In October, the global stock market moved sideways while keeping lower volatility. Investors mostly focused their attention on quarterly corporate reports, as well as on US pre-election jitters.

By the end of the month, Q3 profits have been reported by roughly half of major US and European companies. In the USA, 77% of S&P 500 stock index companies demonstrated profit exceeding analysts’ expectations by 5%. At the same time, the total increase in profit was recorded at 1%, as compared to the last year, which is the first positive earnings report since Q2 2015. In Europe, 62% of the reporting companies exceeded analysts’ earnings expectations and demonstrated the increase by the same 1%, as compared to the last year. In general, the results may be treated as positive; they did not influence the market, though. The uncertainty regarding US presidential elections remained the key deterrent; therefore, investors preferred to wait.

In Europe, the performance of capital market indexes was heavily influenced by volatility on the currency market, mainly due to GBP/USD and GBP/EUR ranges. Upon the statement of Theresa May, the Prime Minister of the United Kingdom, on Brexit being launched within six months, GBP/USD and GBP/EUR rates plummeted, which affected European indexes listing mainly British companies. For example, Euro Stoxx 600 where British companies are present by more than 25%, showed a decrease by 0.7% at the end of the month, while Euro Stoxx 50 presenting almost none of British issuers increased by 1.77%. The same refers to sector indexes, such as media, tourism, consumer staples. The GBP’s fall against EUR by 3.5% contributed to low performance of the above indexes. Reports and outlooks for profit of such companies as Nokia and Ericsson, which disappointed investors, put pressure on the technology sector. This time, the financial sector was the one to come to the capital markets’ help. In Europe, Deutsche Bank made a big difference. As we previously outlined in the comments, the US government had put a massive fine on Deutsche Bank, which endangered the financial stability of the company and caused a collapse in quotations in the last month. However, news in October became more positive; although the final fine amount remains unknown, the numbers appearing in press are much lower than the ones announced initially. The increase in developed markets bond yields positively influenced the financial sector in both Europe and the USA, as low interest rates negatively affect the financial market return making market participants positively treat rate increase perspectives.

On emerging stock markets, differently directed movements were present, mainly due to local factors. Brazilian capital market demonstrated a strong growth again (+11%), which resulted in MSCI EM emerging markets index increasing by 0.2%, while MSCI World global index decreased by 2% by the end of the month.

October was rather complicated for the global bond market. Following the consolidation in September, the market experienced quite strong decline in the prices of most long-term developed markets bonds, primarily those of the USA, Germany, and UK. Firstly, it was due to changing investors’ opinion on the possibility of ultrasoft monetary policy to be maintained by the leading central banks. While things are more or less clear with regard to the USA (only few doubt rate increase by the FRS in December this year), good macroeconomic data published in Europe, especially in the UK, have rapidly decreased the probability of interest rate decrease by the Bank of England and also made everyone talk about possible graduate closing of the ECB QE programme. Secondly, inflation expectations have grown, which is a determinant of long-term interest rates. Thirdly, considering the price increase since the beginning of the year, it is quite possible that many short-term players have decided to take the profits.

Yield increase in the developed bond market has also produced negative impact on the emerging bond market, mostly concerning long-term investment-grade government bonds, which are more sensitive to changes in the yield of US Treasuries and Bunds. Moreover, many new placements take place on the market, both at the corporate and government level. Saudi Arabia alone has issued the bonds amounting to USD 17.5 billion. Finally, the uncertainty regarding the US presidential election impelled many investors to reduce the risk, causing spreads’ expansion.

The emerging corporate bond market looked much more stable than the government bond market, primarily due to lower duration and higher coupon rate, and therefore price decline in the sector of medium-term securities was a minor one, compared with the long-term bonds.

In the short-term, we take waiting attitude, since the results of the US presidential elections and the investors’ reaction to these results will be very important. Relatively high cash portion is retained in both equity funds and bond funds, and further actions will depend on the market developments.

Mutual funds’ return as at 31.10.2016:

¹ Except ABLV Multi-Asset Total Return USD Fund and ABLV Emerging Markets Corporate USD Bond Fund, for which return is calculated on funds’ period of operations.

Additional information is available at ABLV Bank home page in the section “ABLV Mutual Funds”.