November shines bright

November stock market rally
Progress on inflation reduction continues
Retailers put to the test
Japan’s comeback

There's nothing quite like a winning streak spanning several consecutive days to shift the market narrative. This month, stocks have swiftly transitioned from a correction to a comeback, with major stock indexes now poised to challenge previous highs reached earlier in the year. Throughout the month, it appears that economic data are striking the right balance - neither too hot nor too cold, helping stocks reach a two-month high and placing the October correction behind us.

As a result, developed markets’ stock index MSCI World has experienced 5.96% increase, while emerging markets stocks’ index MSCI Emerging Markets has risen by 4.63%. Meanwhile, US bond yields have decreased significantly, with 10-year US Treasury bond yields dropping to 4.3% (4.93% 1 month ago). Similarly, German 10-year bond yields decreased to 2.45%, down from 2.83% a month ago – both reflecting lower expectations for high interest rates in the future.

Expectations for a Fed (the Federal Reserve System) pause fuel November rall

A significant factor behind the rise in both stock and bond markets this November is that the easing inflation pressures, together with signs of a cooling labor market, increase confidence that the Fed is likely done hiking rates. Following the lowest core inflation reading in over two years, markets quickly adjusted by pricing out the rate hike in December and adjusting to reflect an earlier start to rate cuts.

The 2-year Treasury yield is now below 5.0%, while the 10-year yield declined below 4.4%, the lowest since September. It is possible that last month's surge in rates might have marked the peak for this cycle. Policymakers will likely push back against aggressive expectations for Fed easing, so there is a limit to how much and how fast yields can fall from here.

Progress on inflation reduction continues

Following a brief increase in late summer, inflation resumed its decline in October. The headline consumer price index (CPI) in the US was unchanged last month, with the annual rate falling from 3.7% to 3.2%, helped by a sizable drop in petrol prices. Oil prices have experienced a 17% decrease from their peak in September and probably will continue to be a downside factor on the upcoming month's data. Core CPI (excluding food and energy), which is considered a more accurate gauge of the underlying trend, also decreased from 4.1% to 4.0%. Despite remaining above the Fed's target, this marked the lowest reading in two years. Additionally, disinflation is also in full force in the Eurozone. Headline Year-on-Year inflation was confirmed at 2.9% in October, matching the initial estimate and down from 4.3% in September.

Adapting to consumer trends

In the face of economic pressures and inflationary environment, there has been a lot of concern about the pace of consumer discretionary spending in the US. Just how deep those concerns went could be evidenced by the stock performance of one of the largest retailers in the US – Target Corporation. Having halved since the retail heyday during the Covid pandemic, Target Corporation stock had lost further 30% this year at least partially thanks to the concerns over the consumer spending strength mentioned above.

Therefore, the recent earnings’ announcement of the better-than-expected sales figures and higher-than-expected confidence in the upcoming holiday shopping season could serve as an optimistic version of the canary in the mine not just for this particular retailer, but for the broader consumer discretionary spending trend in the US. So as to illustrate the potential of the positive surprise in the US consumer story, the investors have bided up the price of Target Corporation shares by 17% in a single trading session right after the news.

Japan’s comeback

For three decades, Japan's economy stayed stagnant, faced by a combination of low growth, low inflation, and low interest rates, but now Japanese stock indices are currently enjoying their highest levels in decades (measured in JPY), signaling a period of positive economic growth. At least a partial explanation lies in the historically low value of Japanese yen versus other major currencies, making exports-reliant Japanese companies more attractive. However, this upswing is fueled by other factors, too, namely a robust macroeconomic environment, a break from years of deflation, as well as international interest reflected by rising foreign investments. A crucial catalyst for this optimistic trend is the ongoing corporate governance reform in Japan, which is focused on increasing the attractiveness of Japanese businesses to outside investments. While it's uncertain whether this positive momentum will lead to a permanent shift in the economic landscape, the overall outlook for Japan is notably brighter than in the past. Should the witnessed trends continue, this could potentially suggest a constructive opportunity for further diversification of the portfolios.

Nikkei 225 Total Return EUR hedged Index

Source: Bloomberg L.P.

Market view

Looking ahead, markets could be further kept down by the concerns over slowing economic growth, heightened geopolitical risks, and the repercussions of tighter financial conditions emerging. Despite these challenges, a potential shift in market dynamics towards a more sustained recovery is also possible in the coming future. This transition supports our largely neutral approach amid the current uncertainties. On the bright side, higher interest rates have made Fixed income part of the portfolios more appealing, especially if things stay uncertain and the economic activity gets slower from the current levels.

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