Movers and shakers – The best and the worst performing assets of October 2023

Strongest – Dow Jones Industrial Average (-1.4%)

The Dow has been spared the worst of the October losses, with the 1.4% decline coming as a result of the relatively narrow grouping of stocks included in this small index of 30 companies. While losses for a number of the big tech stocks served to drive the likes of the Nasdaq and S&P 500 lower, the likes of Alphabet, Amazon.com, Nvidia, Meta, and Tesla are all left out of this index. With that in mind, we often see the Dow outperform at times of relative weakness for the big tech names, but underperform at times of tech strength. Markets have ended the month on a slightly more positive tone, although there is still significant risk that the bottom may not be in quite yet.

Weakest – Russell 2000 (-6.9%)

In a month that has been dominated by selling pressure for equity markets, the Russell 2000 has been by far and away the biggest loser. This small cap index represents the riskier end of the spectrum, and the impact of higher borrowing costs on small businesses that may still be building towards profitability can be damning. With interest rates elevated, loans can be particularly costly while the ability to tap the investment community can be hindered by their opportunity to obtain a favourable risk-free return elsewhere. As we move out of the tightening phase and into a period of maintaining monetary policy in the anticipation of further disinflation, the Russell 2000 is likely to be a key bellwether for market sentiment. Any signs that we could be on our way towards a second peak of inflation would likely cause significant damage to this index. With that in mind keep a close eye on energy markets and inflation expectations as key components of sentiment for this index going forward.

Strongest – CHF (+0.62%)

The Swiss franc has been a big outperformer over the course of October, as heightened risk-off sentiment saw traders searching for a haven. While the US Congress managed to avert a government shutdown a month ago, the decision to push the conversation into mid-November highlights ongoing risk around the US dollar. The battle over spending has taken a particularly notable turn of late, with the jump in borrowing costs now driving US debt payments on a new worryingly steep path. This dramatic surge in US debt will raise concerns around sustainability, thus undermining the view that the US represents the main FX haven. With that in mind, there is a strong chance that the Swiss Franc will continue to come into favour during risk-off moments. Interestingly, the SNB has stated the potential for further rate hikes, although the latest headline (1.7%) and core (1.3%) CPI readings suggest otherwise. With the currency losing traction towards the end of the month, risk sentiment and the upcoming CPI release (2 November) should provide key drivers of CHF sentiment.

Weakest – NZD (-2.85%)

The New Zealand dollar suffered steep losses over the course of October, with uncertainty around the political direction of the country driving NZD weakness. With the Labour party looking to have lost the election, the efforts to form a governing coalition have been taking a toll on sentiment given the potential shift that could come. This includes a move to remove the RBNZ dual mandate. On the bond market, the closing of the gap between US and New Zealand 10-year government yields helped drive NZDUSD weakness as US risks rose and a bout of stronger US data raised expectations of another rate hike from the Fed. With inflation at 5.6%, there is good cause for the elevated New Zealand yields compared with their counterparts. However, we could see further downside for NZD if the RBNZ fail to hike again in the future. The latest inflation figure of 5.6% came in well below the expected 5.9% reading, helping to drive down expectations of further tightening from the RBNZ. The quarterly inflation expectations figure (8 November) and RBNZ rate decision (29 November) will be key for the month ahead.

Strongest – Natural Gas (+22.7%)

Natural gas has been the standout performer over the course of October with a surge in both the early and later parts of the month raising fears over a potential resurgence in inflation pressures. Much of this upside has been attributed to concerns over the potential for another bottleneck this winter given the shake up in trade flows seen since the Russia Ukraine conflict began. Europe looks particularly at risk, with the events in Israel serving two hamper the prospect of Egyptian exports into Europe. Whilst Europe has done well to stockpile gas ahead of this winter period, traders will be keeping a close eye on weather forecasts given the potential impact on inventories should a particularly cold phase emerge. The reliance of Europe on LNG in the absence of Russian pipeline product does mean that any squeeze in Europe would likely drive demand for US gas higher thus causing a ripple effect in global prices. The October peak in natural gas marked the highest level since January, with a high likeliness of further upside should we see supply constraints or colder weather forecasts take shape.

Weakest – Palladium (-10%)

Palladium has been the big underperformer in the commodity space in October, with price particularly losing traction over the first three weeks of the month. This commodity is commonly known for its role in the automotive industry, proving key for the creation of catalytic converters. However, that demand has predominantly been around the need to reduce the emissions of traditional fossil fuel focused vehicles. With automotive companies gradually shifting towards electric and away from petrol or diesel vehicles, it stands to expect that demand for Palladium will wane over time. With the current sentiment shifting on concerns that higher interest rates are set to drive down demand for big ticket items such as cars and houses, the Palladium bull story looks flawed on both a short term and long-term perspective.