Bonds sold off as Donald Trump appeared to edge ahead in the seven swing states that will likely decide the result of the US presidential election. Reassuring US economic data also caused investors to expect the Federal Reserve to adopt a more cautious path of easing.
UK
The FTSE 100 dropped 2.2% over the two weeks.
Chancellor Rachel Reeves’ first budget unveiled £40bn of tax rises, the largest in a generation, to plug a £22bn fiscal black hole and fund increases in public services, particularly the NHS and schools. Financial markets were unsettled by a large step up in borrowing over the next few years.
The flash S&P Global UK composite PMI fell to 51.7 in October, down from 52.6 in September, marking an 11-month low.
Andrew Bailey, the Bank of England governor, said inflation is fading more rapidly but the UK needs to see a continued retreat in services price growth from current levels.
US
The S&P 500 fell 1.8% over the two weeks while the Nasdaq slid 0.9%.
The US economy grew by an annualised rate of 2.8% in the third quarter, a slight slowdown compared with the previous period, driven by strong consumer spending.
US non-farm payrolls rose just 12,000 in October, the weakest monthly gain since December 2020. However, the data was distorted by strikes at Boeing and two significant hurricanes that hit southern US states. Data for September was revised up by almost 100,000, but August pay-rolls growth was revised down by 81,000 to 78,000 jobs. The unemployment rate remained unchanged at 4.1%.
The ISM Manufacturing PMI unexpectedly fell to 46.5, the weakest reading since July 2023.
The flash estimate of the S&P Global US composite PMI inched higher to 54.3 in October, with services activity remaining robust while the decline in manufacturing improved from September’s 15-month low.
Eli Lilly delivered lower sales and earnings per share than expected in the third quarter, blaming high manufacturing costs and fluctuating inventory levels as it races to keep up with soaring demand for its blockbuster anti-obesity treatments.
Microsoft shocked markets when quarterly earnings were weaker than forecast, although Meta, Alphabet, Apple and Intel’s earnings were all supportive. Tesla also reported better-than-expected results.
Europe
The Eurofirst 300 declined 2.5% over the two weeks.
French companies are set to face significantly higher tax bills under Michel Barnier’s proposed belt-tightening budget.
Eurozone GDP grew 0.4% in the third quarter. Germany’s economy avoided a recession, eking out 0.2% growth in the three months to September, after a downwardly revised 0.3% contraction in the second quarter.
Spain’s economy was the strongest in the eurozone, with GDP rising 3.4 per% in the third quarter from a year earlier, leaving the country on course to be the world’s fastest growing large advanced economy this year. The country has been hit by devasting floods in the last week.
Eurozone inflation accelerated to 2% in October, up from 1.7% in September. This was mainly due to base effects, as last year’s sharp declines in energy prices are no longer factored into annual rates.
The flash HCOB euro-zone composite PMI rose to 49.7 in October, marginally above September’s seven-month low of 49.6. Growth in the services sector slowed slightly but remained positive, while the downturn in manufacturing softened.
Japan
The Nikkei 225 slumped 2.4% over the two weeks.
The ruling Liberal Democratic Party coalition lost its parliamentary majority for the first time in 15 years, surprising markets and raising expectations that the government would increase fiscal spending.
The Bank of Japan maintained its key short-term interest rate at around 0.25% during its October meeting, keeping it at the highest level since 2008. Governor Kazuo Ueda has highlighted concerns about the increasingly uncertain global economic outlook, stating that the central bank has time to analyse risk factors after implementing rate hikes in March and July.
The flash au Jibun Bank Japan composite PMI dropped to 49.4 in October, the lowest reading since November 2022 and the first contraction in private sector activity since June, as the downturn in the manufacturing sector deepened and services activity shrank for the first time in four months.
Pacific Basin ex Japan
China’s NBS Composite PMI rose to 50.8 in October, the highest level since May. Manufacturing activity rose to 50.1, marking the first expansion in factory activity since April, while the Non-Manufacturing PMI inched higher to 50.2.
The Caixin China General Manufacturing PMI rose to 50.3 in October from 49.3 in the prior month.
The People’s Bank of China cut the one- and five-year loan prime rates by 25bps each, the largest cuts since the loan rates were introduced in 2019.
Emerging Markets
The MSCI EM Index fell 1.4% over the two weeks in USD terms.
Bonds
The yield on the 10-year US Treasury bond rose 27bps over the two weeks to a four-month high of 2.41%. The yield on the two-year note increased 20 bps to 4.17%.
The yield on the 10-year German Bund rose 23bps to 2.41%. 10-year UK gilt yields rose 38bps to a one-year high of 4.5% after the budget.
Currencies
The US dollar enjoyed its best monthly gain in more than two years in October, propelled by bets that strong economic data and a victory for Donald Trump may lead to interest rates staying higher for longer.
