Global Market Overview | October 2024

04 November 2024

Global markets pulled back in October with the MSCI World Index giving back 0.4% at the time of writing, while emerging markets experienced an even larger sell-off (MSCI Emerging Market Index:
-3.7%). The pullback can be attributed to mixed economic readings out of major economies, escalating tensions in the Middle East, a mixed Q3 earnings season (to-date), and uncertainty surrounding the upcoming elections in the United States. Profit taking following last month’s rally would have also contributed to the outflows seen among risky assets. Central bank activity dominated the headlines as well, with investors continuing to assess expectations surrounding the pace and quantum of rate cuts currently being priced into the market.

US markets remained more resilient compared to global peers with the S&P 500 Index adding 1% for the month amid another round of robust gains from the Magnificent Seven. Investors also remained focused on key economic releases and their impact on interest rate expectations. Recent employment data, which the Federal Reserve has been more focused on (as opposed to inflation that continues its declining path), suggests that the labour market is still quite healthy, which remains supportive of the overall “soft landing” narrative. The futures market is still pricing in close to 50bps of interest rate cuts for the rest of the year, translating to 25bps relief in November and 25bps in December. Further cuts are anticipated through next year, with rates flooring at approximately 3.4% in late 2026. This implies another 130bps in rate cuts (or a total cutting cycle of 180bps).

Moving to the Eurozone, the Euro Stoxx 600 Index gave back 2.1% as the region remained plagued by generally soft economic data as well as ongoing political concerns. In terms of policy movements, the European Central Bank (ECB) cut the region’s benchmark interest rate by 25bps to 3.25% at its October meeting. The decision was unanimous and widely expected following a series of weaker-than-expected data prints for economic activity and inflation recently. Wage pressure remains a key input in the forecasted inflation trajectory and remains volatile, clouding the inflation outlook to an extent. The ECB is also concerned over weakness in manufacturing, and ECB President, Christine Lagarde, noted that more sluggish growth in services is a headwind as well. Overall, the options market is currently pricing in 30bps of cuts at the ECB’s December meeting – implying that investors are leaning more towards a 25bp cut. Currently, the cutting cycle is expected to extend well into 2025, with a further 120bps in cuts priced in through July next year.

China’s “stimulus talk” rally appears to have lost momentum with the MSCI China Index falling 5.2% for the month. China’s Ministry of Finance (MOF) recently laid out its plans to stimulate the economy to meet the state’s 5% growth target which were largely in-line with market expectations. While this included a RMB6 trillion government debt swap programme (aimed at easing funding pressure at a local government level, which in turn will reduce burdensome tax measures on businesses) and plans to stabilise home prices, there was limited clarity on how consumption was to be stimulated (i.e. “helicopter” money measures) and this was viewed as disappointing by certain economists. The MOF said, it is committed to fiscal stabilisation and that there is room to increase spending with other policy tools under discussion.

On the local front, the All Share Index (0.7%, USD: -1.9%) delivered a relatively resilient performance when compared to the deep sell-off experienced among other emerging markets. The 2024 Medium-Term Budget Policy Statement (MTBPS) on 30 October was a key focus area. The MTBPS was more equity friendly as a commitment to further infrastructure investing and structural reform dominated the narrative. Treasury tempered its expectations for fiscal metrics in this fiscal year relative to what was presented in the February budget and while this is widely anticipated, the bond market and the rand reacted negatively to the confirmation thereof.

Economic Data Review

US elections dominate the headlines, rate cut expectations remain intact

Flash estimates showed that the S&P Global Composite PMI for the US rose ahead of forecasts to 54.3 in October, up from 54 in September. The expansion showed business activity in the service sector remained robust. Retail sales increased 0.4% in September, beating market expectations of a 0.3% rise. The trade deficit narrowed to $70.4 billion in August, the lowest in five months, compared to a $78.9 billion shortfall in July and market forecasts of a $70.6 billion shortfall. The unemployment rate edged lower to 4.1% in September, the lowest in three months, down from 4.2% in the previous month and against expectations of a steady reading. The annual inflation rate eased to 2.4% in September, slowing for the sixth consecutive month and the lowest since February 2021, but falling short of the forecasted 2.3%.

Another widely-anticipated rate cut by the ECB

The HCOB Flash Eurozone Composite PMI rose to 49.7 in October from 49.6 in September, marginally below forecasts for 50.1 and pointing to a slight contraction in business activity. Retail sales increased by 0.2% m-o-m in August, in line with consensus. The Eurozone posted a trade surplus of €4.6 billion in August, a decline from a €19.7 billion surplus in July and below an expected €17.8 billion. The unemployment rate remained flat at 6.4% in August and was in line with market expectations. Annual inflation in the Euro area softened to 1.7% in September, close to April 2021 lows, coming down from 2.2% in August and below the estimated 1.8%. The ECB lowered three key interest rates by 25bps in October, as expected. This decision stemmed from an updated assessment of inflation, which shows disinflation progressing well.  

