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iBoxx USD Asia Ex-Japan Monthly Commentary: October 2023

iBoxx Asian Local Currency Indices Monthly Commentary: October 2023

U.S. Equities Market Attributes October 2023

iBoxx Tadawul SAR Government Sukuk Indices – Q3 2023

S&P Kensho New Economies Commentary: Q3 2023

iBoxx USD Asia Ex-Japan Monthly Commentary: October 2023

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Jessica Tan

Principal, Fixed Income Indices

S&P Dow Jones Indices

October 2023 Commentary

As global central banks have been juggling tackling inflation and supporting economic growth, most have moved to a cautious wait-and-see stance toward their policy rate decisions and kept their rates unchanged in October.  The European Central Bank followed suit this month and maintained rates at 4.5% after 10 successive rate hikes since July 2022.

With higher interest costs and a growing budget deficit, the U.S. Treasury department has been increasing its debt issuance sizes, bringing additional supply into the U.S. Treasuries market.  Consequently, the long end of the U.S. Treasuries yield curve, as represented by the iBoxx $ Treasuries 10Y+, rose and its yield surpassed 5% in October.  The 10Y+ index extended its loss by another 4.64%, bringing its YTD loss to 12%.  Against the backdrop of higher 10-year yields coupled with the Israel-Hamas war breaking out in the Middle East, the S&P 500® experienced its third consecutive month of losses, down 2.20%.

In Asia, the strength of the U.S. dollar combined with weak demand from China made for a challenging landscape for central banks to navigate with their policy decisions.  On top of that, geopolitical tensions have been rising in Asia and there is the potential of rising costs due to the Israel-Hamas conflict.  To stifle inflation resurgence, central banks in Indonesia and the Philippines opted to raise rates by 25 bps in October.

iBoxx USD Asia Ex-Japan Monthly Commentary: Exhibit 1

In October, the overall index was down 0.66%, with the investment grade and high yield segments shedding -0.64% and -0.77%, respectively.  In terms of rolling one-year returns, the high yield segment performed the best, at 16.54%.

The investment grade short-end maturity buckets remained in favor over the mid- to long-end maturity buckets.  As the rising 10-year Treasury yields continued to weigh on the global debt market, the worst performance came from the 10Y+ segments of higher quality bonds.  The high yield 10Y+ segments continued to move in the opposite direction, gaining 3.30%, largely attributed to the outperformance in the CCC rated 10Y+ segment.

iBoxx USD Asia Ex-Japan Monthly Commentary: Exhibit 2

All of the top seven markets by market value in the index posted negative returns in October.  The two markets that experienced a rate hike of 25 bps this month, Indonesia (down 1.50%) and the Philippines (down 1.19%), were the worst-performing markets.  Spreads across all top seven markets widened—except for Mainland China and Indonesia—and duration across all of them shortened.

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iBoxx Asian Local Currency Indices Monthly Commentary: October 2023

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Kangwei Yang

Director, Fixed Income Indices

S&P Dow Jones Indices

Monthly performance, maturity, yield and duration of the iBoxx ALBI, iBoxx ABF and iBoxx SGD Indices.

As the Israel-Hamas conflict broke out in early October, investors swooped to the safe haven of U.S. Treasuries, as marked by a 22-bps decline in the yield of iBoxx $ Treasuries between Oct. 6, 2023, and Oct.10, 2023.  That was short lived, as the sell-off of long-dated U.S. Treasuries in recent weeks pushed the yield of the index back above 5%, ending the month at 5.15% and a month-to-date loss of 1.35%.  This also brought the 10-2 Year Treasury Yield Spread to its highest level in the past year, widening to -0.19% by month-end.  The lowest point recorded in the past year was -1.08% in July.

This month, the European Central Bank also put a pause to 10 consecutive rate hikes and decided to hold interest rates following signs of easing inflation and slowing economic activities.  This was decided after the ECB Governing Council’s monetary policy meeting in late October.  In Asia, Indonesia’s and the Philippines’ central banks raised rates by 25 bps in October in a bid to manage inflationary pressures.

