Monthly Market News October 2022 – Trends in the markets

Alexandre Gauthy - Economist

Financial markets reacted in October to the problematic mix of slower growth, mixed corporate earnings, sticky inflation, and central bank actions. This evolution resulted in high volatility, but stock prices moved markedly higher in the end.

Our expert, Alexandre Gauthy, analyzes the trends in October 2022.

Equity markets: Higher following a volatile start

During the first half of October, some weaker economic data contrasted with inflation figures that once again exceeded expectations in Europe and the United States. This information resulted in fluctuating market expectations for the interest rate path that central banks still have in store. Sharp price swings occurred almost daily, with technical elements (short covering) undoubtedly adding to the volatility. Hopes of a 'Fed pivot' - the Federal Reserve moving to a slower pace of rate hikes - were fueled by the Canadian central bank raising its policy rate less than expected. That was the signal for equity markets to move decisively higher in the second half of the month.

The publication of third-quarter corporate earnings also had an impact on price movements. A striking observation in the US were the disappointing results or outlook for the current quarter for some big technology companies such as Alphabet, Microsoft, Meta, or Amazon, as well as companies from other sectors (e.g. Boeing). Their share prices fell sharply. The companies cited slower-than-expected revenue growth, higher costs, and the expensive dollar. These companies are heavyweights in stock market indices, but the S&P500 held up well.

Chinese stocks have underperformed for some time because of the weak economic outlook. However, in October, they realized a clear underperformance following the 20th Communist Party Congress which pointed to a likely greater government grip on the economy and more regulation. In the meantime, geopolitical tensions between the US and China (ban on high-tech supplies from the US), increasing covid outbreaks, and the extension of lockdowns also weighed on share prices.

Equity markets	September	3 months	Since 31/12	12 moths
MSCI EMU NR	7.9%	-4.0%	-16.2%	-15.0%
MSCI EUROPE NR	6.2%	-5.3%	-12.2%	-9.7%
MSCI USA NR	7.0%	-3.0%	-7.0%	-2.7%
MSCI JAPAN NR	2.1%	-7.2%	-12.8%	-11.8%
MSCI EM. MARKETS NR	-4.0%	-11.4%	-18.8%	-19.2%
MSCI AC WORLD NR	5.1%	-4.7%	-9.3%	-6.3%
Performances in EUR dd. 31/10/2022				Source : Bloomberg

Bond markets: interest rates continue to move higher

Bond yields reached new highs for this cycle during October. US 10-year yields rose to 4.25% (the highest level since 2008), and German yields to 2.45%. Hopes of a 'Fed pivot' drove equity prices higher in the month's second half and pushed bond yields lower compared to the recent peak (-30 bp for US and -35 bp for German 10-year yields). Italian government bond spreads stabilized and fell slightly from their recent peak at 250 basis points after the parliamentary elections in late September.

In the UK, the Bank of England had to intervene in the bond market again after buying up bonds in late September to stabilize financial markets. In mid-October, 10-year bond yields rose above 4.5%. The ongoing turmoil in the markets eventually led to the resignation of UK Prime Minister Truss and Finance Minister Kwarteng. The new Prime Minister Sunak scrapped the tax cuts announced last month. The 10-year yield subsequently fell to 3.5% at the end of the month.

Eurozone corporate bond spreads remained fairly stable over the month.

Yield 10 yr	Current	September	3 months	Since 31/12
Belgium	2.73	-0.04	1.32	2.55
France	2.68	-0.04	1.30	2.48
Germany	2.14	0.03	1.33	2.32
Italy	4.30	-0.22	1.28	3.13
Greece	4.62	-0.24	1.66	3.28
Spain	3.23	-0.06	1.31	2.66
United States	4.05	0.22	1.40	2.54
Japan	0.25	0.00	0.06	0.18
Evolution until 31/10/2022				Source : Bloomberg

Central banks: a slower pace of rate hikes on the horizon?

As expected, the European Central Bank raised its policy rate by 75 basis points, bringing the deposit rate to 1.5%. President Lagarde's comments were seen as less strict than at previous meetings. That positive interpretation was based on the statement that significant progress had been made in normalizing monetary policy. Recognising at the same time the recession risk, the decision not being unanimous (some members preferred a 50 bp rate hike), and the observation that no mention was made of the start of the central bank's balance sheet deleveraging.

After the Australian central bank already raised interest rates less than expected in early October (25 basis points instead of 50 bp expected), the Canadian central bank delivered a surprise in the same vein. The Bank of Canada announced a rate hike of "only" 50 bp, not 75 bp as expected. The central bank chairman argued that the interest rate cycle was not yet over, but that there was more focus on the deteriorating economic situation. The Bank of Canada, along with the Federal Reserve, was one of the central banks that first started the interest rate cycle early this year and acted most aggressively.

The Bank of Canada's action opened the door for new Federal Reserve interest rate hopes, not so much for the early November meeting (expectation +75bp) but for indications of a slower pace of interest rate hikes at future meetings.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	3.0-3.25%	+0.75%	Sept. 2022
ECB deposit rate	1.5%	+0.75%	Oct. 2022
Situation on 31/10/2022			Source : Bloomberg

Currencies: dollar advance stalls

Hopes of a less steep interest rate path from the Federal Reserve caused the dollar to weaken slightly, falling back to parity with the euro. Weaker US economic data reinforced the trend. The dollar's advance was additionally held back by dollar sales by Japanese and Chinese governments to support their weak home currencies. In October, both currencies weakened further against the dollar, the renminbi to the level of 7.3 (the lowest level since 2007) and the yen to 150 against the US currency (the lowest level since 1990).

After the pound's sharp decline in September, the currency was able to recoup a significant portion of its losses in October. New Prime Minister Sunak withdrew the tax measures of his predecessor Truss, which restored market confidence.

Emerging market currencies remained fairly stable thanks to the stagnant dollar. The Brazilian real underwent significant currency fluctuations due to the country's presidential election, but remained virtually unchanged on balance over the past month.

Currencies	Current	September	3 months	Since 31/12
USD	0.989	-0.9%	3.3%	13.0%
GBP	0.862	1.8%	-2.7%	-2.5%
JPY	146.95	-3.6%	-7.9%	-12.3%
CHF	0.990	-2.3%	-1.7%	4.6%
Evolution versus EUR until 31/10/2022				Source : Bloomberg

Commodities: OPEC+ production cut pushes oil price higher

Brent oil prices rose to $98 during October before falling slightly. OPEC+ cut its production quota by 2 million barrels per day in early October (starting from November), equivalent to about 2% of daily global production. This evolution was more than expected. The production cut is significant, but the actual quantities that will be taken off the market are about half the announced figure, because, in practice, some countries produced less than their allocated quotas. OPEC+ wants the production cut to cushion weaker demand expected from the global growth slowdown. It may also signal that if a price cap against Russian oil comes into effect in December, the other OPEC+ members will not step in to make up any shortfall. European gas prices continued their decline and even briefly fell below 100 euros/Mwh for the first time since June, down from 190 euros at the end of September. Warm weather conditions in Europe and winter stocks replenished to 95% removed much of the upward price pressure.

Industrial commodity prices remained fairly stable in October after their weak performance in recent months. The gold price fluctuated with bond market swings and on balance closed slightly weaker over the past month.