Bank of England expected to cut rates by 25 basis points

The S&P Global UK Composite PMI contracted to 51.7 in October from 52.6 in September, below forecasts for 52.6 and marking an 11-month low, flash data showed. This signalled modest growth in private sector output and services saw slightly faster growth than manufacturing. Retail sales unexpectedly increased 0.3% in September, following a 1% surge in August, and beating forecasts of a 0.3% decline. The UK’s trade deficit eased to £955 million in August, contracting from a £4.7 billion deficit in July. The unemployment rate declined to 4% from June to August, down from 4.1% in the previous three-month period and matching market estimates. The annual inflation rate declined to 1.7% in September, the lowest since April 2021, compared to 2.2% in each of the previous two months and forecasts of 1.9%. The BoE kept interest rates unchanged in September, as expected, following a 25-basis point reduction in August.

Stimulus talks out of China continue to dominate headlines

The Caixin China General Composite PMI softened to 50.3 in September compared to 51.2 in August, the lowest reading since October 2023 as the manufacturing sector contracted while the service economy grew the least in a year. Retail sales grew 3.2% y-o-y in September, improving from a 2.1% increase in August and beating market estimates of a 2.5% increase. China’s trade surplus expanded to $81.71 billion in September from $75.5 billion in the same period a year earlier and missing market expectations of $89.8 billion. The surveyed unemployment rate decreased to 5.1% in September, compared to 5.3% in August. This was below the forecasted 5.3% and the lowest reading in three months. China’s annual inflation rate tempered to 0.4% in September from 0.6% in August, below the forecasted 0.6%. This was the eighth month of consumer inflation but was the lowest print since June, highlighting the need for more policy support from Beijing to address growing deflation risks. The People's Bank of China (PBoC) slashed key lending rates to new lows at the October fixing, intensifying efforts to support a weakening economy. The one-year Loan Prime Rate (LPR), the benchmark for most corporate and household loans, was cut by 25bps to 3.1%, and the five-year rate, a reference for property mortgages, was reduced by the same margin to 3.6%. Additionally, the PBoC, in partnership with Ministry of Housing, introduced a range of policies to ease the financial burden on property owners and regain public confidence.

Bank of Japan maintained rates once again

The Jibun Bank Flash Japan Composite PMI fell to 49.4 in October from 52 in September, which was the lowest reading since November 2022. It was the first contraction in private sector activity since June, impacted by the manufacturing sector deteriorating further and the service economy shrinking for the first time in four months. Retail sales increased 0.8% from a month earlier in August, the most in three months, following a 0.2% gain in July. Japan saw a trade deficit of ¥294.3 billion in September, down from ¥703.2 billion in August and a worse-than-expected shortfall of ¥237.6 billion. This was a result of an unexpected shrinkage in exports, while imports grew. The unemployment rate in August dropped to 2.4% in September from 2.5% in August, below market forecasts of 2.5%. The Japanese annual inflation rate fell to 2.5% in September from 3% in August – the lowest reading since April. The BoJ unanimously retained its key short-term interest rate at around 0.25% during its October meeting, keeping it at the highest level since 2008, in line with market consensus. Governor Kazuo Ueda highlighted concerns about a more uncertain global economic outlook and said that the policy board remains committed to further rate increases if economic and price data permits.

Local CPI eased for a fourth consecutive month, supportive of a November rate cut

The leading business cycle indicator declined 0.7% m-o-m in August, following a 0.7% rise in July, marking the sharpest contraction since March. The SACCI Business Confidence index eased to 110.2 in September (below forecasts of 112), from a five-month high of 111.5 in August. Retail sales rose 3.2% y-o-y in August (consensus: 1%) following an increase of 1.7% the month before – this marked the sixth consecutive month of growth in retail activity. The trade balance surplus softened to approximately R5.6 billion, compared to approximately R17.1 billion in July and against expectations of approximately R15.5 billion, due to a 5% slump in exports. Local mining production increased 0.3% y-o-y in August, improving from a 1% decline in July, but still below expectations of 1.8% growth. Manufacturing production, however, dropped 1.2%, from an increase of 1.6% the month before, and this was well below the forecasted increase of 1.3%. The composite PMI rose to 51 in September (from 50.5 in August), pencilling in a second consecutive month of growth in private sector activity. Manufacturing PMI rose strongly to 52.8 (from 43.6 in August), signalling a renewed expansion in factory activity. Annual Consumer Price Inflation (CPI) eased for a fourth consecutive month to 3.8% in September (below consensus of 3.9% and down from 4.4% in August). This was the lowest rate of inflation since March 2021, underpinned by a decline in transportation costs. Core inflation (which excludes the price of food, non-alcoholic beverages, fuel, and energy) was flat at 4.1%.

