the Holocaust, displacing many Palestinians who lived there.

Now, Hamas is a militant Islamist group that controls Gaza, a coastal enclave under Israeli blockade since 2007. On Oct. 7, 2023, Hamas launched a surprise attack on Israel, killing and abducting hundreds of people. Israel responded with airstrikes and ground invasion, causing massive destruction and civilian casualties in Gaza. The war is still ongoing, with no sign of a ceasefire.

Reaction of Markets Since the Conflict Began

Stocks

The global stock market has been volatile and uncertain, as investors weigh the risks of a prolonged conflict and its impact on the economy. The MSCI World Index, which tracks shares in 50 countries, has fallen by about 3% since the war began on October 7, 2023. Some sectors, such as defense, energy, and technology, have outperformed, while others, such as tourism, aviation, and consumer goods, have suffered.

Bonds

The global bond market has also been affected by the war, as investors seek safe havens and hedge against inflation. The yield on the 10-year U.S. Treasury note, which moves inversely to its price, has risen by about 20 basis points since the war began, reaching 2.5% on November 6, 2023. The yield on the 10-year German bund, the benchmark for the eurozone, has also increased by about 10 basis points, reaching 0.4%.

Commodities

The global commodity market has been influenced by the war, as supply and demand dynamics change. Gold, a traditional safe-haven asset, has risen by about 5% since the war began, reaching $1,900 per ounce on November 6, 2023. Oil, a key source of energy and revenue for many countries in the region, has also surged by about 10% since the war began, reaching $85 per barrel on November 6, 2023.

Gold and oil have been the most sensitive to the conflict, as they reflect the geopolitical and economic uncertainties that the war creates. Gold is seen as a store of value and a hedge against inflation, which could rise due to higher oil prices and fiscal stimulus. Oil is seen as a strategic commodity and a proxy for the stability of the region, which could be disrupted by the war or its escalation. Both gold and oil are also influenced by the U.S. dollar, which could appreciate or depreciate depending on the Fed’s policy response to the war.

Potential Escalation of the War

The war between Israel and Hamas, which began in October 2023, has escalated into a regional conflict that threatens global stability and security. Several countries have intervened in the war, either directly or indirectly, to support one side or the other. Iran, Turkey, Qatar, and Hezbollah have provided military and financial assistance to Hamas, while the US, Egypt, Saudi Arabia, and the UAE have backed Israel. Russia and China have also expressed their interests and concerns in the region, but have not taken any decisive actions yet.

The war has disrupted the supply chains of many goods and services, especially oil and gas, which are vital for the global economy. The war has damaged the infrastructure and facilities of oil and gas production and transportation in the region, and has increased the risk of attacks on tankers and pipelines. The war has also reduced the supply of other commodities, such as metals, grains, and fertilizers, which are produced or exported by the countries involved in the war. The war has also affected the movement of people and goods across borders, as well as the availability of air and sea routes.

The impact of the war on the capital markets and commodity prices has been significant and negative. The war has increased the uncertainty and volatility in the financial markets, as investors have fled from risky assets to safe havens, such as gold, bonds, and the US dollar. The war has also pushed up the prices of oil and gas, as well as other commodities, due to the supply disruptions and the increased demand for energy and raw materials. The war has also fueled inflation and interest rates, as the higher costs of production and transportation have been passed on to consumers and businesses. The war has also reduced the growth prospects of the global economy, as the lower consumer confidence and spending, as well as the lower trade and investment, have weighed on the economic activity and output.

Conclusion

The conflict has made several investments very risky due to high stock market volatility.

To take a lesson from this conflict, Investors can diversify their portfolio across different asset classes, regions and sectors to reduce the exposure to any single source of risk.

Another lesson for is to consider investing in safe havens such as gold, bonds or currencies that tend to appreciate during times of geopolitical turmoil. A third lesson is to maintain a long-term perspective and patience, as markets often recover quickly from the initial shock of a conflict.