Global stocks rallied as central bank stimulus and rising M&A activity helped offset ongoing concerns about a slowing world economy. Energy and materials stocks led markets higher amid signs of stabilization in commodity markets. Information technology stocks also advanced on better-than-expected earnings from some bellwether companies. Bonds were generally flat, and the U.S. dollar rose against the euro and the yen.
Index Returns (Monthly)
U.S. stocks sprang back to life in October after two months of losses, buoyed by the Federal Reserve’s decision to keep interest rates on hold and news of additional quantitative easing in Europe. The Standard & Poor’s 500 Composite Index rose 8% — its best monthly performance in four years — pulling its year-to-date return back into positive territory. The Dow Jones Industrial Average and the Nasdaq composite Index both rose 9%, with the latter finishing October above the 5,000 level.
All S&P 500 sectors had positive returns. The materials and energy sectors experienced the biggest gains, advancing 14% and 11% respectively, as investors appeared to conclude they had touched a bottom; however, they remained in the red year to date. The rate-sensitive utilities sector lagged the overall market, nudging up 1%.
Information technology stocks advanced 11%, supported by mergers-and-acquisitions activity and favorable quarterly earnings reports. Flash memory manufacturer SanDisk notched the best return in the S&P 500, soaring 42% as Western Digital announced it would acquire SanDisk in a cash-and-stock deal valued at around $19 billion; Western Digital’s shares fell 16%. In the semiconductor space, Lam Research agreed to acquire rival KLA-Tencor in a transaction valued at just under $11 billion. The companies’ shares gained 17% and 34%, respectively. The ongoing shift to cloud computing bolstered earnings and share prices at several large tech companies, including Microsoft and Alphabet (the former Google), as well as Amazon in the consumer discretionary sector.
Among energy stocks, oil majors Exxon Mobil and Chevron handily beat third-quarter earnings expectations despite reporting steep declines in profits due to depressed oil prices. U.S. crude oil futures spiked above $50 a barrel early in the month but ended the period below $47, around a 3% gain. Several hard-hit oil services stocks, including Transocean and Helmerich & Payne, also bounced back. On the other hand, warm weather and abundant supplies contributed to a slide in natural gas futures, weighing on shares of companies with significant gas operations.
October was the fifth-best month ever by dollar value for M&A activity, but with slightly under 2,200 transactions deal volume plunged from earlier in the year, according to Thomson Reuters. Announced during the month were Visa’s planned acquisition of Visa Europe for around $23 billion, which would unite the payment processor’s global businesses, and Pfizer’s intention to merge with Ireland-based Allergan, a move spurred in part by Pfizer’s desire to take advantage of Allergan’s more favorable tax rate.
Economic data was largely positive but pointed to signs that growth was slowing in the U.S. The advance estimate for third-quarter gross domestic product came in at 1.5% — below consensus expectations, and far below the second quarter’s 3.9% expansion. The strong dollar and weak global growth took a toll as businesses cut back on goods destined for overseas markets. Employers added 142,000 new jobs in September, continuing the trend of slowing job growth that began earlier this year. Nonetheless the unemployment rate held steady at 5.1%. Real average weekly wages and hours worked declined in September, though consumers benefited from an increase in disposable income due to falling gasoline and energy prices.
With inflation still at paltry levels, the Federal Reserve kept interest rates unchanged at its October 28 meeting. Observers searched the Fed’s announcement for clues as to the timing of the next rate hike, with some moving expectations from December to early 2016. In the political arena, Congress passed a two-year fiscal package that averted a looming debt default and potential government shutdown.
In bond markets, the Barclays U.S. Aggregate Index was flat for the month. The yield on the benchmark 10-year Treasury note rose 10 basis points to 2.14%. Corporate spreads to Treasuries narrowed about 10 basis points to 159 basis points. Treasury Inflation Protected Securities gained 0.3%, while corporate and municipal bonds both notched a 0.4% return. Amid a broad-based rally, high-yield corporates rose 2.7%. In the new issue market, Microsoft sold $13 billion of bonds. This deal, which was the tech firm’s largest-ever offering, included $3 billion of 10-year notes paying a yield of 3.13%.
European stocks rallied amid strong indications that the European Central Bank will ramp up monetary stimulus measures in the weeks ahead. ECB President Mario Draghi said the central bank would need to “re-examine” its accommodative polices in December, leaving little doubt that plans for additional stimulus are in the works. Stock prices were also supported by resurgent M&A activity and a bounce-back rally in the energy and materials sectors. Overall, the MSCI Europe Index gained 7%.
