After a volatile September, most developed equity markets staged a rapid recovery at the end of October, closing in on their all-time highs. Equities took comfort from a very supportive earnings season to overcome what could have been potential headwinds: fading growth, stubbornly high inflation, and a drastic adjustment in global rate hike expectations.
Growth for instance has been softening both in absolute and relative terms, with economic surprises for G10 economies now coming in on the negative side. After the strong recovery from last year’s crisis this was to be expected, but in a context of worsening supply chain issues, the slowdown has been a bit more pronounced than what had been pencilled in by most forecasters. China’s regulatory crackdown on the economy and the impact of Evergrande’s meltdown on the housing sector have also increased downside risks to global activity.
Higher and stickier than expected inflation, which had been a key focus for markets, also failed to derail risky assets. In the US, 5-year break evens reached their highest level in over 15 years, briefly reaching 3%. In Europe, the move was slightly less pronounced, but the ECB’s favourite measure, the 5Y5Y forward, topped 2%.
Originally Published in November 2021
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