Stock markets concluded November on a positive note, as global equity benchmarks reached three-month highs. This was fuelled by growing optimism that central banks would soon start reducing the pace of interest rate hikes. The shift in sentiment was primarily influenced by the Federal Reserve's (Fed) recent statements and declining US inflation, leading to a reversal of prevailing trends. As a result, stocks gained momentum, bond yields declined, and the US dollar retreated from its 20-year peak.
In US dollar terms, global share indices rose approximately 8% during the month, with US benchmarks lagging slightly but still ending around 5% higher. The majority of Wall Street's gains came from just two trading days, highlighting the market's positive response to falling inflation and a less aggressive Fed.
Early in the month, the US consumer price index revealed the lowest level since January, indicating that price pressures in the world's largest economy were starting to cool. The core reading, which excludes energy and food prices, also delivered promising news, easing from a four-decade high.
Investors and money managers are clearly focused on these developments, as evidenced by the market's strong reaction. US stocks recorded their best daily gain in over two years, with large-cap benchmarks rising over 5% and tech indices surging over 7%. Other asset classes also experienced notable shifts, such as the 25-basis point drop in the yield on the two-year Treasury note, the largest decline since October 2008.
The fall in yields reflects investors' expectations of fewer Fed interest rate hikes in the future. Subsequent communications from policymakers further solidified this belief, culminating in Fed Chair Jerome Powell's speech in late November, where he hinted at the possibility of moderating the pace of rate increases as early as the December meeting.
These statements triggered another significant daily gain for stocks, with derivatives markets now pricing in a 50-basis point increase at the December meeting and 25-basis point increases at the first two meetings of the following year. If realized, this would bring the official rate to 5.0%.
Although US benchmarks are still down around 14% for the year, they have rebounded over 16% from their September lows, leading investors to be more hopeful that the current rally will be more sustainable than the one that began in June. One key difference is that the Fed is no longer perceived as lagging behind, having already moved monetary policy into restrictive territory. There is a growing expectation that policymakers will adopt a more wait-and-see approach, with inflation metrics playing a significant role in determining the path of interest rates.
In the UK, Chancellor Jeremy Hunt's Autumn Statement aimed to repair public finances and restore credibility. The market reacted positively to this return to fiscal orthodoxy after the expansionary "mini-budget" introduced by his predecessor. The plans include raising taxes by £25bn and cutting spending by £30bn by 2027-2028. The reaction in the market was relatively muted as the plans were well-anticipated, with the UK 10-year gilt yield ending November significantly lower than its October peak.
Sterling also recovered from its record low against the US dollar shortly after the mini-budget, ending November above the US$1.20 level with a gain of over 5% for the month. UK large-cap stocks broadly followed global benchmarks, rising by approximately 7%.
There are positive indications that China may shift its stance on Covid-19, potentially moving away from its strict "zero-Covid" policy. Resistance to stringent measures has grown among the population, leading to mass demonstrations. China's adherence to strict controls has weighed on global growth, impacting economic activity and causing supply chain disruptions.
Concerns about a slowdown in global economic activity due to higher interest rates and the reimposition of Chinese restrictions in November have led to fears of a recession. These factors, along with expectations of slowing growth and reduced demand, have weighed on the oil price, with Brent crude falling more than 6% during November to its lowest level since January.
Additionally, European Union member states are reportedly close to agreeing on a price cap for global purchases of Russian oil, further impacting the oil market. The cap, expected to be set around US$60, has contributed to downward pressure on oil prices.
Overall, the recent performance of equities has been encouraging, and there are signs of cautious optimism going forward. The Fed's potential slowdown in interest rate increases and a shift towards a wait-and-see approach have reduced the chances of further policy mistakes. With interest rates nearing their terminal level, attention is shifting towards corporate earnings as a key factor for market performance. While third-quarter earnings remained relatively strong, some softening is expected in the fourth quarter. Consumer spending has been resilient, as evidenced by retail sales figures during the crucial Black Friday period.