October was a turbulent month of trading worldwide. From Hong Kong to New York, stock markets were slammed by a wave of fears about weaker economic growth, trade wars and effects of central banks phasing out easy-money policies, led by the US Federal Reserve.
The month kicked off on a rocky note for equities when Federal Reserve Chairman Jerome Powell said the US central bank still has a way to go before it reaches interest rates where they are neither restrictive nor accommodative, a sign that he believes more hikes are coming. Higher rates make borrowing more expensive and restrict the flow of credit to companies and individuals. In early October, the IMF downgraded its 2019 outlook for both the United States and China, citing the tariffs stand-off between the world's two largest economies.
Other factors having conspired to knock markets in October were a brewing conflict between Italy and the EU over Rome's 2019 budget plan, criticism of world's top oil exporter Saudi Arabia following the death of Saudi journalist Jamal Khashoggi and continued Brexit uncertainty. Some earnings disappointment also weighed on risk appetite. The MSCI World Index, which tracks stocks in 47 countries, fell more than 8 percent in October, its worst drop in six years. The MSCI EAFE, an index of stocks in 21 developed markets excluding the U.S. and Canada, sank 9 percent.
( The general pattern in October was a rotation away from riskier stocks Graphic Source: MSCI )
The U.S. markets lost nearly $2 trillion in October. The Dow Jones Industrial Average dropped 5.1 percent to post its biggest monthly fall since January 2016, when it lost 5.5 percent. The broader S&P 500 lost 6.9 percent, its worst month since September 2011, when it fell 7.2 percent. The tech-rich Nasdaq tumbled 9.2 percent, its largest monthly pullback since November 2008, when it plummeted 10.8 percent. Big technology stocks sold off due to a combination of earnings concerns and diversification. In Latin America, Brazilian stocks soared the most since January after investor-friendly, right-wing candidate Jair Bolsonaro won the presidential election. The Brazilian real staged a recovery of 8 percent.
Asian stocks slumped in October. Hong Kong's Hang Seng tumbled 10 percent. China's Shanghai Composite lost 7.7 percent for the month sinking into a bear market and the Nikkei Asia300 plummeted 10.6 percent as Washington and Beijing seemed unlikely to back down from their tariffs stand-off anytime soon. A key measure of Chinese factory activity for October which came in below market expectations also weighed on sentiment.The MSCI Asia Index collapsed 10.9 percent in the same period while Japan's Nikkei 225 Index dropped more than 9 percent. In Australia, the benchmark S&P/ASX 200 Index ended the month down over 6 percent, marking its worst monthly fall since August 2015.
(Industry factor performance in October reflected investors’ rotation from more economically-sensitive, pro-cyclical sectors to more defensive-oriented ones Graphic Source: MSCI)
African equities suffered a similar fate to the world equity market in October 2018.The MSCI Europe Middle East and Africa (EMEA) Index experienced losses of 6.8 percent while the FTSE/JSE All-Share Index ended the month 5.8 percent in the red, dragged lower by industrial and resource shares. The FTSE/JSE Industrials Index lost 8 percent of its value in the month while the FTSE/JSE Financials Index depreciated by 3.1 percent. The South African rand was the fourth-worst-performing currency for the month, depreciating by 4.2 percent against the US dollar and 1.7 precent against the euro.
France, Germany, and Italy saw declines ranging from 6.5 percent to 8 percent.The Italian government endorsed a budget that would increase the 2019 deficit to 2.4% of GDP. The European Commission rejected Rome's proposal and has asked that revisions be made so that the budget meets the fiscal targets set by the EU authorities. Italy's FTSE MIB Index is now down more than 22 percent over the last five months. In the UK, Brexit negotiations remained on investors' radar as a summit between the EU and London did not achieve a breakthrough in October. Meanwhile,the European Central Bank confirmed its intention to cease bond purchases by year-end. The Eurostoxx 50 Index dipped 5.8%.
Broad strength in the U.S. dollar fueled fears that investors would pull cash away from emerging markets. The emerging market ETF gave back 8.8 percent for its worst monthly decline since August 2015 while the MSCI EM Index plummeted 10.6 percent, led lower by Asian stocks. Tensions between Turkey and the US eased due to the safe release of American Pastor Brunson by Ankara and the Turkish lira regained some ground.
Markets felt the start of the autumn 'blues' in October, a month known for major market sell-offs in the past. However, it is not uncommon for the stock market to end bad months with a rally though trade and geopolitical uncertainties still linger.