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Thursday, November 1, 2018

October 2018 - Monthly Market Commentary

October was a difficult month for global risk assets. Developed and emerging market equities moved sharply lower, credit spreads widened, the USD strengthened, the oil complex sold off, and the US interest rate curve shifted higher. Minutes from the September Federal Reserve meeting pointed to continued, gradual increases in interest rates. Q3 economic growth in China slowed to 6.5%, below expectations, and at the slowest rate since the first quarter of 2009. The ECB took no action on interest rates at its October meeting, and confirmed that it remains on track to end its quantitative easing program by year end. The US job report showed that 134,000 non-farm jobs were added in September (the 96th consecutive month of job creation), the unemployment rate fell to 3.7%, the labor force participation rate remained at 62.7%, and average hourly earnings rose 2.8% from a year earlier.

Notable corporate transactions announced in October included the $794 million acquisition of Trinidad Drilling by Precision Drilling, the $493 million purchase of Transnom by Honeywell, the $2.2 billion merger of Sahara Petrochemicals and Saudi International Petrochemical, the $1.7 billion purchase of Unifrax by Clearlake Capital, the $5.2 billion merger of Cloudera and Hortonworks, the $17 billion merger of the Saudi British Bank and Alawwal Bank, the $345 million purchase of United Flexible by Smiths, the $550 million acquisition of Softvision by Cognizant, the $2.4 billion merger of Ensco and Rowan, Orsted’s $510 million purchase of Deepwater Wind, the $2.2 billion sale of HIG Capital’s stake in FNZ to Caisse de Depot and Generation Investment Management, the $2 billion acquisition of Rocket Software by Bain Capital, the $4 billion purchase of Esterline Technologies by TransDigm, the $2.1 billion purchase of Imperva by Thoma Bravo, GFL’s $2.8 billion purchase of Waste Industries, the $33 billion merger of Harris Corp. and L3 Technologies, the $1.1 billion purchase of NEC by Blackstone, Twilio’s $2 billion purchase of SendGrid, the $1.1 billion purchase of Greencore by Hearthside, the $2.1 billion purchase of Endocyte by Novartis, the $5.7 billion sale of OppenheimerFunds to Invesco, the $1.9 billion purchase of Shell’s Danish upstream business by Norwegian Energy, Micron’s $1.5 billion acquisition of Intel’s stake in their joint venture, the $7.1 billion purchase of Fiat Chrysler’s car parts unit by KKR, the $2 billion acquisition of Ci:z by Johnson & Johnson, Aqua America’s $4.3 billion purchase of Peoples, Clearlake Capital’s $550 million acquisition of Symplr, the $3.6 billion purchase of Nexperia by Wingtech Technology, Aptiv’s $650 million acquisition of Winchester, IBM’s $34 billion purchase of Red Hat, and the $6.8 billion purchase of Essar Steel by ArcelorMittal and Nippon Steel.

Developed market equities were lower in October (see page 8), with the smallest losses in Spain (-4.5%), UK (-4.8%), and Europe (-5.4%), and the largest losses in Hong Kong (-11.0%), Japan (-9.0%), and France (-7.1%). US large caps outperformed small caps, with the Russell 1000 down 7.1% and the Russell 2000 down 10.9% (see page 3). Consumer Staples (+2.3%), Utilities (+2.0%), and Real Estate (-1.7%) were the best performing sectors in October; Consumer Discretionary (-11.3%), Energy (-11.3%), and Industrials (-10.8%) were the worst performing sectors (see page 2). Large cap value (-5.2%) outperformed large cap growth (-8.9%) in October (see page 3). Emerging market equities were mostly lower in October (see page 9), with the largest losses in Korea (-12.0%), China (-11.3%), and Taiwan (-10.6%), and gains in Brazil (+9.6%).

In currencies, the USD Index was up 2.1% in October (see page 10). The Japanese Yen (+0.6%) had the largest gain against the USD, while the Norwegian Krone (-3.4%) and Swedish Krona (-3.0%) had the largest losses. Emerging market currencies were mixed against the USD, with the largest gains in the Brazilian Real (8.8%) and Turkish Lira (+8.4%), and the largest losses in the Mexican Peso (-8.0%), South African Rand (-4.3%), and Korean Won (-2.8%).

The US interest rate curve shifted higher in October (see page 12). 10 year rates closed the month at 3.14%, up from 3.06% at September month end. US investment grade and high yield spreads widened in October (see page 13).

In commodities, the GSCI index was down 5.8% in October (see page 11), with losses in Energy (-8.4%), Industrial Metals (-4.9%), and Livestock (-0.9%) and gains in Agriculture (+2.3%) and Precious Metals (+1.3%). Within individual commodities, Sugar (+18.0%), Coffee (+10.2%), and Cocoa (+8.8%) saw the biggest gains, while Gasoline (-15.7%), Crude Oil (-10.5%), and Brent Crude (-8.7%) saw the biggest losses. Gold was up 1.8% for the month.

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