Global equities experience a sharp sell-off

Equity markets fall sharply in October.

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Key points

  • Global equities experience sharp sell-off
  • Technology and materials the worst-affected sectors
  • Japan hit by fears over global trade
  • Emerging markets come under further pressure
  • US treasury yields rise at the month end on brighter economic news

Global equities experienced significant losses in October. A variety of factors, including Sino-US trade tensions, concerns about US corporate earnings and the end of easy money in developed economies, prompted markets to fall around the world. Concerns over Italy’s budget plans and the Brexit negotiations further unnerved investors. However, shares enjoyed a strong rebound in the final days of trading.

The MSCI World index returned -6.78 per cent in local currencies, which equated to a -5.41 per cent return in sterling terms. Highly-valued sectors, such as technology and materials, fell particularly hard, especially in the US, while more attractively-valued areas such as telecoms, utilities, and consumer staples, experienced smaller declines.

Japan was amongst the worst performers largely as a result of fears over a global trade war. Japan is heavily reliant on global trade. A subdued start to the domestic earnings season also dampened sentiment.

Emerging markets lost further ground after suffering their worst month since August 2015. All of the gains made in 2018 were wiped out over the course of the month.

China was among the worst performers with investors fearing that fresh stimulus from the central bank would not prevent a trade war with the US from causing an economic slowdown in the country. Signs that domestic demand might not be as robust as anticipated further alarmed investors. It had been hoped that spending by Chinese consumers would offset any slowdown in export growth.

US stocks posted their worst monthly performance since 2011 with concerns about higher interest rates and trade war worries rattling investors. However, strong earnings from General Motors and Facebook lifted sentiment at the end of the month, prompting a fresh surge in global equities. Optimism that the US and China could reach an accommodation over trade provided a further boost to spirits.

European markets suffered reverses but fared less badly than other regions. This was despite concerns of a clash between Brussels and Rome over the latter’s budget plans and the continuing uncertainty surrounding Brexit. The European Commission demanded Italy revise its 2019 budget proposals and rein in its spending plans yet there is little sign of the Italian government backing down.

Government bonds experienced a mixed month. The yield on 10-year US treasuries rose to 3.12%, compared with 3.05% at the end of September. News that U.S. consumer confidence rose to an 18-year high in October drove yields sharply higher at the end of the month.
However, German bund yields fell sharply, partly as a result of concerns over Italy.

The extra level of interest investors demand to hold Italian ten-year government debt relative to comparable German bonds widened sharply over the month.

Investors are worried that the clash between the Italian government and the EU could spark another eurozone crisis. Yet other eurozone countries appear unaffected. Ten-year bond yields in Spain and Portugal, key barometers of investor sentiment towards peripheral eurozone countries, moved only slightly higher over the month.

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