Source: Bing AI
October is a spooky month and not just for kids. It has gained a notorious reputation in financial markets due to a series of historic stock market crashes and economic downturns that have occurred during this month.
The 1929 stock market crash, which marked the beginning of the Great Depression, took place in October and left an indelible mark on financial history.
Black Monday is the name of the October 19, 1987, debacle. It occurred due to a confluence of factors and events, but a key factor was the escalating concern over rising interest rates. The widespread adoption of computerized trading strategies and portfolio insurance programs amplified the sell-off as automated trading systems exacerbated the panic.
The 1997 Asian Financial Crisis began in the summer and then intensified throughout October, culminating in Asia’s version of Black Monday on October 27. Indonesia’s stock market, as measured by the Jakarta Composite Index (JCI), plunged by around 8.7%, Hong Kong’s Hang Seng lost 7.2%, and the South Korean KOSPI dropped 6.9%. The crisis was fueled by excessive borrowing and lending practices, which led to currency devaluations in several Asian countries.
The 2008 Financial Crisis, also known as the Great Recession, was not a singular event but rather a series of developments that escalated in intensity during September, then continued to wreak turmoil through October. This crisis was primarily instigated by the collapse of the U.S. housing bubble, which exposed the poor risk management at major global banks. So profound were the missteps in housing investments that the U.S. government felt compelled to provide bonuses to these very bankers. This decision may have been a measure to deter these professionals from migrating to other sectors and potentially causing similar financial calamities.
All of the financial market crises that occurred in October shared common characteristics, including issues related to interest rates, global economic concerns, fluctuations in oil prices, banking failures, and the contagion effects that spread throughout the financial system. These patterns bear a striking resemblance to the events leading up to October 2023.
In the spring, four regional banks in the United States failed, casting doubt on the overall health of the banking sector. The aftermath of this banking crisis may have been one of the factors influencing the Federal Reserve’s decision to keep interest rates unchanged in September.
Global economic growth concerns have taken center stage, especially with China’s post-pandemic economic rebound losing momentum, resulting in a notable slowdown. Youth unemployment has risen to such an extent that Beijing has stopped providing statistics on it.
The memory of the 1973 oil embargo imposed by OPEC, when oil prices surged over 400%, still lingers, especially for people of a certain vintage. Higher oil prices became a concern again in the October 1987 crisis. The months leading up to that crash saw a surge in oil prices, sparking worries that elevated energy costs would squeeze corporate profits and fuel inflation fears. These concerns, coupled with broader economic uncertainties, contributed to a sense of unease in the markets.
Fast forward to 2023, and a familiar narrative emerges. West Texas Intermediate (WTI) crude oil is on a trajectory to reach or even surpass the $100.00 per barrel mark. This rise can be attributed to deliberate production cuts by Saudi Arabia and Russia, as well as forecasts like the International Energy Agency’s (IEA) prediction of a “significant supply shortfall” by year-end. The Federal Reserve is well aware of the inflationary risks posed by surging crude prices, possibly explaining why policymakers have chosen to maintain elevated interest rates throughout 2024.
Lastly, let’s not overlook the potential risks associated with Black Swan events. This term, coined by the renowned mathematical statistician and risk analyst Nassim Taleb, refers to events that are extremely rare, have severe consequences, and present formidable challenges to conventional predictive forecasting models. Essentially, something could happen but we don’t know what.
Canadians are not insulated from October calamities, thanks to the globalization of trade and finance. When the United States sneezes, the world catches a cold, and in Canada’s case, maybe pneumonia. However, the year-to-date currency performance suggests otherwise. The Canadian dollar has only lost 1.07% since the opening level on January 3. Meanwhile, its commodity currency peers, the Australian dollar and New Zealand dollar, have lost 6.20% and 5.47% respectively.
The antipodean currencies have been affected by the ripple effects of China’s slowing economic growth, given that China is their largest export market. Additionally, the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand (RBNZ) have put a halt on rate increases. In contrast, Canada has been relatively insulated from China’s economic challenges, primarily due to its strong trade ties with the United States. This has allowed the Loonie to perform better. However, recent developments indicate that the Loonie’s days of outperformance may be coming to an end.
The risk of a US recession was amplified with the ouster of Republic Senate Leader Kevin McCarthy as he was the man who brokered a deal to avoid a US government shutdown on October 1. The Republican Senate is fractured, and they need to get their act together, then make nice with Democrats before November 15, when the government will be forced to close its doors.
US political dysfunction, combined with bullish technicals, suggest USDCAD will test 1.4050 before the year is out. If October lives up to its reputation, the Canadian dollar will be running scared.