Market insight October – rising bond yields

October was a difficult month for markets. Bonds and stocks fell simultaneously as bond yields rose sharply, and heightened geopolitical uncertainty weighed on market sentiment. The rout in the bond markets continued with the 10-year US Treasury yield rising above 5% for the first time since 2007. This was driven by a combination of strong economic data making ‘higher for longer’ rates look increasingly likely. Rising bond yields and the Israel-Hamas conflict dampened risk appetite further and caused equities to fall.

Economic data 

The best-performing major equity market in October was the S&P 500 Index, this was down 2.1% on the month, and this means it is now in correction territory as it has fallen more than 10% from its July high.

Economic data is still firmly in the limelight and October saw a flurry of data signalling the resilience of the US economy and inflation came in hotter-than-expected.

Resilient data suggests that the Federal Reserve may have to hold interest rates at current levels for longer than most investors were expecting.

UK Markets and Eurozone inflation

In the UK, despite the relatively large tilt towards the energy sector, markets were hit harder than most, the domestic facing Mid and Small Caps continued what has been a torrid 18 months. Higher interest rates appear to be biting, as shown by the sizeable drop in consumer confidence in October, and the fall in retail sales in September. 

Meanwhile, sticky services inflation and elevated wage growth make the prospect of ‘higher for longer’ rates look increasingly likely.

In the wider Eurozone inflation also came in under forecasts, this is potentially the moment where the three major central banks realise the first part of the job is done, with inflation seemingly under control albeit above target. They are now moving into a situation of pausing interest rates – the question now becomes how long is higher for longer?

In late October, the ECB held its rate at 4% ending its unprecedented series of 10 consecutive increases meanwhile The US Federal Reserve and the Bank of England held interest rates for the second consecutive month in their early November meetings.

Factor performance

In terms of factor performance over October, it was quality that was the best performer as investors flocked to safety. 

Small Cap as a factor was the weakest  as investors moved risk off. Whereas Bond yields have been on a rollercoaster ride in the past few years and October was no different, with volatility continuing throughout the month.

Some of the recent bond market volatility has been driven by the horrific events unfolding in the Middle East. Investors are examining whether the prospect of higher oil prices damages economic growth, and therefore reduces the outlook for interest rates, or whether higher inflation puts the central banks in an even tighter spot and feeds the “higher for longer” narrative.

Market insight October 2023 – summary

October was a challenging month for investors, with declines across both equities and bonds. Central bank rhetoric remains firmly in focus and central banks appear set to hold rates at current levels. The “higher for longer” narrative is concerning investors whilst geopolitical issues are adding to the anxiety.

Despite the continued resilience seen in economic activity we continue to believe that the probability of a recession in 2024 is high.

If you would like any guidance on your investments and the current markets, please don’t hesitate to contact us.

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and the value of investments can fall as well as rise. No representation is made that the stated results will be replicated.

Craig Melling

Craig Melling

Director of Investment

Craig joined Progeny Asset Management as a founding member in 2016.

Learn more about Craig Melling