The likely expansion of the ECB’s €60 billion-a-month bond-buying program comes as the eurozone economy continues to struggle with deflationary pressures. Consumer prices remained flat in October compared to a year ago after turning slightly negative in September. The economy overall grew at an anemic 1.5% in the second quarter. Stocks and bonds rose sharply after Draghi suggested that the ECB’s governing council would consider taking action at its December 3 monetary policy meeting.
Energy and materials stocks enjoyed the largest gains, rising 10% and 9%, respectively. A jump in oil prices early in the month and cost-cutting measures helped to boost shares of BP, Total and Royal Dutch Shell. After a summer of financial and economic turmoil, signs of stabilization in China contributed to higher prices for some commodities and basic materials. Shares of mining giant Rio Tinto advanced 7%. Glencore shares soared more than 20% after the Swiss mining firm refuted earlier allegations that it might not be able to meet its debt obligations.
Beverage stocks rose after Anheuser-Busch InBev announced plans to acquire rival beer-maker SABMiller for $104 billion; both companies’ shares advanced on the news. The deal fueled investor expectations for more consolidation in the beverage industry. Shares of Pernod Ricard, Heineken and Diageo moved significantly higher. In the telecommunication services sector, shares of U.K.-based Cable & Wireless soared after U.S. cable operator Liberty Global confirmed that it has entered into negotiations to buy the company.
Technology stocks gained 11% amid an improving profit outlook for some companies. SAP shares advanced after the software giant reported better-than-expected sales growth in its cloud-computing products. Consumer discretionary stocks rose 9%. Daimler gained on investor expectations of strong full-year auto sales. Meanwhile, Pearson shares fell after the news-and-education publisher said its fiscal year earnings will be worse than expected, citing weak market conditions. In the consumer staples sector, Unilever shares rose after the company confirmed that it continues to see sales growth in emerging markets.
Health care and financial stocks lagged the overall market, but still rose 5% to 6% in aggregate. Investor optimism for GlaxoSmithKline’s drug pipeline drove its shares higher, as did merger speculation amid heavy M&A activity in the health care sector. On the other hand, Smith & Nephew shares fell after the U.K.-based medical device maker reported a year-over-year decline in revenue, partly due to currency headwinds. Among financial stocks, shares of Barclays declined amid a management shakeup and higher regulatory costs.
In bond markets, sovereign debt rallied amid expectations for additional monetary stimulus measures and a possible cut in the ECB’s deposit rate. Yields on the two-year notes of many eurozone countries, including Germany, France and Finland — already in negative territory — fell to record lows. The yield on Germany’s benchmark 10-year note declined 6 basis points to close the month at 0.53%, and the euro slipped 1% against the U.S. dollar.
Japanese equities gained sharply, joining the global rally following a weak third quarter. Amid mixed economic data, the Bank of Japan lowered its growth forecast but decided to keep its monetary stimulus program unchanged. Investor enthusiasm increased over the imminent initial public offering of Japan Post Holdings in what will be Japan’s largest privatization in nearly 30 years. The MSCI Japan rose 11%, while the broader MSCI Pacific Index advanced 9%. The yen weakened 1% against the U.S. dollar.
Telecommunication services led all sectors in Japan, climbing 16%. NTT Docomo rose after announcing an agreement with Nippon Life to sell insurance policies at its stores in Japan. Investors viewed the potential diversification of revenues positively as the government has recently pressured mobile carriers to lower rates. SoftBank gained, benefiting from improved earnings at Chinese e-tailer Alibaba, one of its largest holdings. Shares of KDDI also advanced.
Automakers rose amid strong overseas sales growth. Investors cheered the unveiling of Toyota’s next-generation Prius, which is expected to strengthen the company’s environmentally friendly image. Toyota also reclaimed its position as the world’s top-selling automaker last month. Honda’s sales in September increased 13% from a year earlier, lifting its shares higher. Shares of other consumer discretionary companies also climbed. Panasonic’s six-month net profit soared 37% despite flat sales as management focused on shedding underperforming businesses. Sony returned to profit in the second quarter as strong PlayStation 4 sales offset a fall in revenue from smartphones.
