Key points
- Equity rally on second-bailout news
- Corporate news surprised
- Italian bond yields spike
- Investors end month risk-off
UK
Equity markets rallied in October, reversing the summer sell-off. This reflected renewed hope of a solution to the European crisis, and sentiment was also compounded by better than expected corporate numbers. In the UK, the FTSE 100 recorded one of its biggest monthly rises, up 8.2%; the FTSE 250 +6.9%, and the FTSE Small Cap (incl. ITs), +2.2%. The month, however, was not without volatility, and investors remained highly sensitised to newsflow and speculation. Government bonds markets experienced flights to quality, and credit spreads widened and then contracted as investors decided between risk-on and risk-off modes. The ten-year Gilt yield started and ended October at 2.43%, having fluctuated during the month between 2.50% and 2.60%.
Global
Equities rallied (as above) on the prospect of another bailout package for Europe, and economic indicators that suggested improving conditions in China and the US. The US equity market was +7.1%; Europe +8.3%; the emerging markets +8.9%, with Japan lagging -4.2%. In bond markets, all eyes were on Italy, rendering investors increasingly wary as new developments surfaced. They became increasingly ‘risk-off’, something that was reflected in Italian bond yields that touched 6%.
Investment outlook
At the time of writing, November is already proving a tricky month. Uncertainty surrounding Europe continues to cast a shadow, especially now that we are seeing contagion beyond the peripherals. Italian bond yields are spiking again +7%, and Greece only has until mid-December to sort out its mess. The situation remains very fluid, and any package must address the underlying social and welfare problems. Despite Silvio Berlusconi’s departure, and a successful €3 billion bond sale of five-year bonds (albeit it at a hefty +6% yield), little is being done to address Italy’s underlying problems - a lack of growth in the economy and the rising cost of debt. Spain has also suffered, and Hungary has been downgraded. A shift in the ECB’s mandate, one which allows it to print money, seems to represent the best course of action, bringing with it the potential for a rally. Any positive economic data should also help to underpin sentiment. Meanwhile, the market will remain prone to speculation amid a melee of some bad and some better news. This frame of reference will characterise the rest of year, and consequently, expect markets to remain volatile.