On the equities front, the S&P 500® posted -2.20%, its third consecutive month of negative returns.  Likewise, the S&P Pan Asia Ex-Japan LargeMidCap (USD) was down 3.34%, and China—as represented by S&P China 500 (USD)—also lost ground in October (-3.53%).

 

iBoxx Asian Local Currency Indices: Monthly Commentary: Exhibit 1

Asian local currency bonds—as represented by the iBoxx Asian Local Bond Index (ALBI) (USD)—posted a loss for the third consecutive month, declining 1.05% in October.  Capital losses were observed in all underlying markets; in addition, most local currencies (except Hong Kong dollar and Thai baht) lost ground against the U.S. dollar.

Three markets, in local currency terms, posted positive performance after adding returns from the bond coupon payments and accrued interest, namely Singapore (up 0.22%), Hong Kong (up 0.19%) and China Onshore (up 0.10%).  The worst-performing markets were Indonesia (down 1.99%), the Philippines (down 1.60%) and South Korea (down 1.51%).

Similar to U.S. Treasuries, the longer-dated bonds experienced a sell-off this month with the largest losses in the 10+ years segment.  The heaviest losses were seen in the Philippines 10+ (down 4.27%) and South Korea 10+ (down 3.05%).  China Onshore was the only market with gains across the yield curve, in local currency terms.

As of the end of October, the overall index yield increased by 11 bps to 4.34%.  India remained the highest-yielding bond market in the index, posting 7.48%, while China Onshore (2.80%) represented the lowest-yielding market.

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U.S. Equities Market Attributes October 2023

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Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

Key Highlights

Exhibit 1: Index Returns - U.S. Equities October 2023

MARKET SNAPSHOT

The S&P 500 was down 2.20% for October, continuing September’s downward trend (-4.87%), which started in August (-1.77%) after five months of gains (up 15.59%).  The three-month index level was in correction mode (-10.28%) but improved in the last two days of the month (0.65%, 1.20%) to close the period down in the single digits (-8.61%).  Year-to-date, the S&P 500 remained positive (9.23%), but the index was down considerably from its 2023 closing high (4,588.96 on July 31, 2023, when it was up 19.52% YTD), but up from its recent low (up 17.25% from Oct. 12, 2022).  The easy reason for why the index was down this month is that there is more selling than buying, and as for why, one of the major reasons appears to be Q3 earnings.  While earnings reports have come in nicely, but not great (77.5% beat, compared to the historical two-thirds), and sales have been stronger than expected (and may set a new quarterly record at USD 3.935 trillion, with earnings at USD 465 billion), the guidance didn’t appear to be as strong as hoped for, as money managers measured the risk/reward going forward against potential 2023 profits and decided to take some of the profit off the table. 

The S&P 500 closed at 4,193.80, down 2.20% (-2.10% with dividends) from last month's close of 4,288.05, when it was down 4.87% (-4.77%) from the prior month's close of 4,507.66
(-1.77%, -1.59%).  For the three-month period, the index was down 8.61% (-8.25%), as the YTD return was up 9.23% (10.69%) and the one-year return was 8.31% (10.14%).  The Dow Jones Industrial Average closed at 33,052.87, as it declined 1.36% (-1.26% with dividends) for the month, less than the S&P 500’s -2.10%, as it continued to significantly trail the S&P 500 YTD, down 0.28% (up 1.44% with dividends) compared with the S&P 500's 9.23%.  The variance is due to the weighting (price versus market value), which historically tracks well.

The S&P 500 decreased USD 0.803 trillion for the month (down USD 1,721 trillion last month), as it was up USD 3.002 trillion YTD, to USD 35.135 trillion.  Monthly intraday volatility (daily high/low) increased to 1.28% from last month’s 0.88% and was 1.09% YTD; the 2022 volatility was 1.83%, 2021 was 0.97% and 2020 was 1.51%.  S&P 500 trading decreased 2% (adjusted for trading days) for October, after being down 3% in September, as the year-over-year rate was down 20% over October 2022.  The October 2023 12-month trading volume was up 10% over the prior period, after full-year 2022’s 6% increase.

