Bonds and stocks fell simultaneously in October as bond yields rose sharply and heightened geopolitical uncertainty weighed on market sentiment. Commodities were the notable outperformer, as energy prices rallied and investors fled to gold as a safe haven.

The rout in the bond market continued in October, with global bonds down 1.2% over the month. The US 10-year Treasury yield pushed above 5% for the first time since 2007, driven by a combination of buoyant economic data making ‘higher for longer’ rates look increasingly likely, and concerns around the sustainability of government finances. A move higher in yields was seen throughout the global government bond market and in credit, widening spreads dented monthly returns for both investment grade and high yield bond markets.

Stocks fell globally as the prospect of ‘higher for longer’ rates hurt equity multiples and the Israel-Hamas conflict dampened risk appetite. Developed market equities fell 2.9% on the month, while emerging market stocks fell 3.9%. Growth stocks proved relatively resilient versus their value counterparts, returning -2.4% over the month in comparison to -3.4% for value stocks.

Exhibit 1: Asset class and style returns

Source: Bloomberg Barclays, FTSE, LSEG Datastream, MSCI, J.P. Morgan Asset Management. DM Equities: MSCI World; REITs: FTSE NAREIT Global Real Estate Investment Trusts; Cmdty: Bloomberg Commodity Index; Global Agg: Bloomberg Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2023.

Commodity prices reversed some of their year-to-date losses, with the broad Bloomberg Commodity Index rising 0.3% over October. The tragic events that unfolded in the Middle East led to a flight to safety in gold. Oil prices also rallied amid concerns that an escalation into a wider regional conflict could disrupt oil supply, although the price of Brent Crude remained below its September peak. Meanwhile, European gas prices rose due to fears over global supply chain disruptions, exacerbated by the sabotage of a gas pipeline in the Baltic sea.

Equities

The best performing major equity market in October was the S&P 500 Index, down 2.1% on the month, but still up 10.7% year to date. October saw a flurry of data signalling the resilience of the US economy, including a blockbuster jobs report, strong retail sales data and a blowout GDP print of 4.9% annualised for the third quarter. Inflation came in hotter-than-expected, with the headline figure flat at 3.7% year on year in September, against expectations of a slight moderation.

Resilient data suggests that the Federal Reserve (the Fed) may have to hold interest rates at current levels for longer than investors were expecting which, combined with elevated geopolitical uncertainty, was a likely factor behind the weak monthly performance of US stocks.

While still the top performing regional market year to date, Japanese equities struggled to maintain momentum in October. The TOPIX Index fell 3.0%, despite continued weakness in the yen.

Exhibit 2: World stock market returns

Source: FTSE, LSEG Datastream, MSCI, S&P Global, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2023.

The MSCI Europe ex-UK Index declined 3.3% on the month, as cracks continued to emerge in the economic outlook for the eurozone. Bank surveys from the European Central Bank (ECB) showed a contraction in the supply of credit to households and businesses in the third quarter, while the eurozone composite purchasing managers’ index (PMI) fell 0.7 points to a preliminary 46.5 in October. Despite a weaker month, the MSCI Europe ex-UK Index is still up 6.3% year to date.

In the UK, despite the relatively large tilt towards the energy sector, the FTSE All-Share fell 4.1% in October. Higher interest rates appear to be biting, as shown by the sizeable nine point drop in consumer confidence in October, and the 0.9% month on month fall in retail sales in September. Meanwhile, sticky services inflation and still elevated wage growth make the prospect of ‘higher for longer’ rates look increasingly likely.

In China, there were positive surprises in third quarter GDP, industrial production and retail sales. Nonetheless, continued weakness in the real estate sector, and reports of new US restrictions on AI chip exports to China further dampened market sentiment. This likely contributed to the weak performance of the MSCI Asia ex-Japan Index and the MSCI Emerging Markets Index, which both declined 3.9% on the month.

Fixed income

In fixed income markets, government bond returns were negative across a number of developed markets as yields rose to multi-year highs over the month.

In Japan, government bonds were down 1.6% in October. 10-year Japanese government bond yields moved higher throughout the month as persistent price pressures led the market to question the sustainability of the Bank of Japan’s (BoJ’s) yield curve control (YCC) policy. Despite efforts to defend its accommodative stance earlier in the month, the BoJ tweaked the YCC policy at its October meeting, with the 1.0% upper limit becoming only a “reference”.

Exhibit 3: Fixed income government bond returns

Source: Bloomberg Barclays, LSEG Datastream, J.P. Morgan Asset Management. All indices are Bloomberg Barclays benchmark government indices. All indices are total return in local currency, except for global, which is in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2023.

UK Gilts remained the major laggard year to date and fell 0.4% on the month, as a ‘Table Mountain’ profile for UK interest rates, as preferred by the Bank of England’s (BoE’s) chief economist, seems increasingly necessary to tame inflation.

High yield bond markets remained the top fixed income performers year to date, with the US and European benchmarks returning 4.7% and 5.7% in 2023 respectively. However, widening spreads across high yield and global investment grade bond markets hit monthly returns. Global investment grade bonds fell 1.2% over the month, while US and European high yield bonds fell 1.2% and 0.3% respectively.

Exhibit 4: Fixed income sector returns

Source: Bloomberg Barclays, BofA/Merrill Lynch, J.P. Morgan Economic Research, LSEG Datastream, J.P. Morgan Asset Management. Global IL: Bloomberg Global Inflation-Linked; Euro Gov.: Bloomberg Euro Aggregate - Government; US Treas: Bloomberg US Aggregate Government - Treasury; Global IG: Bloomberg Global Aggregate - Corporate; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBIG. All indices are total return in local currency, except for EM and global indices, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2023.

Conclusion

In summary, October was a challenging month for investors, with declines across both equities and bonds. Despite the continued resilience seen in economic activity in the US year to date, our base case is still for a slowdown to materialise. The recent re-pricing in the bond market suggests that core bonds should perform their job as a diversifier in the event of a deflationary recession, while the positive correlation between stocks and bonds this month is a reminder of the importance of alternative assets, such as commodities, to hedge against other risks.

Exhibit 5: Index returns for October 2023

Source: Bloomberg Barclays, LSEG Datastream, MSCI, J.P. Morgan Asset Management. Past performance is not a reliable indicator of current and future results. Data as of 31 October 2023.

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