Global Markets Rebound Strongly
Global equities rebounded strongly in October (MSCI World Index +7.2% MoM) in what turned out to be a roller-coaster of a month. US economic data continued to make a case for a more hawkish US Federal Reserve (Fed) as the US unemployment rate fell to its pre-COVID-19 low (3.5%), with rising wages not enough to encourage Americans back into the labour market. US inflation also came in above expectations (headline CPI +8.2% YoY), with the upside surprise coming predominantly from accelerating core service prices, particularly shelter inflation, which drove core inflation to a new high (6.6% YoY). That economic data helped to push bond yields higher, with US 10-year government bond yields ending the month above 4%, the first month-end print above that level since early 2008 before the global financial crisis (GFC).
Most stocks were able to overcome the prospect of an incrementally more hawkish Fed, buoyed by better-than-expected earnings, with c. 60% of large US corporates reporting 3Q22 earnings during October that were slightly ahead of undemanding expectations. S&P 500 companies reporting earnings during October delivered earnings growth of c. 3% YoY, slightly ahead of expectations for a small contraction in earnings (-1% YoY). However, the energy companies helped drag earnings into positive territory, with non-energy companies that reported 3Q22 earnings during October seeing their aggregate earnings fall by c. 3% YoY. Energy companies were also the best-performing S&P 500 sector (+25% MoM) thanks to the combination of better-than-expected earnings and buoyant energy prices (Brent crude +8% MoM due partly to production cuts announced by OPEC+ members during the month).
US large-cap tech companies were amongst the biggest losers during October, with Facebook parent, Meta, falling 31% MoM after lacklustre earnings and a pledge by CEO Mark Zuckerberg to forge ahead with spending on the Metaverse. Amazon (-9% MoM) fell on disappointing sales and profit guidance, but Apple (+11% MoM) bucked the trend for US large-cap tech companies despite sales of iPhones and services coming in below expectations. Banks joined energy companies amongst the list of October’s top performers with higher rates boosting their net interest income (JP Morgan +22% MoM, Bank of America +19% MoM).
Emerging market (EM) stocks (-3.1% MoM) were unable to match the strong performance of developed markets despite a strong showing from the stock markets of Brazil and India (both +5.5% MoM) as Chinese markets imploded in the wake of the Chinese Communist Party’s (CCP’s) congress to appoint new leadership. Xi Jinping’s much-anticipated approval for a third five-year term as president came alongside a shift to consolidate his power and entrench his ideology as two of the more moderate members of China’s top leadership group, the seven-member Politburo Standing Committee, were forced out and the four incoming members appear to be Xi Jinping loyalists. Foreign investors, in particular, showed their disapproval of the new trajectory of Chinese leadership, leaving US-listed Chinese corporates down 25% MoM with Hong Kong-listed Chinese corporates falling 17% MoM.
The US dollar experienced a mixed performance in October, strengthening against most EM currencies (except for the Brazilian real [+4.5% MoM] and the Mexican peso [+1.7% MoM], which remain the only EM currencies besides the Russian ruble that have strengthened against the US dollar YTD). The British pound and the euro ended the month firmer against the US dollar (+2.7% and +0.8% MoM, respectively), though they remain significantly weaker against the greenback YTD (-15% and -13%, respectively). The British pound strengthened off beaten-up levels as the ruling party made yet another leadership change, ousting Liz Truss after just 45 days as prime minister as her plan to borrow and spend the UK out of its economic malaise was strongly rejected by investors. The baton was handed to Rishi Sunak, who now faces the unenviable task of coming up with a different economic fix for the UK.
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