October was a positive month for stocks. The US indices set new records while the European stock markets erased their decline of the previous month.
Our expert, Alexandre Gauthy, analyses market trends in October 2021.
Equity markets: good results propel U.S. markets to new records
U.S. stocks rose in October. The S&P500 index completely erased its September drop and even recorded its best monthly performance of the year. The Dow, S&P and Nasdaq Composite all finished October at record levels. In addition, all sectors of the U.S. market ended the month on a positive note. Consumer discretionary (+13%) led the market. The automotive sector was strongly driven by Tesla (+43.7%), which reported better-than-expected results. Moreover, the News that Hertz would order 100,000 vehicles boosted sentiment on the stock. The energy sector once again posted a strong monthly gain thanks to rising energy prices. Within the technology sector, software and semiconductors fared well last month. Mega-caps also contributed, such as Microsoft, whose share price rose by more than 17% in October following the release of good results. Banking stocks also outperformed the overall index. In contrast, credit cards showed a period of relative weakness. Similarly, the industrial sector underperformed, with airlines being the main drag. Beverages were the best performing subgroup of the consumer staples sector. Netflix (+13.1%) and Alphabet (+10.8%) provided support to the communications services sector while Facebook's stock price dropped. By management style, growth stocks clearly outperformed value stocks during the month. By region, emerging markets once again underperformed U.S. and European equities over the past month.
The month of October was driven by the third quarter earnings season. As expected, supply chain issues, input cost pressures, and labor market strains were discussed throughout the company conference calls. However, companies drew attention to rising demand, which has helped support profit margins in the face of rising costs. For example, according to FactSet data, 56% of S&P 500 companies had already reported earnings as of October 29, and 82% of them beat consensus earnings estimates (compared to a 5-year average of 76%). In addition, 75% of them also beat revenue estimates (versus a five-year average of 67%).
Bond markets: slight increase in risk-free rates
This risk-on sentiment was also evident in the bond market, where risk-free rates rose slightly during the month. The German 10-year yield rose from -0.20% to -0.10%, while the equivalent U.S. rate reached 1.70%, before falling back somewhat at the end of the month. The U.S. Treasury yield curve flattened significantly in October, reflecting a global trend. This was largely due to a change in central bank rhetoric, which viewed inflationary pressures as somewhat less "transitory" than originally thought. Nevertheless, while this shift was evident in many of the statements made by Fed members last month, they also reiterated that the bar for reducing asset purchases was significantly lower than the bar for raising rates. All segments of the European and U.S. bond market (government bonds, corporate bonds, and inflation-linked government bonds) posted slightly negative performance last month.
Central banks: towards the gradual withdrawal of monetary support
The Fed did not meet in October. Nevertheless, the minutes of its September meeting were released and clearly indicate that a reduction in quantitative easing will be announced at its early November meeting. The Fed's net purchases will likely end in mid-2022, just before the first-rate hike that the market expects to take place in September 2022. The ECB left its key rates unchanged in October and maintained a slightly lower pace of net asset purchases under the PEPP (Pandemic Emergency Purchase Program) than in the second and third quarters of this year. Indeed, the ECB believes that despite the rise in bond yields, financing conditions in the euro area remained favorable. At the press conference, C. Lagarde made it clear that the conditions for a rate hike were not yet in place. The Central Bank of New Zealand raised rates for the first time in seven years, following the lead of Norway and South Korea. Other central banks have signaled their intention to tighten monetary policy, such as the Bank of England. The central bank of Australia refused to defend its 0.10% bond yield target on 3-year bonds - one of the pillars of its quantitative easing program - which triggered a violent rise in the country's sovereign bond yields. The yield on the government bond maturing in April 2024 jumped to 0.8 per cent. The Bank of Canada also surprised investors earlier in the month by signaling an abrupt halt to its bond-buying program. In Brazil, the central bank accelerated the pace of monetary tightening in response to the significant rise in inflation. Its monetary policy committee unanimously voted to raise the benchmark rate by 1.5 per cent, compared with one per cent increases at the previous two meetings, bringing the Selic benchmark rate to 7.75 per cent.
Currencies: Appreciation of commodity-related currencies
In October, the dollar remained strong against the euro at around 1.16. The greenback also remained near its recent highs against most currencies. The appreciation of the dollar (and the euro) against the Japanese yen was more pronounced, mainly reflecting the growing risk appetite of investors. In contrast, the dollar depreciated against the British pound and commodity-linked currencies such as the Norwegian krone, the Russian ruble and the Canadian dollar. Bitcoin recorded its best month since December 2020, rising more than 40 percent in total and ending the month near its all-time high of $67,000 reached on October 20.
Commodities: Energy prices continue to rise
Commodity prices rose in October by just over 5% measured in dollars, driven by energy prices. Due to the global energy crisis, coal and gas prices reached record levels. Demand for crude oil has accelerated as power plants have the ability to switch from gas to oil relatively quickly. WTI crude added to the September rally, rising 11.4 percent amid rising energy prices. European natural gas, which had risen fivefold since the start of the year, fell at the end of the month following new statements by Vladimir Putin, who suggested that Russia will increase its gas exports to the continent in November. The Russian leader ordered Gazprom to focus on filling its European storage sites from November 8. Industrial metals and agricultural commodities were up about 3% for the month. Finally, at the bottom of the commodity complex, gold ended the month up just 1.5%.