October 2022 Market Insights
Most developed markets saw a bounce back as investors began to anticipate a slowing to monetary tightening.
Written by Kevin Hua Co-founder & Chief Investment Officer
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
What happened to the markets in October?
Most developed markets saw a bounce back as investors began to anticipate a slowing to monetary tightening that could bolster asset prices and some corporate earnings that surprised on the upside.
The strongest markets were U.S. Down Jones Industrial Index, up +13.95% and the U.S. Russell 2000 Index, up +10.94% (local prices). Although the U.S. NASDAQ Index was up +3.90% (local price), it underperformed as growth stocks remained subdued given the news of large-scale layoffs at technology companies.
Hong Kong markets remained weak as the HSCEI Index and the HSI Index, were down -16.49% and -14.72% respectively (local prices). China’s Shanghai Composite Index was also down -4.33% (local price).
Inflation and rates remain the key drivers of U.S. markets
Inflation remains elevated in the U.S. as core inflation, excluding food and energy, jumped to a 40-year high of 6.6% in September. This dampened a month-long rally where investors were hoping that monetary tightening would ease. Instead, the U.S. Federal Reserve raised rates by 0.75% in early November, its fourth such rise in four months.
The U.S. benchmark is now at a 3.75% to 4% range, from nearly zero in March. The Federal Reserve forecasts released at its September meeting showed rates reaching 4.4% this year and 4.6% next year, before cuts in 2024. These forecasts are likely to be revised upwards to 5% by March 2023.
U.S. technology stocks underperformed over the month as earnings disappointed. Companies such as Alphabet, Microsoft, Meta and Texas Instruments fell on weaker earnings as well as bearish forecasts.
U.K. economy remains in turmoil
The U.K. economy remained under pressure as Fitch Ratings became the latest firm to lower the sovereign’s credit outlook, citing “the large fiscal stimulus, announced without compensatory measures or an independent evaluation of the macroeconomic and public finances’ impact.”
With overwhelming pressure to reverse the fiscal stimulus and tax cuts announced by Liz Truss, newly appointed Chancellor of the Exchequer Jeremy Hunt said the income tax cuts the government had previously planned would be shelved indefinitely as well as reversing plans to cut dividend tax rates and remove alcohol duties.
The backflip also resulted in Liz Truss, resigning as Prime Minister after only 44 days to be replaced by Rishi Sunak, who will be expected to be fiscally prudent as he navigates the country’s tenuous finances, control inflation and manage it out of recession.
Asian markets remain weak
Chinese President Xi Jinping is set to rule China for at least another decade, and possibly for life. However, his consolidation of power at last month’s Communist Party congress made markets uneasy despite Xi’s optimistic outlook for the Chinese economy.
Investors are concerned about Xi’s unfettered ability to enact government policies that may not be market friendly, stifle the economy and private businesses.
The Japanese Yen weakened to a three-decade low after Bank of Japan Governor Haruhiko Kuroda vowed to keep monetary policy loose to support economic recovery, making Japan one of the few remaining economies with low interest rates.
Inflation remains too high in Australia and the rain isn’t helping
Rain, rain and more rain in Australia has contributed to inflationary pressures as flooding and bad weather have damaged crops and increased food prices.
Headline CPI inflation was 7.3% over the year to the September quarter - the highest rate in over three decades. To combat this, following a sequence of increases of interest rates of 50 basis points, in October and November the Reserve Bank Board issued a moderate rise of 25 basis points, recognising that policy operates with a lag and that the full effect of higher rates is yet to be felt in mortgage payments and household budgets.
Inflation in Australia still remains too high however so further rate rises seem inevitable.
On positive news, the ASX was up 6% in October, and the unemployment rate remains around the lowest rate in nearly 50 years at 3.5%. Check out the RBA's recently released quarterly Statement on Monetary Policy for more detail on Australia's economic outlook.