Equity markets were in ebullient mood last week with global equities gaining 1.9% and 2.5% in local currency and sterling terms respectively. China and the UK fared best with rises of 4.4% and 3.2% in sterling terms while Europe lagged with a gain of 1.7%.
These latest gains mean global equities have now more than recouped their wobble earlier in the month and bring their year-to-date local currency and sterling returns up to an impressive 18.6% and 14.1%. Asian markets were also up 1-2% today on the positive US-China trade news over the weekend although European markets have opened only slightly higher
The global macro news was mildly positive but not obviously warranting a further ratchet higher in markets. US data releases remain limited as a result of the continuing government shutdown, but we did have the September inflation numbers out on Friday which were a bit better than expected. Headline and core inflation both came in at 3.0%, showing the boost from tariffs as yet remains quite limited. These numbers cemented expectations of a 0.25% reduction in US rates next Wednesday.
The latest business confidence numbers, meanwhile, showed sentiment improving in the US, Europe and UK in October, providing further evidence that the global economic recovery remains on track.
Tariffs reared their head again with Trump suspending trade negotiations with Canada and launching a new investigation into Chinese trade practices. But the real news occurred this weekend with China and the US agreeing the framework for a trade deal which looks likely to be signed off by Presidents Trump and Xi at their meeting on Thursday. Less positive but much less significant, the US raised tariffs on Canada by 10%.
The latest developments suggest the trade truce between the US and China, which would have expired on 10 November, will now be extended for at least a few months. Tensions will undoubtedly remain – given the two countries remain locked in a geo-political struggle – with an occasional flare up inevitable. But the potential for a big bust-up now looks likes it has been kicked into the long grass.
Here in the UK, the September inflation numbers were significantly better than expected – or to be more accurate not as bad as anticipated. Rather than rising to 4.0%, headline inflation was unchanged at 3.8%. As for the core rate, it edged down to 3.5%. Meanwhile, retail sales posted an unexpected gain in September and consumer confidence was up a tad in October, suggesting the gloom over the impending tax rises is having less effect than feared.
The inflation surprise means the next UK rate cut may now occur as soon as December rather than February. It also led to a decline in gilt yields, with the 10-year yield now back down to 4.5% from a high of 4.8% earlier in the month. UK gilts returned a strong 1.0% for the second week running. This drop in yields may in turn reduce the debt servicing costs forecast in the Budget and reduce the Chancellor’s black hole a little.
The gold price was centre stage last week but not for the reasons of late. Instead, it was because gold fell as much as 6% on Tuesday. With gold surging 30% since the summer, helped by private investors piling into the golden bandwagon, a correction had been looking overdue. None of the fundamental support behind the gold price has gone away – namely heavy central bank buying amidst numerous concerns over US policy along with the general expectation of a marked decline in US rates and a further fall in the dollar. We plan to retain our gold-related holdings.
The Brent oil price, by contrast, was up 7.7% last week. This followed the news that the US was imposing sanctions on Russian oil companies Rosneft and Lukoil. This may lead to China and India, who have been the major buyers of Russian oil, scaling back their purchases.
This coming week, central banks will be a major focus with Fed, ECB and BOJ meetings on Wednesday, Thursday and Friday. Only the Fed, however, is expected to make any change in rates. There is also the Xi/Trump meeting on Thursday.
Almost as important will be the third quarter results of five of the Magnificent Seven companies. Alphabet (Google), Meta and Microsoft report on Wednesday and Amazon and Apple on Thursday. The Magnificent Seven surprised strongly on the upside last quarter with earnings up as much as 27% on a year earlier. The big question is whether they can pull this trick off again – the consensus is looking for 15% earnings growth this quarter.
Finally, third quarter Eurozone GDP numbers are out on Thursday. US releases will continue to be few and far between as long as the government shutdown continues.
Rupert Thompson – Chief Economist