UK
Stocks in London experienced steep falls in October as the renewed financial
crisis that erupted the month before continued to play out in global markets.
Despite ongoing moves by the Bank of England to keep the UK market liquid by
injecting billions into the system and a 50bp interest rate cut, the market
carried on falling. Although inflation remained high at 5.2% for September,
there were widespread expectations that price rises would soon evaporate.
Meanwhile, the government stepped in to keep major banks, such as RBS and
Lloyds, solvent with an £87 billion bailout. The move came with strings
attached, i.e., government stakes in the banks with representatives on company
boards. But market panic was not allayed until finance ministers from the G7
agreed a co-ordinated programme to take stakes in banks in the major economies
as a lifeline to troubled financial firms. Although this seemed to calm market
fears, economic and earnings worries returned to the fore, as company reporting
and a stream of very poor data on the housing market, consumer sentiment and
manufacturing prompted further market declines. The pound was undermined by the
increasingly gloomy background and fell steeply. News that the economy
contracted by 0.5% in the third quarter exacerbated concerns. However, risk
aversion relented late in the month and equities recouped a bit of the earlier
losses.
| Index | Local | € | £ | $ |
| FTSE All-Share | -11.90% | -11.54% | -11.90% | -20.14% |
North America
The US stock market suffered huge declines amid continued investor worries
over the financial system. Market observers were speculating that the monthly
decline might be the largest on record, before rallies in the last week
mitigated October's loss. During the first half of the month, US market
declines were driven by persistent fears over the viability of the banking
system. Central banks continued to inject billions into the global financial
system and agreed a co-ordinated 50bp interest rate cut. But the biggest event
to restore investor confidence was a meeting by finance ministers and central
bank officials from the G7 mid month to hammer out a new set of measures to
tackle the credit crisis, notably by injecting funding into banks in their
respective regions to prevent them from failing. While this appeared to address
market concerns, stocks continued to decline on recession fears and the impact
of this on company earnings. The flow of data in the US suggested very
harrowing conditions ahead. The economy contracted by 0.3% in the third
quarter, as consumer spending fell and unemployment rose to 6.1%, while retail
sales dropped by 1.2% in September. However, markets staged a recovery from
their lows in the final days of October.
| Index | Local | € | £ | $ |
| S&P 500 | -16.80% | -7.84% | -8.21% | -16.80% |
Europe
European stocks plunged repeatedly in October, as fears over the viability
of the financial system dogged markets. The European Central Bank continued to
inject cash into markets and cut interest rates for the first time since 2003
in an effort to keep markets liquid. But only when global governments came
together to forge a set of measures to instil investor confidence in banks did
the market panic ease. Even after worries about the viability of banks abated,
markets continued a downward path as fears about the credit crisis were
replaced by worries over future company earnings in the face of a potentially
deep recession. Evidence that the economy was rapidly deteriorating accumulated
over the month, with third quarter GDP in the eurozone contracting by 0.2%, as
capital expenditure and consumer spending both fell. And German retail sales
declined by 2.3% in August. However, a rally in the final week gave European
stocks their best weekly gain since 2001.
| Index | Local | € | £ | $ |
| FTSE Europe ex UK | -15.31% | -14.53% | -14.88% | -22.84% |
Japan
Japanese equities succumbed to increasingly grave concerns about both the
global and domestic economy in October. Despite the relative lack of exposure
of the Japanese financial sector to the sub-prime debacle, Japan's economy is
exceptionally dependent on exports, so the clear evidence that economic
activity around the world was sharply falling combined with a strong rise in
the yen greatly alarmed investors. This explains why an agreement worked out in
the middle of October by finance ministers and central banks of the leading
economies did little to assuage market worries. Equities did rebound in tandem
with other global markets late in October, assisted by a 20bp cut in interest
rates by the Bank of Japan. This helped to reduce losses, but the market still
ended significantly lower.
| Index | Local | € | £ | $ |
| Japan Topix | -20.26% | -4.65% | -5.04% | -13.92% |
Asia Pacific
Despite many of the region's markets enjoying more resilient economies, and
its banks being less exposed to the bad debt on the books of western banks,
Asian stock markets proved especially vulnerable to the panic that continued to
grip exchanges around the world. Sharp falls early in the month led both Russia
and Indonesia to suspend trading for a time on their respective exchanges.
Signs of the global slowdown were making themselves felt even in Asia. For
example, in Singapore house prices fell in the third quarter for the first time
in over four years. In China, growth slowed to 9% in the third quarter from the
same period the year before. But perhaps more worrying was weak manufacturing
data, with a larger than expected fall in China's Purchasing Managers' Index,
which fell to 44.6 in October from 51.2 in September. Any score below 50
indicates contraction. The region's markets rallied in the last week, helped by
aggressive moves by local central banks (notably China and Taiwan) to cut
interest rates and an agreement between the US Federal Reserve and several Far
Eastern countries to inject liquidity via a currency swap.
| Index | Local | € | £ | $ |
| MSCI Asia Pacific ex Japan | -18.71% | -16.33% | -16.67% | -24.46% |
Bonds
Government bonds continued to outperform both equities and credit in
October, benefiting from extreme investor risk aversion and the worsening
economic outlook. The month saw yield spreads for corporate bonds widen to
levels not seen since the Great Depression. As a result, it was the worst month
for credit on record, with demand for corporate issues almost nil.
Unsurprisingly, the lower the credit grade the worse the performance and this
extended into the high yield market, which also experienced unprecedented rises
in yields. Index-linked bonds continued to underperform their nominal
government bond counterparts in October, as it became increasingly clear that
inflation would fall rapidly as economies grind to a halt.
| Index | Local | € | £ | $ |
| JP Morgan Global Government All Stocks | 0.54% | 9.28% | 8.84% | -1.34% |