Global equities retreated last week with markets down around 1.5% in both local currency and sterling terms. The decline was led by the tech sector which was off close to 4%. The UK, as befitting its defensive nature, held up well and was down only 0.4%. Bonds, currencies and indeed gold – which has bottomed out at around $4000/oz – also had a quiet week.
This morning, however, markets are up 1% or so, buoyed by news over the weekend that the US Senate has endorsed a plan to end the shutdown of the federal government. This has now lasted 40 days and is the longest ever. The deal still needs to be signed and sealed but would secure government funding until the end of January.
Last week’s setback in tech was not triggered by any new data. Rather, if anything, it was sparked by news that Michael Burry – the famed short seller who shorted the US housing market before the 2008 financial crisis and was inspiration for the film The Big Short – had sizeable short positions on Nvidia and another AI darling Palantir.
The retreat led to seemingly scary headlines of ‘$1.2 trillion AI sell-off’. But in truth a correction was overdue following the sharp rise of late. This drop merely unwinds the gains of the last month and still leaves the sector up 10% over the last three months. $1 trillion is anyway no more than Elon Musk could in theory earn over the next ten years – this extraordinary pay package has now been approved by Tesla’s shareholders.
As we mentioned last week, our stance is to retain a significant allocation to the tech sector and the Magnificent Seven but keep it significantly smaller than the outsized exposure underlying a passive global equity allocation.
While Michael Burry has done his best to unnerve the market, the third quarter US reporting season has done a good job at reassuring investors. With 90% of the S&P 500 now reported, earnings are as ever easily beating expectations and on course to be up 17% on a year earlier. This is similar to the growth seen in both the last two quarters and is once again being led by the tech sector.
On the macro front, recent releases in the US have been few and far between because of the government shutdown. However, Friday saw news that consumer confidence retreated further in October to a three-year low. This echoes other signs that while the wealthy are doing very nicely and propping up consumer spending, the poor are struggling. Even so, with tax cuts scheduled for the new year, spending overall should continue to hold up.
Here in the UK, in her unusual pre-Budget speech, Rachel Reeves intensified speculation that she will break Labour’s manifesto pledge and raise income tax rates on 26 November – albeit potentially offset by a cut in employee national insurance contributions.
Although this would be the first rise in income tax rates for 50 years, the freezing of tax bands had led to a major stealth increase in income tax payments in recent years. Rumours of other tax increases continue to abound with the latest favourite being a cap on the tax benefits of employee pension contributions.
The Bank of England, meanwhile, as expected left interest rates unchanged on Thursday. The vote was close, with four voting for a cut and five for no change, and a reduction in December looks very likely – assuming no big surprises from the Budget and the inflation data in the meantime.
This coming week, UK labour market and GDP numbers are out on Tuesday and Thursday. US release dates will continue to depend on when the US government reopens.
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