UK assets had a good week, with a further reversal of the sell-off caused by the mini-budget. The pound rose 3.8% against the dollar and is now back up to $1.15, some 3% higher than the day before all hell let loose and 10% up on its low.
The turnaround in gilts has been just as dramatic. 10-year yields fell 0.5% last week and are back down to 3.5%, their level just prior to the mini-budget and a full 1% below their recent high. Interest rate expectations have also retreated further with the market now looking for a peak of a bit below 5%, rather than the 6% expected a few weeks ago. The BOE meeting on Thursday should see rates raised by 0.75% to 3% and the market will be looking for confirmation that its new outlook is in the right ballpark.
As for UK equities, they gained 1.6% over the week, outperforming other markets. UK mid-cap, which has had a torrid time of late, bounced as much as 5%. Even so, UK stocks still remain a little below their levels prior to the mini-budget.
The news that Sunak was to be the new PM and Hunt would remain Chancellor bolstered confidence in the return to economic orthodoxy. The announcement that the fiscal statement, which will be critical and will set out the government’s medium term fiscal plans, would be delayed until 17 November was greeted with no more than a shrug.
For markets more generally, the US earnings season was a major focus with the big tech beasts all reporting. Amazon, Alphabet (Google), Microsoft and most particularly Meta (Facebook), which fell as much as 25% over the week, all disappointed. In the case of Meta, competition from TikTok and Zuckerburg’s costly obsession with the metaverse were principally to blame.
But for the others, it was a reminder that the tech behemoths are not immune to the slowdown in the economy. That said, Apple was the one FAANG to buck the disappointing trend. Despite the FAANGs ending the week down some 4%, US equities overall continued their recent rebound and rose 4%. Even though the FAANGs may have disappointed, the market’s worst fears over earnings more generally have not been realised. S&P 500 earnings are forecast to be up 3% on a year earlier, down only slightly from expectations at the start of reporting.
The market rebound has also been bound up with the US Fed. While it looks likely to raise rates a further 0.75% to 3.75-4% on Wednesday, the hope is that it will indicate future increases will be smaller. This belief was left intact by last week’s data which provided few surprises. Headline US GDP growth recovered in the third quarter to an annualised 2.6% from -0.6% in the previous quarter, but the underlying trend remained very sluggish. Meanwhile, core inflation on the Fed’s favoured measure edged up to 5.1% from 4.9% in September.
In the Eurozone, the ECB led the way for this coming week’s rate hikes in the US and UK with another 0.75% rise to 1.5%. This was anticipated but the markets took heart from comments suggesting that while rates would increase further, they would not be raised as far as previously anticipated. However, today’s numbers showing inflation rising further than expected to a new high of 10.7% in October, highlight the pressure on the ECB to continue tightening policy.
Finally, there is China which continues to buck the global economic and market trend. Even though its economy is slowly picking up speed whereas activity in the West is turning down, Chinese equities have recently been falling rather than rising like Western markets. Gloom over the state of affairs in China is now looking overdone, just as the revival in optimism in Western markets is also beginning to look a bit overblown.
All this left global equities in local currency terms up 2.8% on the week and 6.2% from their end-September low. In sterling terms, the bounce in the pound meant equities were down 0.5% on the week but this still left them up also around 6% on their low which was back in mid-June.
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