Riding the Market Rollercoaster
If we had written this commentary early in the week as intended, we would have said that markets were still on the back foot, as they were down another few percent. However, having got to the end of this week things have improved quite a bit and most markets are now actually up a few percent, with China leading the way. As the chart below shows markets are moving in tandem, and they are all being pushed around by long-term US interest rates.
Worries around the burgeoning US deficits and the supply of bonds that would entail had put upward pressure on yields. Then yields fell back, as various Fed committee members lined up to say that higher rates (especially long-term rates) were doing their work for them – highly ironically that led to falls in rates and rising markets throughout most of this week. Then overnight the latest CPI report was just a little bit warmer than the market expected, with hotel costs and energy prices adding the most upward pressure.
The core monthly number of 0.31% equates to an annual figure of 3.7% and was slightly higher than the last 2 readings, indicating that inflation pressures are dissipating but slowly. On this trajectory the market expects core inflation to be back to around 2% later in 2024, and this number was just low enough to keep things more or less on track.
Against this backdrop, Australian equities are up by 0.6% so far in October, supported by strength in banks, materials, utilities, real estate and information technology sectors. Small-cap stocks underperformed slightly, with the S&P/ASX Small Ordinaries up just 0.3. Internationally, developed markets were positive as the MSCI World Ex Australia index rose 3% in unhedged terms, but gained only 1.3% when hedged back to Australian dollars. Global (mainly US) smaller companies were the most sensitive to recession and interest rate fears, while emerging markets outperformed with a 2.9% increase for the MSCI Emerging Markets index. This was mainly driven by the rumours that the Chinese authorities are finally preparing to deploy a meaningful stimulus package to reinvigorate the local economy.
In fixed income, Australian bonds eked out small gains as the Composite Bond index rose 0.7%, but global bonds struggled as the hedged Global Aggregate index dipped -0.25%. With duration or governments enjoying a round trip, this difference was largely due to credit spreads coming under further pressure with the Global Credit index down -0.5% and the Global High Yield index falling -0.8%.
Among other major asset classes, global REITs were flat while listed infrastructure dropped -0.4% for the week, both again experiencing an interest rate-driven round trip.
Gold prices posted a 1.4% gain, but broader commodities slumped -5.2%, mainly due to weakness in energy prices although industrial metals were also in negative territory while soft commodities were up modestly. Overall, this painted a picture of a modest uptick in recession fears amidst heightened geopolitical tensions and the impact they might have on energy prices with inflation pressures and central bank policy ever present in ten background.