Stock markets: Red October, golden autumn?

Article by Carsten Klude

The price losses of the last three months for most indices now add up to around ten percent, although the declines in small and mid caps were significantly greater. One reason for the recent weak stock market development is the war in the Middle East following the attack on Israel by the Islamist Hamas. However, the economic consequences of the conflict are currently limited. As long as Iran is not actively involved in the conflict, the capital markets are unlikely to react to new news from the region.

Fundamental influencing factors are much more important for the stock markets, including inflation and economic data. The recent strong headwind for stocks has come from interest rate developments. In the USA, the yield on ten-year government bonds rose to five percent at the end of October for the first time since 2007, while ten-year Bunds yielded three percent. This development is primarily due to the prayer wheel-like statements from the US and European Central Banks that key interest rates must remain at a high level for a longer period of time. But will the central banks follow their words with actions?

Although both central banks are currently stressing that it is not yet time to talk about cutting interest rates, that time will come, probably sooner rather than later. Tailwind for the stock markets is already coming from corporate profits. The third quarter reporting season is going well. In the USA in particular, more companies than usual were once again able to exceed profit expectations. In addition, the poor stock market sentiment suggests that most investors willing to sell have already reduced their holdings.

Read our analyse here