Whipsawing stocks, tumbling commodity prices and a sell-off in government bond markets meant October was anything but quiet. Brexit, and a US Presidential election the likes of which we have never seen before, have done nothing to calm investors’ frayed nerves, with markets skittish heading into next week’s vote.
Looking at equities first, developed markets have suffered a sharp reversal since mid October, with investors reacting to election fears and comments from central banks. The Fed in particular sent a clear signal last month that it is unhappy with negative yields in government bond markets, with investors expecting further action to push yields up. The impact on stocks has been pronounced – and extended well into November – with major markets retreating sharply.
Starting with the UK, the FTSE 100 retreated from a peak of 7,097 during October to close the month out at 6,954, and since then things have grown bleaker, with the index back below 6,700 points late in the day on Friday.
Other UK indices have shared the same fate, with the FTSE 250 also down 2% in October (and much further down from its peak price early last month) before extending losses so far in November.
Further afield, US shares have gone the same way, the S&P 500 retreating from 2,168 points at the start of October to close the month at 2,126 points. Further weakness has been seen so far in November, with the index off 3% from its opening level last month as all eyes focus on the election outcome.
Adrian Lowcock, investment director at Architas, believes markets had got ahead of themselves in early October, with blue chip investors in particular overvaluing the impact of a weak pound.
However, his big concern was valuations in the fixed income universe. “We got to a point in October that saw valuations across fixed income become far too stretched,” he said.
“At one stage, 48% of the EU government bonds had a negative yield, and this prompted action from central banks to signal they wanted to change course.”
The fallout hit bond proxies in particular among equity markets, but it also impacted government bonds, with US Treasuries seeing yields climb from 1.6% to 1.8% during the month.
Gilt yields also spiked from 0.7% to 1.2%, amid a sharp decline in sterling, but according to Adrian Hull, senior investment specialist covering fixed income at Kames Capital, the UK is in a unique situation. With Brexit the driving force behind the sell-off for gilts, Hull is expecting a bumpy ride for UK government debt markets as the debate over the terms of Brexit rumbles on.
“The gilt market has dominated attention, with the move upwards for yields entangled with the step-change in sentiment around sterling weakness, which has been driven by internal party politics in the UK and by ‘hard’ Brexit comments emanating from Europe. Political thoughts aside, our debate is focused on whether or not higher inflation is being priced-in to sterling rates markets,” he said.
“Continuation of market nervousness (particularly with sterling) is likely to encourage significantly more volatility for rates markets.”
Away from fixed income and equity markets, commodities are not faring any better. Oil in particular has endured a tough month, falling from $49 to $48, and succumbing to a sharper sell-off still in November, while gold has fallen from $1,316 to $1,286, offering little by way of a safe haven trade against growing volatility.
All this, and Trump hasn’t even won the White House…November could be interesting.