Monthly Comment - October 2023

October saw a global retrenchment in financial markets as U.S. interest rateanxieties persisted amidst unrelenting inflationary pressures. Geopolitical tensionsfurther exacerbated investor trepidation, especially due to escalating conflicts inthe Middle East. This environment led to a downturn in bond markets, with yieldsexperiencing a notable surge, whereas gold's value increased as it became arefuge for risk-averse investors.In the U.S., stock markets experienced a decline during the month, reflecting arecalibration of expectations regarding the Federal Reserve’s policy trajectory.With inflation rates maintaining their peak and the economy demonstratingsustained strength, the anticipation for an easing of monetary policies wasdeferred. The Ukrainian conflict's enduring nature and new conflicts in the MiddleEast added layers of uncertainty.Despite these challenges, the U.S. economy posted a robust 4.9% growth rate inQ3 2023, buoyed significantly by consumer expenditure. The consumer priceindex, a barometer for inflation, held steady with a 3.7% year-on-year increase asof September's end. Industrial metrics also indicated growth, with the purchasingmanagers’ index expanding to 51.0 in October.Federal Reserve Chair Jerome Powell underscored the continuance of policytightening against a backdrop of enduring and emerging uncertainties, with interestrates reaching their highest in over two decades. Sector-wise, energy andconsumer discretionary categories lagged, while utilities and consumer staplesdemonstrated relative resilience.Eurozone markets mirrored the downward trend, although utilities and consumerstaples managed marginal gains. The energy and IT sectors also showed relativestability. However, the healthcare sector faced declines following a majorpharmaceutical firm's profit downgrade.The European Central Bank paused its rate hikes in October, offering some respiteamid a sequence of increases. Inflation rates edged closer to the 2% target,suggesting a potential cessation to the current cycle of rate hikes. Yet, thistightening has dampened economic growth, with the eurozone economycontracting by 0.1% in Q3.In Japan, equities fell by 3.0%, with financial stocks benefiting from a rise in long-term yields. Yet, the technology sector and small-cap growth stocks struggled. TheBank of Japan, responding to yield pressures, allowed greater flexibility in its yieldcurve control policy.Corporate earnings in Japan, initially weak, were later bolstered by strongerperformances from domestic and auto-related sectors. In China, equities alsodeclined amidst economic deceleration and unresolved real estate debt issues,while Hong Kong shares dropped due to reduced foreign investment and US-China tensions.Bond markets were dominated by the narrative of enduring high-interest rates, withthe U.S. yield curve steepening and the 30-year yield surpassing 5.0% for the firsttime since 2007. The European Central Bank maintained stable rates, with Italianbond yields influencing decisions against anticipated policy adjustments.UK financial data was largely underwhelming, with consumer and retail indicesreflecting a bleak economic outlook. Nonetheless, emerging market bonds faredbetter than their developed counterparts, despite Middle Eastern conflicts.Currency markets saw the dollar's gains moderate, with the euro and Swiss francappreciating. Credit markets saw widening spreads in investment-grade bonds,indicating underperformance, while high-yield bonds suffered negative returns.Convertible bonds faced losses, reflective of broader equity market challenges,and the S&P GSCI Index fell, though precious metals, particularly gold, surged asa safe haven amidst Middle Eastern conflicts.