Global Markets Update Monday, 14 November 2022

Global stocks surged, especially in the US, while bond yields and the US dollar declined after slower-than-expected US inflation data fueled speculation that the Federal Reserve may slow the pace of its interest rate tightening. There were also rumours that China was planning to ease its strict zero-COVID policy.

The collapse of FTX, one of the world’s largest crypto exchanges, prompted a broad sell-off in crypto assets.

UK

The FTSE 100 rallied 3.8% over the fortnight.

The Bank of England raised interest rates by 75 basis points (bps) to 3% and said it expected interest rates in the UK to peak at a lower level than markets had previously anticipated. UK interest rates are now expected to peak at just above 4.6%.

The UK economy contracted 0.2% over the third quarter, better than market forecasts of a 0.5% drop.

Ahead of the Autumn Statement, UK chancellor Jeremy Hunt said everyone would have to be prepared to pay higher taxes as he seeks solutions to the country’s £54 billion fiscal black hole.

US

The S&P 500 rose 2.4% over the two-week period, while the Nasdaq rose 2.1%. After retreating in the first week, US shares jumped sharply following the release of weaker-than-expected inflation data for October, with the S&P 500 jumping 5.9% between 7 November and 11 November, the strongest weekly performance since June, while the Nasdaq ended the second week almost 9% higher, its best performance in two years.

In the US mid-term elections, the expected red wave of Republican wins failed to materialise, with the Democrats retaining control of the Senate. Counting is still underway for the House of Representatives, but it looks as though the Republicans will regain control by a very slim margin.

A divided government is often seen as positive for US stocks, as gridlock between Congress and the White House reduces the likelihood of passing disruptive new regulations or tax increases.

Prior to the elections, Donald Trump said he would be making a “very big announcement” on November 15 – he is widely expected to announce he will run for president again in 2024, although a poor showing by the candidates he backed may push back such an announcement.

As widely expected, the US Federal Reserve raised rates by 75 basis points at its meeting in early November, its fourth rate hike of that size, taking rates to a range of 3.75%-4%. Fed chair Jay Powell warned that it was still “very premature” to think about pausing interest rate rises and that, while the US central bank may slow the pace of its tightening, recent data suggested that “the ultimate level of interest rates will be higher than expected”. However, with headline US CPI data for October easing, a growing cohort of Fed officials have subsequently thrown their support behind slowing the pace of future interest rate rises.

The US economy added 261,000 jobs in October, exceeding expectations of 200,000 new additions. The unemployment rate, however, rose more than expected to 3.7%.

US inflation eased to an annual rate of 7.7% in October, the smallest 12-month increase since January and a sharp drop from September’s rate of 8.2%. The core CPI reading rose 6.3% year on year, compared to September’s reading of 6.6%.

The University of Michigan index of US consumer sentiment fell to 54.7 in November, the lowest since July, from 59.9 in October.

Meta announced 11,000 job cuts, the largest retrenchment in its history, while Facebook, which has recently been bought by Elon Musk, said it planned to fire up to half of Twitter’s 7,500 strong workforce.

Europe

The FTSEurofirst 300 jumped 7.2% over the two-week period, with European equity markets posting their strongest weekly gains since March in the second week.

German industrial production rose 0.6% over the month of September, outstripping the expected 0.2% fall.

The European Commission predicted a sharp contraction in German output in the months ahead.

Japan

The Nikkei 225 rose 4.3% over the two weeks.

Pacific ex Japan

Chinese equities rose as unsubstantiated rumours that the country was seeking to end its strict zero-Covid policy boosted investor sentiment. While China’s National Health Commission rejected rumours that the country was preparing to ease its strict zero-Covid approach, Beijing lowered the quarantine period for individuals who came in close contact with Covid patients despite cases rising to a 6-month high.

Chinese exports slid 0.3% in October compared with the same period a year before, well below forecasts of a 4.3% expansion. Imports also shrank 0.7%, compared to expectations for 0.1%growth.

China’s factory gate prices fell 1.3% in October, the first year-on-year decline since December 2020.

China’s annual inflation dropped to a year-on-year rate of 2.1% October, down from 2.8% in the prior month This was the lowest figure since May.

Emerging Markets

In Mexico, shares jumped to a five-month high. The Bank of Mexico also hiked its benchmark policy rate by 75bps to 10%.

In Brazil, President-elect Luiz Inacio Lula da Silva unsettled investors when he said that he would give priority to social spending and that many expenditures classified as government spending should instead be classified as investments. Brazil’s central bank also hinted it may cut rates from June 2023. The annual inflation rate in Brazil eased to 6.47% in October, the lowest reading in 19 months.

Indian shares, as measured by the BSE Sensex Index, hit a record high.

Bonds

Bonds were volatile. Initially US bond yields rose, with the 10-year US Treasury yield rising back above 4% after the Fed’s hawkish comments, before better-than-expected inflation data caused yields to plunge back to 3.82%, a drop of 17 bps over the two weeks. The two-year Treasury yield closed at 4.32%, having risen as high as 4.71%, the highest level since mid-2007, following the Fed’s hawkish comments while the inversion between two- and 10-year Treasury yields rose to 59 bps, which is the highest degree of inversion since the early 1980s.

The yield on the 10-year German Bund rose 5 bps to 2.15%, while 10-year UK Gilt yields fell 12 bps to 3.35%. The Bank of England will start unwinding the emergency gilt-buying programme it embarked on in the wake of the Truss government’s ill-fated “mini” budget by the end of this month.

Commodities

Industrial metal prices soared on hopes that China may ease its strict zero-COVID policy. Copper breached $8,000 a tonne for the first time in two months.