Despite a relatively positive start of the earnings season, world equities traded lower in October (MSCI AC World –1.77% in dollar terms) as slightly better growth and inflation/data expectations together with less clarity from central banks pushed bond yields higher, which triggered a major sector rotation within equities. Financials, metals and mining reversed their post Brexit slump at the expense of higher duration sectors, notably Healthcare and Real estate.
Bonds worldwide made their biggest losses since May 2013 (JPM Global Bond index – 2.59%) amid increasing sentiment that monetary policies will be less supportive going forward. Continued strength in the US labour market has increased the probability of a Fed rate hike in December. Q3 GDP data in the UK was strong enough to make the market consider that further rate cuts may not be needed. In Continental Europe, PMI data showed business activity expanded at its fastest pace this year. Better-than-expected German IFO business survey and industrial production numbers suggest executives have so far brushed off concerns about Brexit. The British Pound Sterling extended its decline against the US Dollar on “Hard Brexit” talks. Until recently, markets appeared to have priced in a Clinton victory at the US presidential elections. Polls however tightened into month when the FBI said it had re-opened a probe of Hillary Clinton’s use of a private email server while she was secretary of state. The spectre of a Trump presidency is likely to trigger a rise in market volatility in the first week of November.
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