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Markets and macro insights with Bernard Swords, Chief Investment Officer
How did markets fare in October?
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World equity markets delivered a gain of 0.5% in euro terms in October, but this was due to euro weakness. In local currency terms, markets were down 1% in the month owing to rising US bond yields, increased tension in the Middle East and uncertainty around the US election. The results season is giving some relief but not enough.
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Only three sectors were up in October: Financials, Communication Services and Energy. Financials were driven by strong results from the US banks while Communication Services were pushed up by good results from Alphabet and Netflix. Energy was also up although its performance faded as we went through the month.
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The biggest laggards in October were the defensive sectors (Utilities, Healthcare, Consumer Staples, and Property) held back by rising US bond yields. IT was strong for much of the month but gave up its gains in the last week as outlook statements from some of the mega-caps failed to excite. That said, actual results were quite good.
What were the key takeaways from economic data releases last week?
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Data from the euro area provided some comfort on growth (GDP release) but less joy on inflation (CPI data). In the third quarter, GDP in the region grew 0.4% quarter-on-quarter which was better than consensus expectations of 0.2% growth. By country, only Italy disappointed relative to expectations.
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Meanwhile, eurozone inflation proved a little more stubborn with the core rate of CPI inflation unchanged at 2.7% year-on-year, slightly above consensus expectations of 2.6%. For a data-watching European Central Bank, it could mean greater patience before implementing another rate cut.
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In the US, GDP and inflation data was released. For the third quarter, GDP growth was slightly below forecast (2.8% annualised vs. 2.9% forecast). The main drags came from declining inventories and a larger trade deficit. But these components are volatile and prone to major revision, so in truth, it was a good report. Growth in private final domestic purchases accelerated to 3.2%.
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US inflation data came in slightly weaker than expected. Core PCE inflation (the measure watched more closely by the Federal Reserve) came in at 2.65% year-on-year, down slightly from August’s reading of 2.72%. However, goods inflation has moved back into positive territory – a trend to be watched.
The week ahead: what to watch out for
The biggest event this week will be the US presidential election followed closely by the meeting of the FOMC (i.e., the interest rate setting committee of the Federal Reserve). Will it cut? Growth data will also be released, including euro area retail sales figures and updates on the Purchasing Managers’ Indices (PMI). In the US, the ISM Services report will be released and the latest Consumer Confidence survey from the University of Michigan. Lastly, China will publish trade data for October and the monthly meeting of the main policy group in the country (the Standing Committee of the National People’s Congress) will take place. Will it announce any new policy measures?