Outlook

Local

• Global economic themes remain intact, with projections barely changed over successive forecasts. Growth is expected to remain tepid as advanced economies battle ballooning debt and political shifts that present risks to stability. Countries such as the US should experience less resilience, while Europe is weighed down by weak demand and productivity. Growing tensions with China should weigh on the country’s external trade, pushing for more policy stimulus. Weak growth in China should weigh on commodity prices and emerging market currencies, making structural reform urgent.
• Fortunately, SA’s reform agenda is expected to gain momentum. Alongside improved confidence, investment spending, and higher household consumption growth, this should assist real GDP growth to exceed 2% in 2027. Easier monetary conditions will also be conducive to improved activity.
• Near-term inflation should continue to be supported by positive base effects, a stronger rand and soft oil prices. We expect inflation below 4.5% for nearly the next year of monthly data, averaging 4.5% this year and 4.3% in 2025.
• This will allow the SARB to continue a gradual cutting cycle, with 25bp increments at every meeting until May 2025. The policy rate should settle at 7% over the medium term.
• Lower interest rates, slower inflation, a stronger rand, and reforms will continue to support fiscal consolidation over the Medium-Term Expenditure Framework. Overall, the October budget update highlights Treasury’s conservatism and a strong commitment to fiscal rebalancing even though spending pressures continue to revolve around SOEs, municipalities and the wage bill.

Global

• US growth has held up very well over the last few quarters despite a very aggressive interest rate hiking cycle. The advanced 3Q24 GDP came out at 2.8%, still well above potential growth. Consensus estimates for 2024 growth has been revised higher to 2.6%. According to the latest Bank of America survey, participants are becoming more optimistic that monetary easing will generate a ‘soft’ landing, with 76% of participants favouring this outcome, versus only 8% of the participants calling for a ‘hard’ landing. The remaining 11% sees a ‘no landing’ outcome. The long and variable lags of monetary policy are in progress, but thus far the impact has been relatively small (as most companies/individuals have locked-in low rates). We expect this soft vs hard landing rhetoric to continue throughout the year as new data becomes available. Our house view is for US growth to underperform consensus in 2024 and 2025.
• Inflation in the US has peaked and is now gradually falling towards target after a ‘sticky’ first quarter. This month CPI came in on expectations, confirming the lower trend. Shelter inflation and core services should continue to trend lower; causing overall inflation to move down towards target.
• The Fed’s interest rate cutting cycle started last month with a bigger than expected 50bp cut. The Fed has clearly indicated that labour market conditions will dictate the pace of future cuts. Since the rate cut, economic data has been quite strong, and the aggressive cutting cycle has been pared back. Three cuts of 0.25% have been removed for 2025, indicating a terminal rate of 3.5% versus 2.7% just one month ago. The ‘soft’ landing narrative is based on the Fed cutting rates fast enough, so real rates don’t become too restrictive on the economy.
• In emerging markets, Chinese macroeconomic data has consistently disappointed to the downside. Authorities have eventually responded with the biggest stimulus package so far this year. Most of the announcements to date have been around monetary policy (lower interest rates) and measures to stop the property market from collapsing further. Fiscal policy is what is needed to structurally get China out from their deflationary slump and to restore confidence. Fiscal policy announcements are expected over the next few weeks; the magnitude of these announcements will dictate market movements.
• The US dollar had a very strong month, reversing the weakness of the previous few months. Reasons include stronger economic data from the US versus peers, interest rate differentials (as US cuts are priced out) as well as expectations of a Republican election win that should boost the dollar over the short term.
• Geopolitics are always important for asset markets, but the election calendar for 2024 is exceptionally busy. This year 76 countries will vote, representing more than half of the world’s population and over 65% of global GDP. This, together with two major ongoing wars, could exacerbate uncertainty and volatility over the next few months. The impact from these developments, especially on oil, should be monitored very closely. The build-up to the November US elections should also be monitored very closely. Gold had another good month, returning 5.8% as central banks (and retail money) kept buying the yellow metal as an inflation/geopolitical/currency hedge.
• Given all the above uncertainties, we are closely aligned to our strategic asset allocation benchmarks, with a slight defensive twist. We slightly favour fixed income over equities.