Last week, geopolitical developments trumped by far the economic news, with the fall of the Assad regime in Syria and the declaration of martial law in South Korea coming out of the blue. Yet, markets gave a collective shrug – Korea because the move was quashed almost before it began and Syria because the strategic impact is far from clear and there are no immediate economic implications.
Ever since the Hamas attack on Israel last October, the oil market has been surprisingly relaxed about the war in the Middle East and the threat of Iran being sucked in. This continued last week with the Brent oil price ending down slightly at $72/bbl, the bottom end of its range over the last three years. Amidst a surfeit of supply, it was unmoved by news that OPEC was delaying its planned output increase to April 2025.
Equity markets rose slightly more than 1% over the week in both local currency and sterling terms, while bonds were little changed. The US, for a change, underperformed with a rise of 0.7%, despite the Magnificent Seven rising 6% led by Tesla. The latter is now up as much as 60% since the US election, buoyed by Elon Musk’s love-in with Donald Trump.
This has even trumped the other big bromance of the day, namely between the crypto bros (as enthusiastic supporters of cryptocurrencies are sometimes called) and Trump. Bitcoin touched $100,000 last week and is up close to 50% since the election.
The big macro event of the week turned out to be a non-event. US payrolls rebounded just a bit more than expected in November from the strike and hurricane related weakness of October.
With US growth looking likely in the fourth quarter to have continued at a firm pace of around 3%, Chair Powell’s comment that the Fed could afford to be a little more cautious in easing policy came as no surprise. The Fed is still firmly expected by the markets to lower rates by a further 0.25% next week but then hold off cutting again until February.
UK equities overall lagged last week with only a 0.4% gain but small and mid-cap stocks fared rather better, rising 1.5% or so. In a further sign that the malaise caused by the October Budget may be starting to fade, both the Halifax and Nationwide reported house prices rising a strong 1.2-1.3% in November. This left prices on the Halifax measure up a sizeable 4.8% on a year earlier.
Moving across the Channel, European equities had a good week, rising 2.3%. Most surprising, the French market was up 2.7% despite the collapse of the Government, which brought to a quick and inglorious end to Michel Barnier’s tenure as Prime Minister (Barnier being the EU’s infamous Chief Brexit negotiator in his previous incarnation).
So why did the market rally? Maybe the spectacular re-opening of Notre-Dame lifted spirits. More likely, the government’s fall came as no real surprise and seems just to herald the prospect of another lame-duck government, rather than anything more alarming.
Macron has said he plans to stay on as President until his term ends in May 2027. Moreover, if no agreement is reached on next year’s budget, which was the cause of the government’s demise, this year’s budget is just carried forward postponing the day of reckoning. Quite a lot of bad news was anyway already in the price. Even after last week’s bounce, France has still underperformed by close to 10% since Macron’s ill-fated decision to call a snap election in June.
Emerging markets also fared well last week with a 2.6% rise. Importantly this morning, the Chinese authorities announced a further substantive easing of policy. China will now adopt an ‘appropriately loose’ monetary policy, the first change from its ‘prudent’ policy designation since 2010. Crucially, it also noted the need to ‘vigorously’ boost consumption and expand domestic demand ‘in all directions’. As usual, the proof will be in the pudding but these statements do seem to show the authorities are poised to take more aggressive action and are encouraging.
This coming week, the US inflation numbers on Wednesday will be the highlight and is forecast to show the core rate remaining unchanged at 3.3%. The ECB also meets on Thursday and looks all but certain to lower rates by 0.25%. Finally in China, the Government will be fleshing out over coming days the details of this morning’s announcements.
Rupert Thompson – Chief Economist