October 2014

• Global equity markets were mixed in October 2014, with a sharp mid-month sell-off driven by concerns over slowing global growth, falling inflation and the end of quantitative easing in the United States, followed by a strong recovery into month-end.
• The United States remained the principal source of stability, as robust economic data and strong corporate earnings helped major indices rebound from steep intra-month declines.
• Europe struggled with weak economic momentum, concerns over deflation and geopolitical tensions involving Russia and Ukraine, prompting the European Central Bank to reinforce its commitment to monetary support.
• Japan benefited from continued monetary stimulus and a weaker yen, although uncertainty surrounding the impact of April's consumption tax increase persisted.
• Emerging markets delivered mixed results as lower commodity prices and a strengthening U.S. dollar created pressure on export-dependent economies.
• Commodity markets were broadly weaker, with crude oil prices falling sharply amid abundant supply and softer demand expectations, while gold experienced heightened volatility.

Asia (ex. Japan)

Asian equity markets outside Japan were volatile during October as investors reacted to shifting expectations regarding global growth and U.S. monetary policy. Chinese shares were relatively resilient, supported by targeted policy measures and expectations that authorities would continue to provide selective stimulus to sustain growth. Data from China indicated moderating industrial activity, but policymakers remained committed to maintaining stable economic conditions.

Elsewhere in the region, markets in South Korea, Taiwan and Hong Kong experienced fluctuations as export-sensitive sectors responded to weaker global demand forecasts. Southeast Asian economies faced pressure from declining commodity prices and concerns over capital outflows. Nonetheless, many Asian countries continued to benefit from low inflation and healthy domestic demand, which helped cushion external headwinds.

Europe

European equity markets endured a difficult month as investors became increasingly concerned about stagnant growth and persistently low inflation across the eurozone. Germany, traditionally the region's economic engine, reported softer industrial production and exports, raising fears that broader weakness was spreading throughout the continent. Banking shares were volatile ahead of the European Central Bank's comprehensive stress test results.

The European Central Bank maintained its accommodative stance and reiterated its willingness to expand its balance sheet through asset purchases. These measures helped restore confidence after a sharp mid-month correction. Peripheral bond yields remained subdued as investors anticipated further support from policymakers, although geopolitical tensions and weak corporate earnings continued to weigh on sentiment.

United States

U.S. markets experienced significant turbulence in October, with the S&P 500 briefly entering correction territory amid concerns about global growth, Ebola-related headlines and uncertainty over the conclusion of the Federal Reserve's asset purchase programme. However, stronger-than-expected economic data and robust corporate earnings sparked a swift recovery in the second half of the month.

The Federal Reserve officially ended its third round of quantitative easing at its October meeting, citing continued labour market improvement and moderate economic expansion. GDP growth remained solid, unemployment trended lower and consumer confidence improved. Treasury yields declined during the period as investors sought safety during the sell-off, before stabilising as risk appetite returned.

United Kingdom

UK equities posted modest gains despite global volatility, supported by relatively resilient domestic economic indicators. Growth remained steady, employment continued to improve and inflation stayed subdued. However, concerns over slowing eurozone demand tempered optimism, given the UK's close trade links with continental Europe.

The Bank of England maintained its policy rate at 0.5% and signalled that interest rate increases were unlikely in the immediate future. Sterling weakened somewhat against the U.S. dollar as expectations for tighter monetary policy were pushed further out. Gilt yields declined in line with global bond markets as investors reassessed growth and inflation prospects.

Japan

Japanese equities advanced during October as the yen weakened and expectations grew that the Bank of Japan would maintain highly accommodative monetary policy. Economic data remained mixed following the April consumption tax increase, with household spending and industrial activity showing signs of continued softness.

Investor confidence was supported by ongoing corporate governance reforms and increasing participation by domestic institutional investors. Toward month-end, anticipation of additional policy action strengthened, laying the groundwork for the Bank of Japan's surprise expansion of stimulus announced shortly after the close of the month.

Emerging Markets

Emerging market equities delivered uneven results as falling commodity prices and a stronger U.S. dollar weighed on sentiment. Countries with large external financing requirements faced greater pressure, while reform-oriented markets attracted selective investor interest. Political developments in Brazil and India were closely watched by global investors.

Brazilian assets were volatile around the presidential election, with markets responding sharply to changes in polling and the eventual re-election of Dilma Rousseff. India remained one of the stronger performers, buoyed by optimism surrounding structural reforms and improving business confidence under Prime Minister Narendra Modi.

Commodities

Commodity markets were dominated by a steep decline in crude oil prices, with Brent crude falling below $90 per barrel for the first time in several years. Rising North American production, ample global inventories and weaker demand expectations combined to create significant downward pressure on energy markets.

Gold prices fluctuated as safe-haven demand increased during periods of equity market stress but was offset by the strengthening U.S. dollar and the Federal Reserve's policy normalisation. Industrial metals were generally softer due to concerns over slower Chinese growth, while agricultural commodities remained mixed depending on supply conditions and harvest expectations.