Tokyo Electron had the highest return in the index, gaining 30% after the company announced strong earnings and unexpectedly raised guidance for the fiscal year. Fanuc announced a partnership with Cisco and will provide predictive technology that reduces manufacturing downtime. The robotics maker also issued strong full-year earnings forecasts. Elsewhere, shares of Japan’s three megabanks largely moved in line with the broader market.
Fast Retailing shares lagged, declining 8%. The clothing company fell short of profit targets for its fiscal fourth quarter, hurt by weak sales at its U.S. Uniqlo stores and a second consecutive year of impairment losses for its upscale denim label.
The Bank of Japan lowered growth and inflation forecasts but decided against expanding its monetary stimulus program. The central bank lowered its GDP estimate for the current fiscal year to 1.2% while moving the date it expects to achieve its target of 2% inflation to early 2017. Prices excluding energy and fresh food rose 1.2% in September, although headline inflation was flat. On a positive note, factory production rose 1% after two straight months of declines. Robust U.S. and domestic demand for cars and cosmetics made up for weak machinery demand in China.
Australia lagged most developed nations, but still returned 4% as commodity prices rose. Shares of Santos soared 47% as the energy producer rejected a $5.2 billion takeover offer amid reports that it intends to divest some assets. Commonwealth Bank of Australia and Westpac each advanced 6%.
Hong Kong equities gained 9%. Macau-based casino operators had the top returns in the index, rising amid speculation that China would soon introduce more policies to support the city’s slumping economy. Hong Kong Exchange & Clearing gained 15% as pessimism over China’s stock performance waned.
Emerging markets rallied in October. Expectations that the Federal Reserve will move slowly in raising interest rates supported investor sentiment, as did monetary and fiscal stimulus in China and stabilizing commodity prices. The MSCI Emerging Markets Investable Market Index advanced 7%. Emerging markets debt also gained. U.S. dollar-denominated bonds, as measured by the J.P. Morgan EMBI Global Index, ended 3% higher. Local currency debt also fared well. The J.P. Morgan GBI-EM Global Diversified Index rose 2% in local currency terms and 5% in U.S. dollar terms.
The MSCI China IMI gained 9%. China’s central bank cut interest rates for the sixth time in a year, and again lowered the amount of cash that banks must hold as reserves. The People’s Bank of China said it would expand a program that allows lenders to borrow money from the central bank using loan assets as collateral.
Asian markets produced some of the largest returns. The MSCI Indonesia IMI rose 16%, helped by the unveiling of the latest installments in the government’s sweeping economic stimulus plan. The rupiah, which had touched its lowest level against the dollar since the financial crisis of the late 1990s, rebounded 7%. Indonesian debt also rose, with local currency bonds gaining 13% in U.S. dollar terms and dollar debt rising 6%. Meanwhile, South Korea and Taiwan stocks climbed 10% and 6%, respectively. In Korea, shares of Samsung Electronics soared after the technology heavyweight announced a share buyback plan worth $10 billion. The MSCI India IMI gained 2%.
Latin American markets advanced, with most benefiting from stable commodity prices. The MSCI Brazil IMI rose 5%, following the move by China — Brazil’s largest trading partner — to cut interest rates. Brazilian bonds and the currency also rose, in line with the general recovery in emerging markets. In Mexico, stocks gained 7%, while the currency appreciated 3%.
Elsewhere, Turkish equities, bonds and the currency rose in the run-up to the November 1 parliamentary election. The MSCI Turkey IMI climbed 12%. The Turkish lira rose 4%, local currency bonds gained 10% and dollar bonds advanced 5%. (Turkey’s ruling Justice and Development Party (AKP) won the parliamentary elections, retaking the majority that the party lost in June.) The MSCI Russia IMI gained 6% as oil prices stabilized and the ruble strengthened 3% against the U.S. dollar. Meanwhile, local currency bonds rose 8% and U.S. dollar bonds rose 3% over the month. The economy is finally showing signs of stabilization and disinflationary pressures will allow the central bank to take a more accommodative stance.
In new debt issuance, Romania raised $2.3 billion in 10-year and 20-year government bonds. Meanwhile, the Polish government raised €1.75 billion (US$2 billion) in its biggest euro-denominated bond sale since January 2014, as speculation that the U.S. will keep interest rates lower for longer boosted demand for riskier assets. Lithuania and Uruguay also sold $1.7 billion worth of government bonds each.