Global equities rise on outlook for US interest rates

Comments by federal reserve chairman drive rally.

2 minute read

key on us dollar

Key points

  • Global equities rally after sharp sell-off
  • Emerging markets bounce back but remain well down over the year
  • European stocks buck the global trend losing further ground
  • US treasury yields fall below three per cent
  • US corporate bonds on track for worst performance since 2008

November was a rollercoaster ride for equities. For much of the month the decline that began back in October continued. However, comments by the chairman of the Federal Reserve, Jay Powell, on the outlook for US interest rates propelled global equities higher in the final days of trading. Probably erroneously, these remarks were interpreted as indicating that borrowing costs in the US would not rise as far and as fast has had been anticipated. Optimism that a trade war between the US and China could be averted also lifted sentiment.

The MSCI World index returned 1.2 per cent in local currencies, which equated to a 0.27 per cent return in sterling terms. The price of oil continued its descent and by the end of November had fallen by around 30 per cent from the four-year high reached in early October. Unsurprisingly against this background, energy stocks were among the worst performers on both sides of the Atlantic, while technology stocks also lagged other sectors in the US.

Emerging markets finally gained some relief with both stocks and currencies enjoying their best month since January. The MSCI Emerging Markets Index gained 2.97 per cent in local terms reducing the loss for the year to date to -7.46 per cent. Hopes that China and the US could resolve their trade differences drove the rally. The remarks by Powell regarding the outlook for US interest rates also lifted sentiment. Rising US interest rates, a stronger dollar, as well as concerns over global trade, have sapped demand for emerging market assets this year. China, Indonesia and India were the star performers among emerging markets over the month.

US stocks also fared well, the S&P 500 rising by 2.04 per cent in US dollar terms. Major technology stocks, such as Amazon and Apple, which came under further pressure earlier in November, recovered in the final week of trading. However, the technology sector as a whole remained in negative territory over the month, with healthcare, basic materials and industrials among the best performers.

The prospect of the European Central Bank ending its bond-buying programme by the end of the year and the UK quitting the European Union by March 2019, as well as Italy’s clash with Brussels over its budget deficit, weighed on European stocks with the MSCI Europe index falling by -0.91 per cent in local currencies.

The yield on the 10-year US treasury briefly fell below three per cent for the first time since mid-September on the back of Powell’s remarks. Meanwhile the sharp fall in oil prices hit the US high yield bond sector given that many of the country’s shale oil companies borrow in this market to finance their operations. US corporate bonds in general have fared poorly this year, with yields rising to an eight-year high of 4.36 per cent at the end of November, putting the sector on course for its worst performance since 2008.

The extra level of interest investors demand to hold Italian ten-year government debt relative to comparable German bonds declined towards the end of the month on signs that Rome is adopting a more conciliatory stance over the nation’s budget deficit.

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