Global financial markets finished around 3% lower during October as bond yields continued to march higher and geopolitical conflict in Israel lowered confidence in the outlook.
Market volatility, as measured by the CBOE Volatility or VIX index, rose accordingly, trading at levels not seen since the United States experienced a regional banking crisis in March.
The turbulence follows comments we made in our August Snapshot where we debated the type of economic slowdown expected over the next 6 to 12 months, being either a soft landing or a hard landing.
At the time in August, the probability of a soft economic landing in the United States seemed to be rising as economic growth, including retail sales and the labour market, remained strong, while inflation continued to fall.
This momentum continued into September as well, with the economy growing at 4.9% during the quarter, retail sales beating expectations, unemployment remaining low at 3.8%, and inflation falling to 3.7%.
The subsequent rise in bond yields during September and October however, along with the conflict in Israel, have created a more balanced likelihood of a soft versus hard economic landing.
In response to strong economic data and central banks sticking with their higher for longer interest rate policies, the 10-year Australian Government Bond yield rose from 4.03% at the end of August to 4.95% at the end of October. Similarly, the 10-year United States Government bond yield rose from 4.09% at the end of August to 4.91% at the end of October.
Furthermore, a conflict erupted in the Middle East in early October between Israel and Gaza. Although neither party is a major oil producer, concerns about higher oil prices emerged due to alleged Iranian support for Hamas and the risk of the conflict spreading in the region.
Even before the conflict, the global oil market was already experiencing tightness because of OPEC+ production restrictions and voluntary production cuts by Saudi Arabia and Russia. Surprisingly, however, the oil price fell by about 10% during October, while the gold price rose by around 7%.
As we move forward, it remains to be seen whether market movements in September and October are the beginning of a new trend, or if the coming months will revert to their usual seasonal patterns. If the seasonal narrative holds up, the fourth quarter can often lead to a 'Santa Claus' rally and strong equity market returns. Nevertheless, the Investment Committee remains alert in light of recent economic and geopolitical developments, and believes the portfolios are well positioned with high-quality liquid assets should any further volatility be experienced in the coming months.