Global equities ended last week up 0.5-1% in both local currency and sterling terms and are now some 2-2.5% above their end-July high. US and European equities performed best with gains of 1-1.5% while the UK was down slightly and Emerging markets lost 1.5%, as China unwound close to a third of its surge of more than 30% over the previous couple of weeks.
Meanwhile, bonds saw yields continue to drift higher and UK gilts and US Treasuries both lost 0.5% over the week. The 10-year US Treasury yield edged above 4% and is now 0.4% above its low a month ago, dragged higher as hopes for aggressive Fed easing have been scaled back somewhat.
In a sign of how inflation concerns have eased recently, the US inflation data are no longer quite the big event they have been for the last couple of years. Last week’s numbers barely caused a ripple in the markets even though they came in a tad higher than expected. While the headline rate did edge down to 2.4%, the core rate edged up to 3.3%.
Rather, last week’s big event – even though it turned out to be pretty much a non-event – was the press conference of the Chinese Finance Minister Lan Fo’an on Saturday. Here, the hope was that he would provide more concrete details of the forthcoming fiscal stimulus promised by President Xi a couple of weeks ago.
Although Lan talked of helping local governments tackle their debt problems, offering subsidies to people with low incomes, supporting the property market and replenishing state banks’ capital, he was disappointingly light on detail. Still, it was just enough to prevent the market reversing any more of its sharp run-up and Chinese markets ended 2% or so higher in today’s trading.
We continue to expect substantive measures to be announced over coming weeks, simply because the Chinese authorities cannot afford not to do so. The inflation data out today showed the economy struggling to throw off deflationary pressures and Friday’s third quarter GDP numbers should see growth falling short of the government’s 5% target for this year.
Back here in the UK, the Government will also be doing its best to talk up the economy and attract overseas investment at its investment summit today. But as in China, the proof will be in the pudding – or rather in the Budget on 30 October – with all eyes on how much taxes will be raised, public investment boosted and the fiscal rules tweaked.
In the meantime, the latest UK growth numbers provided some relief. After stagnating in June and July, the economy returned to growth in August with GDP rising 0.2%. And the firm expectation now, barring some unexpectedly nasty inflation numbers on Wednesday, is that the Bank of England will cut rates by a further 0.25% to 4.5% on 7 November.
This Thursday, the European Central Bank looks certain to reduce rates by 0.25% to 3.25% on the back of encouraging inflation news and increasing gloom on the economy. Germany is the main culprit here with even the German government last week now forecasting that economy to contract this year for the second year running.
The US is light on economic data this coming week other than retail sales on Thursday. Still, the latter will not be unimportant given the Fed is now more focused on propping up growth and the consumer than on driving inflation down further.
But corporate earnings will be centre stage over the next few weeks with JP Morgan and Wells Fargo kicking off the third quarter reporting season last Friday. Although both banks reported earnings down on a year ago, their results were better than expected and fueled gains of 5% in their share prices.
Expectations for earnings growth for the S&P 500 overall are quite muted at 5% this quarter, versus the 13% gain seen last quarter. But as already seen, the relatively low expectations provide room for positive surprises. We believe global equities should sustain further gains over the coming year and increases in corporate earnings, rather than any further re-rating of valuations which are already on the high side, will be the key here.
Rupert Thompson – Chief Economist