In October, the financial markets presented a mixed landscape, influenced by a combination of positive and negative developments in the US, China, and the Middle East. Let's delve into each region to understand their impact on the overall financial markets.
US - A Complex Scenario
The US market experienced fluctuations with a unique dynamic: "Good news is bad, and bad news is good." Initially, US equities declined as Treasury yields rose following inflation data, signaling the Federal Reserve's reluctance to declare victory over inflation. The market anticipated another interest rate hike this year.
Towards the end of October, stocks surged despite lackluster economic news, such as a slight increase in nonfarm payrolls and a 2% drop in existing home sales to the lowest point since 2010. However, this positive trend couldn't fully offset the losses from the first three weeks of October.
The market's response to economic indicators led to a shift in expectations, with traders lowering the probability of a rate hike and considering the possibility of a future rate cut. Despite market indications, recent statements from Fed officials, particularly Fed Chairman Jerome Powell, suggested that rate cuts are not imminent.
China - Economic Recovery Amid Capital Withdrawal
In China, stocks experienced a significant climb, marking the most significant increase in over a year. This surge followed reports of China contemplating new economic stimulus measures to achieve its 5% growth target. Economic support from Chinese authorities propelled US-listed Chinese shares to their highest point since July 28.
However, China's economic landscape paints a mixed picture. Official data indicated an economic pickup as manufacturing activity returned to expansion after six months. Yet, both manufacturing and services indicators fell below estimates, signaling continued pressure on parts of the economy.
China also faced challenges with its first-ever quarterly deficit in foreign direct investment (FDI), reflecting capital outflow pressure and difficulties in attracting overseas companies amid Western governments' "de-risking" moves.
Evaluating the Impact of Israel-Hamas War on Financial Markets
The impact of Hamas attacks on Israel and the war in Gaza had a relatively modest effect on oil prices. September's oil prices remained close to the mean since 1970, and the oil market demonstrated increased resilience over the years. The damage is expected to be limited unless the conflict escalates into a regional conflict involving other oil-producing states.
Despite calls for Arab countries to rally against Israel, reactions have been limited to condemnation of Israel's actions. Even Iran, a financial backer of Hamas, has not gone beyond condemning Israel's actions. As long as this trend persists, major disruptions in the world's financial markets are not anticipated.
Portfolio Strategy
In October, the portfolio continued the correction after a run up of more than 10%, with Cash showing a loss of -2.70%, CPF down -1.89%, and SRS declining by -2.27%.
As of now, there is no change in the current portfolio strategy. However, we are approaching an inflection point where interest rate hikes are expected to cease, potentially leading to a strong rally in the equities market. This sets the stage for a positive year-end close for US equities.
The changing interest rate environment also prompts a shift in fixed income strategy. There are plans to reallocate shorter-duration bonds to longer-duration bonds to capitalize on higher interest rates for this economic cycle. Regarding China, there is optimism that the government will adopt a more pro-business stance in the near future to address the current economic challenges.
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