Despite events that do not normally do market sentiment any good, October was a good month for financial markets. In the United Kingdom, there was much to do around the announcement of the new government policy; after the departure of the Chancellor of the Exchequer (Kwarteng), it also led to the resignation of Prime Minister Truss. With only 44 days, she was the UK’s shortest-serving prime minister. The Bank of England had to intervene to somewhat undo the fall of the pound and the steep rise in government bond yields. Following the recent drop in oil prices, OPEC (led by Russia) announced a 5% cut in production. New sanctions by Europe against Russia could lead to a boycott, eliminating sales for that country and thus benefiting it from higher oil prices. But overriding was the ECB’s message. Interest rates continued to rise, but policy rates are expected to be raised less in the future as the likelihood of a recession is estimated to be higher. Following this news, bond yields fell and equity markets rebounded .
Shares
Measured in euros, the MSCI All Countries World Index rose 5.1% in October. Geopolitics and COVID-19 lockdowns did stock prices in China (-17.5%) no favors. It pulled the emerging market index down with it (-4%). Indices of developed countries such as Europe (+6.2%) or North America (+6.9%) did considerably better. Japan, however, lagged a bit behind with a positive return of 2.1%. Growth stocks (+2.6%) again underperformed value stocks (+7.5%). And among sectors, it was again real estate and communications that lagged behind health care, industrials and especially energy. The latter achieved as much as a 17% return in the month of October.
Bonds
So although markets breathed a sigh of relief and interest rates fell a bit following the ECB’s announcement, there was still a slight increase in interest rates for the month broadly. German 10-year interest rates rose 0.03% to 2.14%. U.S. 10-year interest rates went up a bit harder by 0.22% (to 4.05%). Investors were willing to take on a little more risk in October. As a result, the risk premium for less risky corporate bonds fell by 0.05% to 2.16% and for more risky corporate bonds even by 0.64% to 5.49%.