Despite all the noise, market moves were quite limited last week.
Global equities edged up 0.8% in sterling terms, reversing their drop the previous week and leaving them still hovering around their high in early August. US equities led the gains with a 1.3% rise while the UK was up 0.8% and Europe trailed behind with a decline of 0.9%.
As for bond yields, they paused for breath after the steep rise seen in the last few months. 10-year US Treasury yields edged down to 5.25% while 10-year UK gilt yields slipped to 5.4% from their recent high of 5.5%.
The wars in the Middle East and Ukraine provided plenty of headlines but little in the end seemingly to move the needle much in terms of energy prices. The Brent crude oil price ended the week little change at $104 per barrel while wholesale diesel prices slipped back a little.
Most eye catching was the deal agreed by Trump and Putin for the US to suspend sanctions on Russian diesel exports given only a few weeks ago Trump had announced fresh American sanctions on countries importing Russian energy. But the surge in US diesel prices has become a flashpoint ahead of the US mid-term elections on 3 November, prompting the policy flip-flop.
The diesel sales to the US promised by Russia over coming months should reduce diesel prices only a little, both because the extra supply is not that large in the global context and there are doubts given the damage to Russian refineries that Russia can export as much as it claims.
Trump also announced an energy ceasefire between Ukraine and Russia, shortly after calling for a new President in Ukraine after Zelensky’s withering comments on the Russia-US diesel deal. The only problem with the ceasefire was that this announcement seemed to catch at least Ukraine by surprise and was followed by further Russian attacks on Ukrainian energy facilities.
Finally, we had the attacks by the Houthis on Saudi Arabia’s airport, their most brazen strikes so far – threatening a further escalation of hostilities in the region. All in all, the conflicts in the Middle East and Ukraine continue to look as intractable as ever.
For markets, the prospects for interest rates remain very much centre stage and the latest news from the US Fed seemed to confirm that US rates are headed higher but the next hike will occur in December rather at their next meeting late this month – barring a nasty surprise in this coming week’s inflation numbers.
The minutes from the last Fed meeting showed almost all Fed members agreeing that risks to inflation were tilted to the upside and downside risks to the labour market had diminished. Whereas Fed Chair Warsh is determined to cut back on the amount of forward guidance, others seem to have other ideas with several key Fed members outlining over the last week or two their views in graphic detail and pointing to no hike this month.
Meanwhile, US consumer confidence fell back further in October, close to the record low in the spring. The pessimism, however, is mostly down to affordability concerns and concentrated in lower income households and so far at least much more of a problem for Trump in the mid-terms than it is for the economy. Consumer spending has been holding up surprisingly well, buoyed in part by wealthier households who are enjoying the gains in the stock market.
The resilience of global equities in the face of the sharp rise in bond yields has been down in large part to very strong corporate earnings growth which has allowed equities to weather a marked decline in valuations without a fall in prices.
This surge in earnings has been driven – at least in the US and emerging markets – very much by AI-related gains in the tech sector. Even so, the long-term sustainability of this boom remains a key question overhanging markets and is causing a few jitters in some areas even while the so-called hyperscalers (Amazon, Microsoft, Alphabet et al) have swung back into favour and seen a new burst of outperformance.
Friday’s news that the revenues of OpenAI were rising at a considerably slower rate than previously indicated only reinforces the uncertainty over whether AI will ever justify the vast sums currently being spent on building data centres. But for the moment at least the AI-related earnings bonanza continues, as should be evident in the forthcoming third quarter US earnings season.
This kicks off on Tuesday with the big US banks. US earnings look set to be up an underlying 30% or so on a year earlier for the second quarter running with the stellar performance led by the tech and energy sectors.
Politics may not be the big issue for markets overall but at a country level, it is certainly having an impact. Most notably in Brazil, following the victory in the first round of the Presidential elections of the right-wing candidate Bolsonaro over the incumbent left-wing Lula, Brazilian equities gained close to 15% last week.
Rather closer to home, the beleaguered socialist prime minister Sánchez called a snap election in Spain on 29 November which could well see a right-wing coalition gain power. The market’s eyes, however, are much more focused on France at the moment – not so much because of the student protests but because of the worrying state of the public finances which has meant France has been at the forefront of the global rise in bond yields.
A French budget proposal to cut the deficit is currently up for approval but looks likely to meet the same fate as most of its predecessors. Marine Le Pen could well be elected President in the elections next April and this week promised large cuts in public spending and a cap on future borrowing. But promises are easy and their implementation will be far harder.
Here in the UK, with little more than two weeks to go until the Budget, the Treasury has been doing a rather better job this year than in the last two years quelling endless tedious and fruitless speculation about the contents of the forthcoming Budget.
Instead, we have just been left to ponder competing estimates of quite how much of the Chancellor’s headroom in meeting the fiscal rules has been eaten away by the surge in energy prices and rise in gilt yields. But with numerous factors at play here, this game is almost as fruitless as guessing the contents of the Budget or indeed whether Burnham will go for an early election as indicated by some of his actions despite his claims to the contrary.
This coming week, the US will be centre stage with the earnings season kicking off on Tuesday and September inflation data out on Wednesday. For UK investors at least, the August GDP numbers will also be of interest.
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