Last week was action packed with trade deals, the Fed meeting and the Magnificent Seven all competing for the market’s attention.
After all the excitement, global equities ended the week up a moderate 0.6% in local currency terms. The rise was a rather larger 1.7% in sterling terms as the pound retreated against a stronger dollar to $1.31.
Japan, Emerging markets and the US led the way with gains of 2.4%, 2.1% and 1.8% respectively in sterling terms while the UK gained 0.5% and Europe slipped 0.3%. Within emerging markets, Korea and Taiwan were up as much as 6% and 4% on the back of strong gains in their tech giants Samsung and TSMC, more than making up for a flat performance from China.
Bonds had a mixed week. US Treasuries posted a small negative return while UK gilts were up slightly. As for gold, it continued its recent fall from grace, falling 3.5% and retreating below $4000/oz.
The most important news was that China and the US once again stepped back from the brink, agreeing a one-year trade deal. Basically, China agreed to postpone controls on rare earth exports while the US stepped back from imposing increased restrictions on chip exports.
This was welcome if not wholly unexpected news for the markets. Tensions will undoubtedly continue – indeed, the average US tariff on Chinese imports will remain as high as 45% – but the risk of a big bust-up has been pushed out. Less important but still encouraging, the US and Korea also agreed a trade deal.
Meanwhile, just as everyone expected, the US Fed reduced rates by 0.25% to 3.75-4.0%. The surprise came more in Chair Powell’s comment that another rate cut in December was far from a foregone conclusion. Investors duly scaled back their hopes for future cuts although still see rates falling to 3-3.25% by the end of next year.
The Fed also announced that it will be ending in December the programme of quantitative tightening seen over the last three years. This has involved the Fed running down a good part of its massive holdings of US Treasuries and mortgage-backed securities which were built up through its quantitative easing during the pandemic.
We also had meetings of the European Central Bank and the Bank of Japan. Both left rates unchanged as expected. The ECB is comfortable with rates where they are, now they’re back down to a neutral level of 2%. As for the BOJ, while it was equivocal on the need for further rises, rates most likely will remain on a gradual upward trend.
Last but far from least, we had the results from five of the Magnificent Seven which in all cases once again beat expectations. However, the focus was more on their AI-related capital spending plans than their earnings, with markets looking for reassurance on the future payback on their massive and still growing investment in data centres.
Meta (Facebook) failed on this front and saw its share price fall 12% over the week as a result. Microsoft also fell 1% whereas Apple, Amazon, and Alphabet ended up 3%, 8% and 9% respectively. Nvidia, which doesn’t report until 19 November, also managed a 9% gain, buoyed by news of record orders for its chips. This pushed its market cap up to $5 trillion – the first for any company. Microsoft and Apple had to be satisfied with their market caps reaching a mere $4 trillion.
In short, these results did little to advance the debate about whether or not we are in an AI-bubble and these massive AI-related investments will pay off. With some of the best brains of the planet divided on these matters, we feel it best to retain a prudent and relatively agnostic approach. We have a significant exposure to both the US and the Magnificent Seven but it is markedly smaller than the outsized and risky 63% and 21% allocations respectively contained in a passive global equity allocation.
Moving on to the rather more immediate question of the UK Budget, the rumour mill is in over-drive. The recent refusal by Starmer and Reeves to confirm their pre-election pledge not to increase the three big taxes has fuelled speculation that income tax rates could be raised. Higher bands of council tax are also now the current favourite for implementing the long-feared tax-grab on expensive homes.
The size of the fiscal shortfall needing to be filled is also the subject of intense speculation. And the latest rumour is that the OBR has reduced its long-term productivity forecasts by more than anticipated, possibly adding £20bn or so to the shortfall. However, there are numerous moving parts at work here and the black hole still looks likely to be of the order of £20-30bn.
This coming week, we have October US business confidence numbers out but other US releases will remain in short supply due to the ongoing government shutdown. In the UK, the BOE meets on Thursday and a rate cut looks possible but not probable.
Rupert Thompson – Chief Economist