I know this is an October summary but it would be remiss to ignore the huge Trump elephant in the room after a historic US election in November. It has been a talking point all year and if the result has disappointed some people then the drama on the night and market reaction has certainly not disappointed the neutrals, with an unexpected Trump/Republican sweep of the seven ‘swing states’ and both the Senate and House of Representatives on Capitol Hill. The S&P 500 subsequently hit its 48th record high this year posting the best post-election day return in its history (+2.5%). The 10-year and 30-year US Treasury bond yields surged 16 and 17 basis points, respectively, posting their biggest jump since March 2020 during the pandemic turmoil. Furthermore, the US dollar had its strongest day against the Euro since 2016 (+1.9%), whilst Bitcoin (+6.5%) also closed at an all-time high of $74,507. A truly historic day all round.

October was a weak month for markets, with bonds and equities losing ground and paring year-to-date gains across the board. Indeed, it was the worst month for global fixed income since September 2022, back when inflation was still raging and the Fed was hiking interest rates in 75 basis point increments. The October move was partly because US economic data continued to surprise on the upside, which pushed back fears of a downturn and led investors to dial back the likelihood of rapid Fed rate cuts. Fiscal policy risks were back in focus around the world, particularly in the US and UK, which contributed additional pressure to rising bond yields. Equity markets also declined, with the exception of Japan which benefitted from a weaker Yen during the month boosting economic prospects. The S&P 500 lost ground for the first time in six months, declining by -1.0%, whilst world equities declined by -2.3%, as the bull market took a breather.

The focus on fiscal policy risk was amplified with the IMF’s fiscal monitor in October projecting that global public debt would exceed $100 trillion in 2024. In the US, a Republican ‘sweep scenario’ of the White House, Senate, and House of Representatives, is seen as raising the likelihood of yet more fiscal stimulus relative to a divided Capitol Hill, and with it, also raising concerns over fiscal sustainability. Remarkably, there are currently 117 companies in the S&P 500 with a lower CDS (credit default swap) spread than the US government itself, or put another way, over 1/5 of S&P 500 companies are now perceived to have a stronger credit worthiness than Uncle Sam.

US 10-year government bond yields have increased in real and nominal terms – the latter from a low of 3.6% in mid-September to currently around 4.3%, a significant tightening that also led to an increase in US mortgage rates. For now, this increase is similar to what we observed after the first rate cut in the 1995 Fed cutting cycle, which saw a circa 50 basis point bounce in long-term yields before they resumed their downward trend to the ultimate cycle low in 1996. Rising yields were also likely driven by better than expected economic data recently, as evidenced by the substantial rebound in the Citi US Economic surprise index. We have seen a similar albeit somewhat muted move also in the Eurozone, whilst data in the UK generally came in worse than expected.

Another big theme in October was geopolitics, as tensions in the Middle East remained high. At the start of the month, there was a significant spike in oil prices after Iran launched a missile strike against Israel, and Brent Crude oil prices hit an intraday peak above $81 per barrel. However, Israel’s subsequent response was focused on military targets in Iran, rather than any oil facilities, and with the response being more limited than many had anticipated, oil prices have subsequently pared their gains. This backdrop meant that several safe haven assets put in a strong performance in October, with gold prices rising 4.2% and advancing for a 4th consecutive month to an all-time high, and the US Dollar index rising by 3.2% in its strongest monthly performance since April 2022.