OREANDA-NEWS. November 13, 2013. The first half of October was marked by extremely difficult political and economic situation in the USA.

Congress did not manage to approve even temporary budget before beginning of new financial year starting on the 1st of October and to solve the issue of increasing public debt ceiling, due to disagreement between democrats and republicans. This caused temporary government shutdown and risk of technical default in the USA.

Given this, increased nervousness was observed at global stock market, which caused decrease in main stock indexes at the beginning of the month. However, market players seemed to be not overly concerned about the USA future, since shutdown situations periodically occur in the USA since 1977, and this is already the 18th time it happens. Thus, as early as first signs of solving the problem shortly appeared, buyers returned to the market, causing stock indexes to rise again. Moreover, possible negative consequences of shutdown for the US economy forced most analysts to change their expectations about termination of the quantitative easing (QE) programme – from December 2013 to March 2014.

This is mainly due to the fact that the US politicians managed to reach only partial agreement on temporary resuming provision of financing to state institutions till 15 January 2014 and cancelling the public debt limit till 7 February 2014, and after that this problem might worsen again.

Release of corporate reports for Q3 2013 also added to optimism, evidencing that situation at microlevel is improving, especially in Europe. US companies included in S&P 500 demonstrated average increase of profits in Q3 2013 / Q3 2012 by about 6%, and profits of large European companies included in ВЕ 500 rose approximately by 10%.

Consequently, most major stock indexes showed good growth in October. Also, it should be noted that stock index of emerging countries MSCI EM demonstrated better dynamics than the global market for the second consecutive month.

Positive mood also dominated at bond market. Change of the possible term of terminating QE programme caused stabilization at the US government bond market, which contributed to investors’ return to corporate bond market and emerging countries government bond market, leading to considerable decrease of spreads and growth of prices.

Fund managers kept to the strategy chosen earlier. The manager of stock funds, given market decrease at the beginning of the month, reduced cash component as much as possible, in expectation of successful resolving of the US political problems. Whereas certain increase of the share of emerging markets within the portfolio, initiated in September, was continued. In our opinion, emerging countries stock index lagging behind the global stock index by more than 20% since the beginning of the year does not represent actual fundamental situation, thus allowing assumption that investors will regain interest in these markets in mid-term. However, at the end of the month, there was profit recorded under positions that, in our opinion, demonstrated too fast and too strong growth and also bear increased currency risk, which makes short-term correction much more possible.

Taking into account stabilization of the US debt instruments market and possible terms of terminating QE programme being considerably postponed, cash component was also significantly decreased in bond funds.

At the same time, despite the surge of optimism, we continue to hold to moderate strategy. Mainly, bonds of medium duration and with high coupon yield are bought.