In October, the global market faced further challenges, with the MSCI world index which tracks the performance of most countries experiencing a 3% decline as bearish market momentum persisted. This downturn was largely attributed to a surge in US bond yields,
which surpassed 5% for the first time in 16 years, prompting investors worldwide to sell off global shares. This repricing of yields followed better-than-expected economic data, leading investors to anticipate higher inflation and prolonged elevated interest rates.
As interest rates influence various borrowing costs, including mortgages, credit cards, and loans, this will result in reduced future spending power for consumers. Consequently, there was a notable sell-off in the stock market, particularly affecting rate-sensitive sectors like technology.
Geopolitical tensions, including those between Russia and Ukraine, as well as the ongoing Middle East conflict, also played a role in shaping investor sentiment. The conflict in the Middle East, where some major oil producers are located, raised concerns about potential disruptions in oil supply, putting upward pressure on oil prices momentarily. This, in turn, posed the risk of reigniting inflationary pressures. Meanwhile, gold prices experienced a 7.2% increase for the month due to uncertainty.
Looking ahead, business activity is going slow and this has a negative impact on hours paid and worked and labor demanded proving that the world economies in the world are weakening and slowing and showing a picture of stagnating characteristics at a time when inflation is above target. So, we can expect to see more bad data with more bad reactions, unlike the recent months.
Global Macroeconomic Landscape: Signs of Stagnating Growth Availability
The global macroeconomic stage exhibits palpable signs of weakening demand, driven chiefly by central banks' efforts to curb inflation. Notably, the global manufacturing sector is witnessing contraction, while services experience a discreet deceleration. Simultaneously, credit availability tightens conspicuously, and commodities, along with industrial metals, hit lower lows. Given the persistent elevation of inflation above central banks' targets and the contracting economic data, a potential scenario of stagflation is becoming the prevailing
baseline.
Europe Navigates Recession Risks Amidst Inflationary Pressures
In Europe, the risk of recession looms as the region contends with elevated inflation and weakened manufacturing activity. The Eurozone's manufacturing sector has entered contraction territory, marking the sharpest decline in three months. New orders, purchasing activity, and backlogs have all contracted significantly and rapidly, resulting in a notable decrease in factory production. Tightened credit conditions and renewed central bank assertiveness particularly impact key growth areas such as Services PMI, construction PMIs, Retail Sales, and sentiment surveys.
The GDP in the Eurozone saw a marginal year-on-year increase of 0.1% in the third quarter of 2023, marking the weakest reading since the contractions in 2021 and falling below forecasts of 0.2%. Although the inflation rate in the Euro Area declined to 2.9% year-on-year in October 2023, it remains above the central bank target. Consequently, The European Central Bank opted to maintain interest rates at multi-year highs during its October meeting, reflecting a more cautious "wait-and-see" stance among policymakers, influenced by the gradual easing of price pressures and concerns about a looming recession.
This risk scenario was mirrored in stock markets, with the Dax experiencing a 3.7% decline.
UK Economy Grapples with Elevated Costs and Monetary Tightening
The UK economy confronts challenges, grappling with an elevated cost of living and the impact of 14 consecutive rate hikes by the Bank of England. The latest GDP report showed a modest expansion of 0.2% in August from July, largely driven by the relative strength of the services sector. While the labor market is showing signs of cooling, providing some optimism in the fight against inflation, the overall economic outlook for the UK remains sluggish. The International Monetary Fund predicts that Britain will have the slowest-growing economy among the Group of Seven nations. Despite this challenging outlook, UK equities have followed their developed peers lower, with the FTSE 100 index down 3.7% in October.
China's Economy Sees Growth Amidst Real Estate Sector Concerns
The Chinese economy gained momentum in the third quarter, evidenced by a 4.9% year-on-year growth in GDP. However, the troubled real estate sector remains a concern, with property investment dropping by 9.1% in the first nine months of 2023 compared to the same period last year. China implemented a stimulus to bolster the economy, but its effectiveness has not yet been realized, as incoming data suggests. Inflation in China remained unchanged at 0%, reflecting persistent deflationary pressures in the world's second-largest economy and raising concerns about the sustainability of the economic recovery due to sluggish demand.
