By Bertel Roslev Rasmussen

October was a nervous month in the financial markets, with rising long-term interest rates sending ripples through the stock market, especially in the first half of the month. The uncertainty was not lessened by the terrorist attack in Israel and the subsequent acts of war.

The automatic reaction in the financial markets following the outbreak of war in Gaza was rising oil prices and falling share prices. As the conflict showed no signs of spreading further into the region, oil prices fell again and the conflict is currently not showing signs of significantly impacting financial markets - nor is the war in Ukraine.

This is a general picture of the geopolitical turmoil that is currently dominating the news. It has only a modest impact on financial markets. The greatest potential for market turmoil lies in the US-China conflict, where a possible armed conflict over Taiwan is expected to have a significant impact on the financial markets. On the other hand, a softening of the relationship between the two superpowers is expected to be a significant positive for the stock market.

The global inflation picture continues to improve, helped by declining energy prices. Inflation is developing slightly better than expected in both the Emerging Markets region and the US, but especially in Europe. However, the risk of a re-acceleration in inflation from higher commodity prices and continued tight job markets is still present, and in the US, core inflation of 4% is still too high and incompatible with the 2% inflation target.

This also means that investors are still scratching their heads as to when interest rates will peak. There is a broad consensus among economists that the European economy is in recession and that inflation is so low that real deinflation, i.e. falling prices, is a real possibility in the coming months. This also means that the European Central Bank can stop pressing the brakes and is expected to keep interest rates steady for the rest of the year.

In the US, however, the story is different, where growth remains high, the job market is very tight and inflation is significantly higher than in Europe. However, there are signs of lower activity here too, with, for example, the US housing market stalling at the lowest level of activity since 2010.

This should provide room for the Federal Reserve to keep interest rates steady for the rest of the year. However, the challenge for the Federal Reserve is that it needs to signal a very tight monetary policy. If it fails to do so, financial markets will see it as a sign that interest rates have peaked, which will send both market rates down and equities up, once again stimulating economic activity and the inflation that continues to lurk just below the surface.

So, equity investors shouldn't get ahead of themselves. If there is too much happiness in the equity and fixed income markets, the Fed is once again ready with the interest rate hammer.