Last week certainly did not lack for newsworthy events but at the end of the day, the market moves overall were distinctly pedestrian. Global equities ended the week down all of 0.2% in local currency and 0.4% in sterling terms while US Treasuries and UK gilts both saw gains of 0.5%.
It was very much a week of two halves for equities with gains in the first half reversed later on. And once again, tech stocks were the main source of the volatility, closing the week down 2.7%. The UK even managed a gain of 0.4%, benefiting more from its lack of tech than any burst of enthusiasm for the Budget.
The tech sector’s performance was in many ways a repeat of the previous week with an initial recovery from earlier losses derailed by results from one of the Magnificent Seven. Last week the culprit was Alphabet while the previous week it was Meta.
Alphabet incurred the market’s wrath for similar reasons as Meta, namely growing worries over the sizeable external financing now being required to fund their massive capital spending plans. The icing on the cake this time was that Google’s AI capabilities are eating into its existing search revenues. Alphabet’s market cap fell more than $500bn with the stock ending down 13%.
Microsoft also reported but rapid growth in its cloud revenues saved it from the market’s wrath. However, Amazon’s revenues disappointed a bit and weaker than expected numbers from the chip producer Intel led to its shares diving 30%, adding to the market’s nervousness.
The tech sector looks set to remain a source of significant volatility as the tension between the near-term strength of tech earnings and worries over their longer-term viability looks unlikely to be resolved any time soon. But markets are generally up a bit this morning following the US sell-off on Friday, suggesting the latest weakness is not of a different order to previous bouts of nerves.
For equity markets overall, the current strength of earnings should remain a major support and continue to limit the impact of any tech-related weakness. Indeed, with 60% of S&P 500 companies now reported, US earnings are on course to be up an outsized 30% on a year earlier.
This earnings strength comes on the back of the continued robust performance of the US economy which grew at a 3.4% annualised pace in the third quarter. While a good part of this strength is coming from AI-related investment, consumer spending has also somewhat surprisingly continued to power ahead despite the affordability problems facing a good part of the population.
Growth in Europe is significantly slower but it too has proved more resilient than feared. Eurozone GDP grew at an annualised 1.6% pace last quarter, shrugging off a small decline in French output – although some of the strength was down to an erratically large gain in Ireland.
The resilience of the global economy is a major reason why central banks feel able to raise rates to head off wider potential inflation pressures stemming from the surge in energy prices. As widely expected, the Federal Reserve, European Central Bank and the Bank of Japan all held off from tightening policy last week but all are forecast to hike rates again in December.
The question more is whether central banks will continue to tighten policy next year and market fears on this front have eased a bit from the peak paranoia of a few weeks ago. 10-year US Treasury yields are back down to 4.9% from a peak of 5.3% and UK gilt yields to 5.2% from 5.5%.
It would be nice to say the decline in gilt yields was down to a euphoric market reaction to last week’s Budget but the truth is the latter was more a case of doing no harm rather than doing much good. As had been anticipated, it contained no major policy moves even while containing a hundred and one minor initiatives.
A range of small spending measures were offset by some small tax hikes (including a lower than expected and temporary 3% increase in the tax surcharge on bank profits and higher taxes on property and savings income). Net, the measures are forecast to raise government borrowing this fiscal year by £8bn (0.2% of GDP) and £4bn the following year.
The reduction in the headroom against the fiscal rules to £15bn from £23bn was broadly in line with expectations. But here’s the rub. This headroom is only achieved by implausibly large cuts in public spending in two years’ time with the hard decisions on spending delayed until next year’s review. This, along with the more encouraging polling picture, is why there is mounting speculation, despite his claims to the contrary, that Andy Burnham could call an early election in the spring.
But in the meantime, we have to contend with tomorrow’s US mid-term elections. The Democrats are widely expected to gain control of the House of Representatives and possibly also the Senate. Still, Lula’s surprise win in the recent Brazilian Presidential election and Netanyahu’s stronger than expected performance in Israel’s parliamentary election, along with the tendency for Republican/Trump support to be under-recorded, argue against placing too much faith in the polls.
If the Democrats do win either the House or Senate, this will most likely lead to a period of gridlock, at least in terms of domestic policy, with major initiatives thwarted by bi-partisan differences and the Presidential veto (which Democrats won’t have a sufficient majority to overcome). Markets generally like gridlock and have usually performed a bit better than normal in the third year of a presidency with a gridlocked government.
However, there are two reasons not to read too much into this. The first is the macro backdrop is normally much more important than the political one. The second is that Trump would still have relative free rein on foreign policy and the fear is that Netanyahu and Trump, once the mid-terms are out of the way, may launch new attacks on Iran.
This coming week, the US mid-terms will clearly be the main focus. But we also have US payroll numbers on Friday and the UK MPC meeting on Thursday which looks almost certain to raise rates by 0.25% to 4.0%. Apple also reports later today.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
IBOSS Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Mattioli Woods Limited is registered in England and Wales at Companies House, Registered number 3140521.
Registered Office is: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.