The S&P 500 continued to decline, centering on earnings (and projections) and interest rates (in that order), as it ended the month in the middle of an FOMC meeting, which was expected to end with no change.  Housing data continued to show low supply and higher demand, as prices mostly held their levels (but were off their highs), even as mortgage rates continued to increase (the 30-year rate was 8%).  Consumer spending concerns also increased, though consumers continued to spend. 

The S&P 500’s one-year Street consensus target price remained optimistic, though it declined after 11 consecutive months of gains (which was after 9 consecutive months of declines) to 5,063, a 20.7% gain from now (19.8% last month), from 5,135 last month.  The Dow® target price decreased after three consecutive months of gains, to USD 38,896, a 17.7% gain (17.1%) from now (USD 39,354 last month).

On Oct. 1, 2023, Congress passed a bipartisan 45-day stop-gap funding bill (through Nov. 17, 2023) to prevent a government shutdown.  After the vote, the Republican Speaker of the House Kevin McCarthy was voted out of his position by a group of Republicans that disagreed with his polices.  In an initial vote to replace the Speaker, Republican Steve Scalise of Louisiana was defeated and more conservative Republican Jim Jordan of Ohio was nominated, as the behind-the-scenes negotiations started for Scalise to get enough votes for the full House vote.

Scalise dropped out of the race, citing the need to unite, and Jim Jordan failed to get enough votes after three rounds of voting (with declining votes for him in each round); he then also dropped out.  Tom Emmer of Minnesota was next selected and then dropped out the same day, as he could not get enough votes, and Mike Johnson of Louisiana was then the fourth selection and was voted in as the Speaker of the House.

The backlog of legislation then started to be addressed, as the first item passed was a support bill for Israel.  Still awaiting discussions and votes was a funding bill (USD 105 billion and a supplementary bill of USD 56 billion) from Biden, which includes aid for Ukraine and Israel, as well as the U.S. budget, which is under a stop-gap funding bill that ends on Nov. 17, 2023, and would lead to a government shutdown if not addressed.

The U.S budget gap increased to USD 1.7 trillion in September 2023 from the USD 900 billion in July 2022, as the old adage that higher inflation is good news to reduce the deficit failed to work.  Government spending continued due to higher interest costs and existing programs (infrastructure, CHIPS, IRA, COVID-19, etc.), as the government set a cost-of-living adjustment for social security at 3.2%, down from last year’s 8.7%.  Indications (based on recent guidance) were that the Treasury was laying the groundwork for offering more Treasury bills.  Growing deficit spending has increased the need for government borrowing.

The World Bank reduced its expectations for East Asia and the Pacific to grow at 5.0% for 2023, down from its April 2023 estimate of 5.1%, as it now saw 2024 at 4.5%, down from the prior 4.8% level.  The International Monetary Fund (IMF) left its global growth rate at 3% for 2023 and 2.9% for 2024, as it raised the U.S. expected growth for 2023 to 2.4% from its July 2.1% projection.

iBoxx Tadawul SAR Government Sukuk Indices – Q3 2023

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Jessica Tan

Principal, Fixed Income Indices

S&P Dow Jones Indices

iBoxx Tadawul SAR Government Sukuk Index

iBoxx Tadawul SAR Government Sukuk Indices: Exhibit 1

After steadily climbing since last October, the iBoxx Tadawul SAR Government Sukuk Index experienced three consecutive months of losses, making Q3 its worst quarter of the year, losing 2.12%. The 10+ year sukuk performed the worst, at -4.42%, followed by the 5-10 year maturity segment, at -1.69%. In contrast, on the short end, the 0-5 year maturity segment gained a modest 0.44%.

iBoxx Tadawul SAR Government Sukuk Indices: Exhibit 2

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S&P Kensho New Economies Commentary: Q3 2023

The S&P Kensho New Economy Indices seek to track the industries and innovation of the Fourth Industrial Revolution

After three consecutive quarters of positive returns, U.S. equities (as measured by the S&P Composite 1500®) posted a negative quarterly performance (-3.4%), bringing the YTD gain to 12.2%.  Notwithstanding supportive Q2 2023 earnings data (link), this negative performance played out across the large-, mid- and small-cap segments of the U.S. equities space.

