Market Movers — October 2021

U.S. equity markets recovered in October on the back of strong earnings numbers. Inflation levels remained heightened on a year-over-year basis and caused fixed income markets to sell off with the U.S. yield curve flattening as the Fed indicated they would taper bond purchases going forward. Central banks in the UK, Australia, and Canada also indicated tightening may need to happen sooner than anticipated.

The main story in October was rising yields on the short end of the curve in developed and undeveloped countries. One common factor was at the heart of the move higher in short-term yields and that was inflation. Many central bank policymakers deemed inflation to be “transitory” but the CPI prints across the globe in October tell a different story.

Inflation remains at heightened levels and central bankers are realizing tightening may need to happen sooner rather than later. In Australia, central bankers abandoned their yield curve control policy to combat rising inflation and stronger than expected economic growth numbers, causing the short end of the yield curve to rise to levels not seen in years. This marked one of the first real pivots by a major central bank.

Canada announced it would end its bond-buying program in the last week of October, which triggered a sell-off in Canadian government bonds with yields on the shorter end of the curve reaching levels not seen since before the pandemic. A similar story played out in the U.S. The Fed indicated they would start unwinding $120bn a month bond-buying program, again causing yields on the shorter end of the curve to rise to pre-pandemic levels. Many managers, especially trend-followers were able to profit from short positions on the short end of the curve. Short-term managers also benefitted from these moves as well. Opportunities in the financial futures markets should persist as central banks try to combat more persistent inflation than they had expected.


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