The above is supported by the Manufacturing PMI in China unexpectedly falling to 49.5 in October 2023 from 50.2 in September, highlighting that economic recovery in the nation remains fragile and requiring additional support measures from the government. Meanwhile, the service sector was down at 50.6 as expansion in the service sector eases. However, there may be a shift on the horizon. For the first time in more than 10 years, China issued additional sovereign bonds and raised its budget-deficit target in somewhat of an ‘emergency legislative session.’
The government agreed to issue 1 trillion yuan, or $137 billion, in additional sovereign debt, which will provide additional capital for stimulus measures – although it is currently unclear what form these measures will take. Considering the aforementioned risks, Chinese equities are likely to face continued pressure in the coming months, with the Shanghai Composite down 3%.
The US Economy Faces Stagflation Risk Amidst Growing Weakness
The U.S. economy is building on downward trends in economic data, with signs of a potential slowdown. The unemployment rate has risen to 3.9%, suggesting a weakening demand for workers in what has historically been a strong American labor market. Consumer
Confidence has slowed, and US Consumer 1-year inflation expectations have accelerated. The inflation rate remains steady at 3.7% in September 2023, supported by declining energy costs, although prices have increased at softer rates for various goods and services. The U.S. Federal Reserve opted once again not to raise interest rates in its latest meeting, relying on data to inform its decisions.
Manufacturing business activity continues to weaken, underscoring the impact of higher borrowing costs from the Federal Reserve. These further challenges the resilience of U.S. goods producers. Notably, new orders and employment numbers are at lows due to a lack of demand from local and foreign markets. Meanwhile, the service sector is also experiencing a slowdown, with business activity falling below expectations. Slower increases were seen in business activity/production and employment. The US stock market was also under pressure for the month of October, with the SP500 down 2.2%, Nasdaq down 2.7%, and Dow Jones Industrials down 1.3%.
South Africa Economic Outlook: Struggles Amidst Challenging Conditions
South Africa's private sector activity took a downturn in October 2023, registering a decline from 49.9 to 48.9, marking the first decrease in three months. Weaker customer demand led to a significant pullback in activity, with business output experiencing its sharpest decline since May. Additionally, new orders moderately decreased due to persistent inflationary pressures and rising fuel prices, resulting in reduced sales.
Foreign client business also saw a negative trend. Conditions prompted swift cuts in procurement levels, while supply-side constraints intensified. Despite rising fuel prices, reduced wage pressures and lower demand for inputs led to a softer rate of cost inflation, the lowest in over two years. Moreover, businesses continued to expand employment levels, marking a third consecutive monthly growth. In response to challenging economic conditions, consumers and businesses have increasingly turned to credit, resulting in an unexpected 4.60% year-on-year rise in private sector credit in September 2023, up from a marginally revised 4.39% increase in the previous month.
South Africa's annual inflation rate saw a second consecutive increase, rising from 4.8% in September to 5.4%, primarily driven by higher fuel and food prices. Although this remains within the South African Reserve Bank's (SARB) 3%-6% target band, the risk of further downside impacts on the economy persists due to potential spikes ongoing issues with load-shedding and logistics challenges.
The depreciation of the dollar, coupled with rising consumer prices, supported a marginal appreciation of the South African rand against the dollar and other major indexes in October. However, the rand remains on a bearish trend. With South African 10-year yields holding steady at 10.6%, investors grapple with mounting concerns over the government's fiscal position.
This rise is reinforced by the prevailing expectation of higher interest rates in the long term and the overall uncertainty surrounding the global economy. Major central banks, including the Federal Reserve, have signalled their intention to maintain interest rates at elevated levels to counteract inflationary pressures, contributing to investor apprehension.
Reflecting the challenging economic climate and investor sentiment, South African equities experienced a decline. The JSE All Share index was down 3.7% in October, with significant declines in industrial metals, industrials, and resources, which dropped by 7.8%, 4.69%, and
4.31% respectively. Looking ahead South Africa's equity performance will be under
pressure to attract capital flows from global trading partners as they
navigate stagnating economic conditions.
Commodities Market: Oil Prices are Bearish and Gold Bullish
Brent crude oil prices closed above the support level of $85 supported by less disruption on the supply side as the Middle East conflict remains managed. Meanwhile, a more significant contributor is the outlook of demand didn’t experience an upside because major importers like China and the USA experienced tough economic conditions. Gold prices turned bullish from trade and trend, largely due to new conflict in the Middle East and increased expectations of weak global growth.
