Global Asset Allocation Team Market Update – November 2022
Sentiment improved in October amid mounting speculation for a dovish shift in the global monetary tightening cycle as signs emerged that measures taken to combat inflation are beginning to take their economic toll. In early November, the Federal Reserve raised interest rates by 75 basis points. However, in the press conference that followed, Chair Powell dashed investor hopes for a dovish pivot when he said the terminal rate would move higher than previously thought, while reiterating that its “very” premature to expect a pause.
Global equity markets posted some solid results in October, with the MSCI All Country World surging 6.0%. Developed markets outperformed their emerging market peers by a wide margin. The S&P 500 rose 8.0% on expectations that the Federal Reserve may slow its pace of tightening, while the S&P/TSX advanced 5.3% on the back of some healthy gains in the heavyweight energy sector. International developed stocks (5.3%) also got some reprieve last month. By contrast, the MSCI Emerging Market index declined -3.2%. Chinese stocks saw some notable weakness following the 20th Communist Party Congress, where there was no shift away from Beijing’s current macro and regulatory policies. President Xi Jinping’s decision to stack his leadership ranks with loyalists prompted a historic market rout, as investors saw a likely continuation of market-unfriendly policies such as Covid Zero.
Fixed income markets generated negative results. Bond yields pushed higher throughout most of the month as central banks continued their quest to tackle elevated inflation. However, bond markets reversed course towards month-end and yields fell back as investors moved to price-in a moderation in central bank tightening. Still, the Barclays U.S. Aggregate Bond index was down -1.3%, while the FTSE Canada Bond Universe lost -1.0%.
The U.S. dollar posted its first monthly decline since May as traders reassessed the course of Federal Reserve policy. The Canadian dollar strengthened even after the Bank of Canada surprised the market with a smaller-than-expected 50 basis point rate hike, with the rally in crude prices bolstering the loonie. The yen retreated after the Bank of Japan maintained its ultra-accommodative bias, which widened its policy divergence with the Federal Reserve.
Finally, crude oil remained in a tug-of-war between the deteriorating economic landscape and supply-side risks, with the latter dominating in October. Oil prices propelled higher following a decision by OPEC+ to make sizeable cuts to output that tightened supplies in an already strained market. The curbs take effect from November and are the start of an uncertain period for oil supplies heading into the winter, with the European Union set to implement sanctions on Russian flows in December. Gold posted its seventh straight month of declines in its longest losing streak since the late 1960s as rising treasury yields weighed on the non-interest bearing metal, while copper fell on further indications of economic vulnerability in China – the world’s top consumer of the red metal.