Risk off, risk on — Market Insights (October 2023)

US Economy posts strong Q3 growth

October saw the release of the third quarter GDP numbers for the US — a surprising 4.9% growth. Strong consumer spending arising from summer travel, amid other categories, generated these tailwinds. However, this level of economic expansion is not likely to be sustainable considering the many challenges faced by US consumers - higher mortgage rates, burgeoning credit card debt and slowing job growth, etc. 

With 30 year mortgage rates hovering around the high 7% and in some areas, around 8%, and no concrete signs of that softening, the housing market has been a pain point for a large segment of Americans. Powell added more fuel to fire last Thursday, saying that policymakers “are not confident” interest rates are high enough to bring it down to their target 2% — sending major US indices tumbling.

Meanwhile, credit card debt in the US increased $154 billion USD from 2022 (Federal Reserve Bank of New York); a significant increase and the largest since 1999. The labour market also fettered, with growth in jobs slowing in October, to half that of September, a core statistic that significantly impacts consumer spending and confidence. 

Fed pauses, again

The Fed, in their November 1 meeting, decided to pause on increasing the benchmark interest rates. Even though this was not unexpected by investors, the stock market gained on the news as market participants decided to focus on the marginally more dovish tone from Jerome Powell, the Fed Chairman. This was the second meeting in a row where the Fed had kept rates steady. 

Middle-east tensions

Negative sentiment weighed on both the equity and fixed income markets in October as bond yields rose again and recent geopolitical events, such as the Israel-Hamas conflict, added more uncertainty. While the market’s response has been muted so far, there have been a few areas where the impact has been more pronounced.

1. Oil and Energy prices

There was some nervousness and uncertainty around supply chain disruption as news of the conflict broke. Following the incursion on October 7, the price of Brent oil shot up by less than 10% over the subsequent days but started to fall afterwards. However, most analysis point towards the containment of  the conflict and that it is unlikely to  spread to the large oil producing countries such as Saudi Arabia, Iraq and Iran in the short term.

2. Israel stock market

Israeli stocks declined about 12.6% in October in USD terms; some of the decline could be attributed to the sharp drop in the Israeli Shekel against the US dollar. While Israel was one of the worst performing markets in October, it was also one of the strongest performers month-to-date (9 November 2023). The rebound of the Israeli Shekel against the US dollar was a major contributor to the currency’s performance year-to-date.

3. Israel’s credit rating

One area where there might be lasting impact is Israel’s credit rating. Fitch placed Israel’s “A+” rating on RNW (Rating Watch Negative) status on 17 October 2023, citing heightened geopolitical risks as one of the driving factors. Moody’s, a couple of days after, placed Israel’s “A1” rating under review, due to the severity of the conflict with Hamas. S&P announced shortly after Moody’s warning, that it was maintaining Israel’s “AA-” rating but with a negative outlook.

Uncertainty was the overarching theme of October’s stock market and in Sam’s latest article, he discusses how markets perform during times of war and conflict. The TLDR to the article is — markets are oftentimes rational and focus on core business fundamentals to bring it back to normalcy. 

October market commentary

The global equity markets extended September’s losses in October with the MSCI ACWI (All Country World Index) declining about 3% in USD terms. The US outperformed on a relative basis versus other major markets, retracting 2.3%. Europe had a slightly tougher time with the MSCI Europe index falling 3.7% (USD terms). While the European Central Bank (ECB) decided to pause on further rate hikes in October, the higher interest rates had already exerted its influence, causing a marginal contraction on the Eurozone economy in the third quarter (-0.1%). As for China, the coupling of negative investor sentiment and ongoing property crisis continues to weigh on the stock market with the MSCI China index dropping by 4.3%. Japan as well, was not spared from the general weaker investor sentiment as it fell 4.5% (MSCI Japan index). And emerging markets, in general, underperformed developed markets in October.

In terms of factors, value stocks generally underperformed growth stocks in October and small cap stocks again lost to their larger cap peers. A trend that was consistent in both developed and emerging markets.

Bond markets, too, fell across the board in October. While US yield curve steepened and European bonds generally fared better than the other regions, Japan government bonds were down about 1.6% (in local currency) as concerns lingered over Bank of Japan’s yield curve control policy. Sovereign debt generally outperformed both global corporate investment grade and high yield bonds, with high yield remaining more resilient than investment grade bonds.

Commodities, as represented by the S&P GSCI, contracted about 4% in October. Gold retained its coveted safe haven status, as it regained favour with investors, returning 7.4% for the month. Energy and crude oil declined 6.8% and 8.7% respectively while Agriculture had a positive month, with a 0.6% return.

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Read more:

• Introducing Endowus model portfolios — curated with Best-In-Class Funds for core-satellite strategies
• Why invest through Endowus
• Choosing Endowus when investing in Hong Kong
• Endowus HK Q3 2023 Performance Review

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