Monthly Market News October 2023 – Market trends

Alexandre Gauthy - Economist

Both equity and bond markets found themselves in turbulent waters in October. Besides the geopolitical situation, investors' attention continued to focus on rising bond yields.

Our expert, Alexandre Gauthy, analyzes market trends in October 2023.

Equity markets: share prices under downward pressure

Both the European (Stoxx600) and US (S&P500) stock markets dropped for the third consecutive month. For both stock markets, losses amounted to 10% or more since their highs earlier this year. Bond yields still determined the direction of stock prices. Geopolitical tensions rose further due to the Gaza conflict. While there is no major direct economic impact, investors are apprehensive about a possible escalation of the conflict involving Iran. That could push oil prices sharply higher.

Nevertheless, there was also positive news for equities. The US economy is holding up well according to recent economic data - although this also plays into the Federal Reserve’s 'higher for longer' discourse. China announced a new set of stimulus measures, including more fiscal support and additional infrastructure investment. In Europe, third-quarter earnings releases so far have been mixed. Revenue figures tend to disappoint, but profit margins are holding up well. Expectations for the fourth quarter are under downward pressure. In the US, companies recorded a slightly positive earnings growth at the end of the month, which beat expectations for a slight decline. However, investors punished misses in earnings reports harder than in recent quarters, while companies with positive earnings surprises were rewarded less than average.

Geographically, performances were similar, with a slight outperformance for US equities. The S&P500 outperformed the Equal Weighted S&P500 index. This implies that the US stock market remains supported by mega-cap growth stocks. However, there were also setbacks there. In particular, the semiconductor sector suffered from an additional export restriction by the US government on semiconductors to China.

Equity markets	October	3 months	Since 31/12	12 months
MSCI EMU NR	-3.3%	-9.3%	6.6%	11.4%
MSCI EUROPE NR	-3.6%	-7.4%	4.9%	8.2%
MSCI USA NR	-2.2%	-4.6%	11.6%	2.4%
MSCI JAPAN NR	-4.3%	-4.8%	7.2%	9.2%
MSCI EM. MARKETS NR	-3.7%	-8.4%	-1.2%	3.6%
MSCI AC WORLD NR	-2.8%	-5.7%	7.8%	3.3%
(Performances in EUR dd. 31/10/2023)				(bron: Bloomberg)

Bond markets: European and US interest rates not moving in same direction

US 10-year bond yields continued their upward trend in October. This was not the case for German 10-year yields. US 10-year bond yield rose to 5%, the highest level since 2007. German yields still rose to levels just below 3% in early October but fell back a bit afterwards. The US economy is still surprisingly solid, while the eurozone is flirting with recession.

Another trend in the bond market is that the yield curve in the US has flattened considerably. Unlike longer maturities, interest rates for shorter maturities have barely risen in recent months (and in October). It is a manifestation of the market expectation that the Federal Reserve may have reached the peak in this interest rate cycle, but that this level will be maintained for a longer period. The 2-year bond yield is hovering just above 5%, leaving the yield curve hardly inversed.

Investors are also scrutinizing issuers with large government deficits in the light of rising interest rates. The yield spread of Italian bonds against German government bonds widened to 210 basis points from 165 basis points in August.

The spread on high-quality corporate bonds ('investment grade') in euro remained fairly stable in October. For 'high yield' corporate bonds, spreads went somewhat higher, in the general environment of increasing risk aversion.

Government Bond Yield 10 yr	Current	October	3 months	Since 31/12
Belgium	3.46	-0.04	0.33	0.24
France	3.43	0.03	0.40	0.31
Germany	2.81	-0.03	0.31	0.24
Italy	4.73	-0.06	0.62	0.01
Greece	4.18	-0.18	0.42	-0.45
Spain	3.88	-0.05	0.37	0.22
United States	4.93	0.36	0.97	1.06
Japan	0.95	0.18	0.34	0.53
Evolution until 31/10/2023				Source : Bloomberg

Central banks: the calm after the storm

After central banks had caused considerable turmoil in markets the previous months, October was calmer on that front. The European Central Bank left its policy rate unchanged at 4%. Some ECB members reiterated that policy rates at current levels were sufficiently restrictive and would bring inflation back to the 2% target over the medium term. According to the statement of the ECB, the possibility of accelerating the reduction of the central bank's balance sheet was not discussed.

The Bank of Japan maintained its short-term policy rate at -0.1% even though core inflation in the country has exceeded the 2% target for 18 consecutive months. The Bank confirmed the target level of the 10-year government bond rate at 0% and retained the 1% fluctuation margin. However, the BOJ now sees that 1% limit as a "reference" and no longer as a strict limit. It represents another step in gradually abandoning the 'Yield Curve Control' policy. However, it remains to be seen to what extent the central bank will wind down its intervention in the market.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	5.25-5.5%	+0.25%	July 2023
ECB deposit rate	4.00%	+0.25%	Sept. 2023
Situation on 31/10/2023			Source : Bloomberg

Currencies: CHF safe haven

The dollar did not really benefit from geopolitical tensions in October. Against the euro, the US currency even slightly lost ground. Economic momentum and interest rate advantage continued to evolve in the dollar's favor last month. However, the positive surprise that pushed up rates in previous months seemed to fade somewhat last month. The sell-off in the US bond market also weighed on the currency.

The Swiss franc did move higher against most currencies in October. The CHF is likely attracting more interest from investors looking for a safe haven due to the uncertain geopolitical situation.

The Norwegian krone declined quite sharply (-4.8%) against the euro in October, after a period of strengthening during the summer months. Inflation fell more than expected, making additional rate hikes from the central banks less likely. The fall in oil prices was an additional negative factor.

The Japanese yen fell deeper despite further easing of YCC policy. Against the USD, the yen exceeded its previous October 2022 low of USD150/JPY and reached a new historic low.

Currencies	Current	October	3 months	Since 31/12
USD	1.058	0.0%	3.9%	1.2%
GBP	0.871	-0.4%	-1.7%	1.7%
JPY	160.23	-1.4%	-2.4%	-14.1%
CHF	0.962	0.6%	-0.5%	2.8%
Evolution versus EUR until 31/10/2023				Source : Bloomberg

Commodities: volatile oil price in October

October kicked off with Brent oil prices hovering around 95 dollar per barrel. During the first week, the price fell below $85 due to concerns about demand after US inventories rose more than expected. This led market participants to fear that, in addition to higher interest rates, the high oil price itself was gradually starting to weigh on consumption. The outbreak of the Gaza conflict then pushed oil prices higher again. The market fears an extension of the conflict across the region and a wider disruption of production in the Middle East. The European gas price also rose to 50 euro per Mwh, despite abundant gas reserves. A wider conflict and possible Iranian involvement could increase security risks for LNG vessels from Qatar in transit through the Strait of Hormuz to the European continent.

Geopolitical tensions are making themselves felt in the prices of other assets. After slipping - a consequence of higher (real) interest rates - gold posted a solid rise and approached 2,000 dollar an ounce, up from 1,800 dollar in early October. Moreover, the gold price continues to be supported by central bank purchases. So far this year, their purchases match those of last year's record levels.

Industrial commodities continued their downward trend in October, despite some more positive signals from the Chinese economy.

Commodities	Current	October	3 months	Since 31/12
Industrial Metals (GSCI)	405.48	-3.5%	-6.5%	-10.1%
Oil (Brent)	87.41	-8.3%	2.2%	1.7%
Gold	1984.21	6.9%	-0.7%	9.2%
Evolution in EUR until 31/10/2023				Source : Bloomberg