Global financial markets reached new highs in October, boosted by positive earnings news and hope that the infrastructure deal worth approximately $1 trillion will come to fruition. Concerns about growing inflation and potential rate hikes remained since inflationary forces, initially thought to be transient, have become more persistent than anticipated. As a result, central banks are bringing forward their rate hike schedules.
Canada
The S&P/TSX Total Return Index was up 4.82% in October after the Canadian economy added 157,100 full-time jobs, bringing employment back to pre-pandemic levels.
The Canadian loonie rose 2.35% after an 11.8% spike in crude oil prices as the central bank’s hawkish shift, substantial economic growth expectations, and increased oil prices have helped push the loonie closer to its 2021 highs. Many commodities exported by Canada also reached new record highs.
The Bank of Canada maintained its key rate at 0.25%. However, the BoC caught investors by surprise after abruptly terminating its bond-buying program and bringing forward its scheduled interest rate hikes, causing a sell-off in Canadian government debt. The Bank of Canada joined a growing number of central banks shifting toward tighter monetary policy in response to rising inflation.
US
The S&P 500 Total Return index was up 6.79% in October, buoyed by corporate earnings and progress with the $1 trillion infrastructure proposal bill moving closer to a vote.
The US economy grew at an annualized rate of 2.0 percent in the third quarter, a dramatic drop from the previous quarter’s 6.7 percent and well below consensus projections of 2.7 percent. The drop-in vehicle sales and a slowdown in spending on food and lodging were to blame, owing to the delta version of the coronavirus. Nevertheless, markets may have felt encouraged because the slower growth may be accompanied by lower inflationary pressures
President Biden introduced a $1.75 trillion spending plan that, remarkably, does not include explicitly increasing personal or corporate tax rates, instead of focusing on a 15% baseline corporate tax, a 1% tax on stock repurchases, and higher taxes for anyone making more than $10 million in income. This move-in tax policy is expected to be seen positively by the markets. If the corporate tax rate is raised from 21% to 25% or 28%, it will undoubtedly lower next year’s S&P 500 profits growth, but not eliminate it.
Regarding monetary policy, the Fed’s meeting on November 2-3 will focus on the process of tapering the stimulus later in the month. Powell has won widespread support among officials for a proposal to wind out the government’s stimulus program by next June, cutting monthly purchases by $15 billion. Therefore, they will wait until they finish the taper first before increasing the interest rate.
International
The MSCI ACWI Ex-US Total Return Index was up 3% in October, as strong corporate earnings may have managed to counter worries about inflation and monetary policy tightening from central banks
Oil prices were in the spotlight after climbing after the largest supplier, Saudi Arabia, turned down pleas for more OPEC+ supplies. At the same time, the International Energy Agency warned that rising natural gas costs might increase oil demand. Natural gas prices increased by more than 150 percent in the previous two months. However, they began to fall when Russia indicated that it was willing to help stabilize prices by upping supplies to Europe. Industry experts have slammed Russia for reportedly withholding extra supplies over and above its contractual duties as it awaits permission for the Nord Stream 2 project. This natural gas conduit would bring Russian supplies to Germany.
The eurozone economy increased 2.2 percent in the third quarter, up from 2.1 percent in the previous quarter and above the 2.0 percent consensus projection. Among the euro zone’s largest economies, France and Italy reported stronger-than-expected gross domestic product growth. However, the headline eurozone inflation rate was 4.1 percent, the highest in 13 years and beyond market forecasts. Increased energy costs were a significant influence. Core inflation rose to 2.1 percent from 1.9 percent, excluding volatile energy and food costs.
The European Central Bank kept its monetary policy in place, indicating that it will continue to acquire assets under its Pandemic Emergency Purchase Program (PEPP) at a slightly reduced pace. President Lagarde recognized that inflation might “take longer to decline than initially expected.” She restated her belief that consumer price will decelerate to less than 2% by 2023. Lagarde also stated that the ECB’s PEPP activities are slated to cease in March 2022 but that the ECB would probably determine in December whether it should launch a new asset purchase program to smooth the transition.
The Portfolio Management Team