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Market Update

October 2017

Positive global economic news continues to support rising markets

October was another relatively strong month for risk assets, including equities and corporate bonds, while more defensive assets such as gold, the Japanese yen and US Treasuries weakened modestly. Volatility in major markets remained low. Markets continued to take their tone from a constructive global macroeconomic backdrop. A political crisis in Spain, following Catalonia’s independence referendum on 1 October, had a significant but temporary impact on Spanish markets that largely unwound as tensions eased towards the end of the month.

The optimistic mood towards global macroeconomic prospects was reflected in the International Monetary Fund’s (IMF’s) latest World Economic Outlook update, released on 10 October. Compared with its April projections, the IMF improved its forecast for global growth in 2017 and 2018 by 0.1 percentage point in each year, to 3.6% and 3.7%, respectively.1 The IMF notes this is a marked rise from 3.2% in 2016. The expansion is broad-based across regions, with improvements to growth forecasts for the euro area and China, while the United States and Japan continue to grow solidly. Global capital expenditure is rising at the strongest rate since the rebound from the global financial crisis, helping drive an acceleration in global trade volumes.

In equities, the MSCI World Index rose 1.8%, measured in US dollars, or 2.9% in sterling terms, during the month. The benchmark US S&P 500 Index rose 2.2% and hit new record highs during the month, buoyed partly by strong US corporate earnings. Emerging-market (EM) stocks outperformed, with the MSCI Emerging Markets Index rising 3.5% in US dollar terms (4.5% in sterling terms), despite a 2.3% weakening of the EM FX (currency) Index over the month. 2 EM credit spreads, the difference in yield for corporate bonds compared with their equivalent government bonds, also narrowed over the month. Higher commodity prices and buoyant global trade are supporting EM assets. Global credit spreads also generally tightened modestly over the month.3

Benchmark government bond yields fell in the Eurozone but rose modestly in the United States as central banks sent contrasting messages. The US Federal Reserve (Fed) looks set to raise interest rates in December, with the futures market now pricing in a virtual certainty of a 0.25% increase in the target range, to 1.25%–1.5%. The European Central Bank’s (ECB’s) October policy statement was perceived as dovish (meaning there’s less expectation of an interest rate rise), despite the announcement of a reduction in the central bank’s rate of asset purchases to €30bn a month for January–September 2018, down from the current €60bn per month. The reduction in asset purchases had been widely expected. Investors seemed to place more weight on the ECB’s signals that asset purchases could well continue after September, and that interest rates would not rise until after it had stopped buying assets. The Bank of Japan left its policy stance unchanged. The Fed’s relative hawkishness (so tending towards raising interest rates) helped the US dollar strengthen 1.6% over the month.4

UK equities underperformed global peers, with the FTSE 100 strengthening 1.6%, while the more domestically oriented FTSE 250 Index rose 1.8%, despite a 1% weakening in the pound against the US dollar (which boosts the sterling value of FTSE companies’ foreign earnings).5 The UK’s modest growth outlook and some political uncertainty seem to be dragging on UK stocks. UK 10-year gilt yields were little changed over the month, although they tracked US yields higher for a brief period during the month on speculation that a relatively hawkish candidate could be appointed to replace Fed Chair Janet Yellen (in the event, President Trump selected Jay Powell, a serving Fed governor, who is widely viewed as likely to provide policy continuity). The rise in UK rates on Thursday 2 November was well anticipated although the Bank’s guidance that rates might not rise quickly was a dovish surprise.

Commodity prices had a generally strong month. Increased global demand, coupled with supply restraint by members of the Organization of the Petroleum Exporting Countries and Russia helped crude oil rise to a year-to-date high of US$61/barrel (Brent) by the end of October, up 7.6% on the month.6 Most metals prices also rose. For real estate, UK physical property strengthened 0.7% on the month, while global real estate rose about 1% (in sterling terms), broadly in line with its trends over the past year or so.7

The political crisis in Catalonia caused some volatility in Spanish markets over October but has had little net impact, so far. The difference between yields on Spanish and German sovereign debt – a measure of market perception of Spain’s riskiness as a sovereign borrower – rose from 1.15% at the end of September to a high of 1.31% as the crisis intensified, but dropped back to 1.09% by the end of October as tensions eased.8 Spanish stocks dipped as much as 4% at the trough during October but rebounded. Spain’s benchmark IBEX 35 Index was up 12.5% year-to-date by the end of October, outperforming the regional Eurostoxx 50, which was up 11.7%.9  Political developments do not yet appear to be serious enough to derail Spain’s recovery from its recession between 2008 and 2014. Spanish manufacturing business confidence rose to a two-year high in October.

Overall, markets look positioned and priced for a ‘Goldilocks’ scenario of growth that is solid enough to support risk assets, but not strong enough to drive accelerating inflation and a sharp tightening of policy by central banks. Other developments such as political shocks have not been able to shift markets out of this complacency. However, a sharp pick-up in inflation from current low levels and revised expectations for central-bank policy could trigger increased volatility.

Should I make any changes to my investments?

Everyone’s circumstances are different and we aren’t able to give you advice on what is appropriate for you. As always, if you are considering your own position, you should remember why you invested in the first place and consider the lifespan of your investments.

One way in which you can help reduce the impact of any market volatility is to spread your investments across different asset classes and regions. For more information about investing across different asset classes take a look at our Introduction to diversification in multi-asset funds guide.

Remember that before making any changes to your investments, you should seek financial advice. If you don’t have a financial adviser, you can find one local to you by visiting find a financial adviser, which is responsible for promoting financial advice in the UK.

All figures quoted are in sterling terms to 31 October 2017 unless otherwise stated.


  1. International Monetary Fund, World Economic Outlook, 10 October 2017
  2. MSCI, JP Morgan
  3. Markit
  4. Macrobond
  5. Macrobond
  6. Macrobond
  7. Financial Express
  8. Macrobond
  9. Macrobond