Market participants' hopes for a less aggressive monetary policy by central banks and a warm October, which caused the price of gas to drop significantly, caused stock markets in the USA and Europe to soar. In addition, the German economy did not shrink as expected in the third quarter, but expanded, which gave the DAX an additional boost.
Most international stock markets experienced a brilliant comeback in October after a deep red third quarter. The German DAX rose by 9.41%, outperforming the broad European Stoxx Europe 600 index, which gained 6.28%. On the other side of the Atlantic, the S&P 500 advanced 6.93%. Only Hong Kong's Hang Seng Index lost -15.55%. Overall, global equities, as measured by the MSCI World, gained 6.06% - all index data in euro terms.
The change in market participants' expectations regarding the monetary policy of the central banks in the USA and Europe was an important catalyst for the soaring share prices. The US Federal Reserve had raised its key interest rates by 75 basis points each in June, July and September (and the European Central Bank in July, September and October). This raised hopes that central banks might adopt a less aggressive monetary policy in the future. The hope was strengthened by the fact that ECB President Christine Lagarde did not want to commit at the ECB press conference whether the rate hikes would continue at the same pace. She also gave a gloomy economic outlook for the Eurozone, saying that further interest rate rises could weigh even more heavily on the Eurozone economy.
Moreover, October was warmer than average across Europe, so that heating was hardly necessary. The gas storage facilities were therefore not burdened and the price of gas fell significantly in October - which also supported the markets. However, spokespersons for the US Federal Reserve countered the hopes of market participants towards the end of the month, as inflation in the US reached 8.2% year-on-year at the end of September. This was a slight decline from August (8.3%), but lower than expected. In the euro area, inflation reached a new high of 10.7% at the end of October (Germany: 10.4%) compared to the same month of the previous year. Experts therefore expect further key interest rate hikes by the end of the year, up to 5.0% in the USA and up to 2.75% in the euro area.
Notwithstanding the high inflation rates and energy prices, the German economy was able to surprise positively in the third quarter and increase the gross domestic product by 0.3%. Economists had expected a decline of -0.2%. However, this did not improve the mood in the German economy. The ifo business climate index remained at a low level of 84.3 points (from 84.4 in the previous month). This is mainly due to pessimistic business expectations.
On the bond markets, yields on high-quality government and corporate bonds continued to rise, with only high-yield bonds yielding lower than in the previous month. The yield on 10-year German Bunds rose from 2.11% to 2.14% and that of their US counterparts increased from 3.83% to 4.05%. In the US, the yield curve remains inverted as the yield on 2-year US Treasuries is higher at 4.48%. This suggests that the probability of recession remains high for the US. The price of a troy ounce of gold fell 1.6% to USD 1,654. This was the seventh consecutive monthly decline, given the continued strength of the US dollar and ongoing ETF outflows.
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