Q3 2023’s macroenvironment was a mixed bag, without enough positive surprises to continue the market rally seen in the first half of this year.  Although the U.S. Fed raised rates only once this quarter, the market perception appears to be skewed toward “higher for longer,” with expectations increasing for another rake hike before the end of the year.  The downtrend in inflation still isn’t within the Fed’s acceptable range, and energy prices and housing costs continue to drive inflation.  The labor market remained durable, with unemployment levels near historic lows, but this data was countered by falling consumer confidence levels.  This weakening sentiment is also seen among corporations, with ISM Manufacturing PMI monthly numbers in contraction territory for the past 10 months.

The popular “magnificent 7” group, which contributed to about 60% of the H1 2023 positive returns within the S&P 500® (-3.3% for the quarter), saw five of its constituents post negative returns.  The underperformance of mid-cap (S&P 400®, -4.2%) and small-cap (S&P 600®, -4.9%) segments compared to their large-cap counterpart continued in the third quarter, but at a relatively slower pace.  Sectoral performance across S&P 500 sectors also saw a reversal, as Energy (12.2%) was the top performer, while the Information Technology (-5.6%) and Consumer Discretionary (-4.8%) sectors were down this quarter.  The rate-sensitive sectors of Real Estate (-8.9%) and Utilities (-9.3%) were the biggest underperformers within S&P 500 sectors.

International equities followed suit, with both the S&P Developed Ex-US BMI (-4.2%) and S&P Emerging BMI (-2.0%) moving lower for the quarter.  European equities struggled with relatively higher rates and higher energy costs, along with a lack of the fiscal spending seen in the U.S.  The expected boost to the global economy from the reopening of China has become mired in credit concerns surrounding its Real Estate sector.

Returns across the factors space within S&P 500 stocks were mostly negative.  High beta (-8.0%) and low volatility (-5.8%) at the opposite ends of the risk spectrum were the biggest underperformers.  Growth (-2.6%) outperformed value (-4.1%), aided by Energy’s weight in growth.  The top factor performer was momentum, with Energy again driving the outperformance.

U.S. 10-year Treasury yields breached 4.5% in September, the highest level since the 2008 Global Financial Crisis.  In addition, the U.S. 2-10-year Treasury slope has remained inverted since June 2022, but the inversion narrowed this quarter, exacerbating losses on the relatively longer tenor bonds.  The S&P U.S. Treasury Bond Index was down 1.9% this quarter, along with the broader S&P U.S. Aggregate Bond Index (-2.2%) and the S&P Eurozone Sovereign Bond Index (-2.0%).  After hiking the overnight rate twice during this quarter, the European Central Bank has indicated a tilt toward a pause with an eye on inflation (link).  U.S. corporate bonds also fell for the quarter, with both the iBoxx USD Liquid Investment Grade (-3.4%) and the comparatively shorter duration iBoxx USD Liquid High Yield (-1.5%) down.  The one spot with positive quarterly returns within the fixed income space was the iBoxx USD Liquid Leveraged Loans (0.6%), a segment that primarily covers floating-rate securities.

On the commodities front, the S&P GSCI has been recovering its losses from H1 2023, gaining 4.1% for the quarter and 16.0% YTD.  The bulk of these returns has been driven by gains in the S&P GSCI Energy segment (up 7.8% in Q2 2023 and up 28.8% YTD).  Despite concerns around a global slowdown, oil prices were up 28.5% for the quarter, driven by tighter supply considerations.  A stronger U.S. dollar weighed on the precious metals (-5.1%) segment, as it was the biggest quarterly underperformer within commodities.  The industrial metals segment was slightly positive (up 1.5%), as zinc and aluminum price gains more than countered weakness in nickel prices.

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