Global equities last week reversed some of their recent gains, falling around 1% in both local currency and sterling terms. Still, they remain close to 2% above their high in the summer. Bonds too were down 1% or so over the week as yields rose 0.15-0.2%.
US equities fared relatively well, falling 0.8% in sterling terms, helped by the resilience of the tech sector where sentiment was boosted by Tesla’s results. Tesla has for a couple of years now hardly merited being included in the so-called Magnificent Seven with its performance distinctly underwhelming. But its third quarter numbers beat muted expectations, prompting a 25% jump in the share price.
Overall, however, the US reporting season has so far been a lacklustre affair. With just under 40% of the S&P 500 now reported, expectations are for earnings to be up a relatively modest 4% on a year ago, well down on the 13% gain seen in the second quarter. It is also a slightly smaller increase than forecast at the start of the month and bucks the usual trend of earnings comfortably beating expectations.
China also had a relatively good week, posting a decline of only 0.4%. It was supported by last Monday’s news that the authorities were cutting interest rates by 0.25%, a record amount. While the Government has still to announce the full details of its fiscal stimulus, this move was reassuring in that it showed earlier talk of more forceful monetary stimulus was being backed up by concrete action.
The UK market fared a bit worse, losing 1.3% as trepidation ahead of the tax rises looming in the Budget took its toll. There were no major new steers on this front with news confined to confirmation that Reeves will as expected be widening the definition of public sector debt used in framing its fiscal rules, to include financial assets such as student loans.
Definitional changes such as these would normally be required if reluctant reading for an economist such as myself but hardly worthy of comment in a high-level market overview. But this time the change matters. The switch will give the Chancellor room to boost public investment considerably while still sticking to the rule that public sector debt be falling in five years time as a proportion of GDP. In fact, it could allow her to boost investment by some £50bn by the end of the decade but, to avoid a Lizz Truss moment, the rise looks set to be limited to more like £20bn or 0.7% of GDP.
10-year UK gilt yields have risen 0.5% from their low in mid-September and are back up to 4.25%. While a bit of this rise may reflect some skittishness over the extent of the forthcoming loosening of UK fiscal policy, the greater part is down to the upward pull from US Treasury yields which are up 0.6% over this period.
Here, the main driver has been the market reappraising – yet again – the extent of the rate cuts likely to be forthcoming from the Fed. In a burst of over exuberance surrounding the Fed’s larger than normal 0.5% reduction in September, the market pencilled in US rates falling as far as 3% by next summer from 4.75-5.00% currently. Now it expects rates only to fall to 3.75% by then.
So why the change of heart? Mainly, this is due to the economic data of late which has generally come in stronger than expected and shown little sign of the major slowdown in growth needed to trigger such aggressive easing. But more recently, it also partly reflects Trump’s improving chances in the US elections on 5 November and the inflationary impact of his tariff-raising and tax-cutting plans.
Elsewhere, Japan hit the headlines this morning with the news that the ruling Liberal Democratic Party had in a surprise result lost its majority in the weekend’s election. This will usher in a period of instability and may reinforce the recent renewed weakness of the yen, which incidentally led to Japan being the worst performing market last week with a loss of 3.8% in sterling terms.
Lastly, the risk of a major escalation in the conflict between Israel and Iran has diminished following Israel’s contained response to Iran’s earlier missile attack. Oil prices have duly retreated with Brent crude back down to $72/bbl.
This coming week will be a big one for markets generally, not just for UK investors with the Budget on Wednesday. US payrolls will be a major focus of attention on Friday with only a small gain forecast, due to the hurricane and strikes, following last month’s bumper increase. But equally important for equities, five of the Magnificent Seven report results – Alphabet (Google) on Tuesday, Microsoft and Meta (Facebook) on Wednesday, and Apple and Amazon on Thursday.
Rupert Thompson – Chief Economist