October was a challenging month for markets as the prospect of ‘higher for longer’ rates hurt equities, while bond yields rose sharply and heightened geopolitical uncertainty weighed on market sentiment. The outbreak of war in the Middle East prompted by the attack by Hamas on Israel raised fears of destabilisation in the region and triggered a spike in volatility. Gold was the notable outperformer during the month as investors fled to gold as a safe haven asset and energy prices rallied amid concerns that the Middle East conflict could disrupt oil supply. Despite the conflict, oil prices actually fell during the month. In equity markets, growth stocks proved relatively resilient versus their value counterparts. In fixed income markets, government bond returns were negative across several developed markets as yields rose to record highs over the month and widening credit spreads impacted both investment grade and high yield bond markets.

The US 10-year Treasury yield increased above 5% for the first time since 2007, driven by a combination of resilient economic data making ‘higher for longer’ rates look more likely and concerns around the sustainability of government finances. US equities posted negative returns in October, however performance was resilient compared to other markets. Factors behind the weak monthly performance of US stocks include concerns around interest rates staying at current levels for longer than investors were expecting combined with elevated geopolitical risks. The US economy remains resilient and the jobs market strong, although it has weakened in recent months. Interest rates were left unchanged in the range of 5.25% to 5.50% as the US Federal Reserve Bank continues to tackle high inflation and considering the health of the economy.

While still the top performing regional market year to date, Japanese equities struggled to maintain momentum in October, despite continued weakness in the yen. Japanese government bonds were weaker throughout the month given higher yields as persistent price pressures led the market to question the sustainability of the Bank of Japan’s yield curve control policy. The Bank of Japan will take a more flexible approach to controlling yields on 10-year government debt, with the 1% level now a reference point only.

The economic outlook for the Eurozone has deteriorated and there has been a contraction in the supply of credit to households and businesses. Despite a weaker month, European equities are still in positive territory for the year to date. European gas prices rose due to fears over global supply chain disruptions, exacerbated by the sabotage of a gas pipeline in the Baltic Sea.

In the UK, despite the relatively large weighting towards the energy sector which rallied, the FTSE All Share Index lost ground in October as higher interest rates impacted consumer confidence and retail sales. Meanwhile, sticky services inflation and elevated wage growth support the prospect of ‘higher for longer’ interest rates. UK government bonds (gilts) remained the major laggard year to date. The Bank of England kept interest rates unchanged at their October meeting and ruled out cuts any time soon with monetary policy likely to remain restrictive for an extended period to supress inflation.

China saw positive surprises in GDP, industrial production and retail sales data however continued weakness in the property sector and reports of new US restrictions on AI chip exports dampened market sentiment. Unlike most other major economies which continue to grapple with rising prices, China is experiencing deflation while other economies grapple with rising prices.

The US Federal Reserve, ECB and the Bank of England have all reiterated that the pause in their interest rate hiking cycle remains just a pause and have reserved the right to raise rates again in their efforts to bring inflation nearer to their target levels.  Despite the continued resilience seen in economic activity in the US year to date and positive corporate earnings, the outlook for equities may be more challenging with higher interest rates curbing consumer demand and the potential deterioration in overall credit. Higher bond yields suggests that this asset class should perform as an improved diversifier within portfolios in the event of a deflationary recession, while the positive correlation between equities and bonds again in October highlights the importance of alternative assets, such as commodities, to hedge against other risks.


Market Performance 2023 Year to Date
FTSE All-Share +0.26%
FTSE World ex-UK +7.29%
FTSE Actuaries UK Conventional Gilts All Stocks -4.44%
FTSE Actuaries UK Index-Linked All Stocks -8.35%


Total returns in GBP to 31/10/2023


Key Rates  
Bank of England Base Rate 5.25%
Inflation (Retail Price Index/Consumer Price Index)* 8.90%/6.70%


    *September 2023

Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk

The content contained in this article represents the opinions of MacIntosh & James Partners Ltd. The commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.