Global stocks rallied on hopes that the US Federal Reserve and European Central Bank might begin raising rates at a slower pace in forthcoming months. Global bond yields also eased back.

UK

The FTSE 100 rallied 1.1% over the week. The sharp fall in sterling has added almost £6bn to UK company dividends.

Rishi Sunak became UK prime minister after being the only candidate to secure sufficient votes. UK bonds rallied and the British pound stabilised on the news. Jeremy Hunt, who retained his job as Chancellor of the Exchequer, has pushed back the government’s tax and spending plan until 17 November – it had originally been due to be published on 31 October – as he seeks the best way to plug a £50 billion hole in the UK’s finances.

The S&P Global/CIPS UK Composite PMI fell to 47.2 in October of 2022 from 49.1 in September, well below expectations of 48.1 and marking the steepest decline in 21 months. Services activity fell to 47.5 in October of 2022 after stagnating in the previous month, well below expectations of 49 and marking the first contraction in the British service sector activity since February of 2021. Manufacturing activity fell to 45.8 in October 2022 from 48.4 in the previous month, well below market expectations of 48 and the lowest reading since May 2020, marked by a sharp fall in production amid persistent supply bottlenecks and lower demand.

US

The S&P 500 jumped 4.2% over the week, while the tech-heavy Nasdaq gained 2.4%. Tech shares sold off sharply after Alphabet reported a severe slowdown in its search ads business, Microsoft warned that revenue growth from cloud computing had fallen, Meta reported a decline in third-quarter revenue and Amazon issued a weak sales forecast for the crucial holiday season. Apple bucked the trend, reporting revenue and earnings above analysts’ expectations, while energy giants ExxonMobil and Chevron recorded surging quarterly profits.

US third-quarter GDP increased by 2.6% on an annualised basis, a sharp reversal from the 0.6% and 1.6% drops recorded in the second and first quarters, respectively.

The S&P Global US Composite PMI declined to 47.3 in October, down from 49.5 in the previous month, pointing to the second-fastest pace of contraction in the sector since 2009 with the exception of the initial pandemic period. The service PMI dropped to 46.6 in October from 49.3 in the previous month and the second-largest output decline in almost two-and-a-half years, as rising prices and higher borrowing costs hit demand. The manufacturing PMI fell to 49.9 in October from 52 in September, well below market forecasts of 51 and marking the sector’s first contraction since June 2020.

The strength of the US dollar is predicted to wipe as much as $10 billion from US corporate earnings in the third quarter, piling further pressures on companies already facing rampant price rises.

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The Bank of Canada raised interest rates by a smaller-than-expected 50bps to 3.75%, its highest level since 2008. It is the sixth rate increase this year and the central bank governor indicated that interest rates are nearing the end of the hiking cycle.

Europe

The FTSEurofirst 300 rallied 3.4% over the week.

The European Central Bank (ECB) raised borrowing costs by 75bps to 1.5%, the highest level since January 2009. ECB President Christine Lagarde said further increases

were ‘in the pipeline’ because inflation remained “far too high”. However, the markets took the ECB’s changed guidance of it “expects to raise rates further” (previously it was the rates would be raised at the next several meetings) to be dovish.

The S&P Global Eurozone Composite PMI dropped further to 47.1 in October, the lowest since November 2020 from 48.1 in the previous month. The Services PMI declined to 48.2 in October from 48.8 in the previous month and well below, indicating falling business activity levels for three consecutive months and at a rate that was the fastest since February 2021. The Manufacturing PMI fell to 46.6 in October 2022 from 48.4 in September, missing estimates of 47.8 to mark the fourth and sharpest consecutive contraction the bloc’s factory activity.

German GDP expanded 0.3% in the third quarter, helped by private consumption and defying analysts’ expectations of negative growth. The S&P Global Flash Germany Manufacturing PMI fell to 45.7 in October 2022 from 47.8 in September, pointing to a fifth consecutive month of declining factory activity and the worst since June 2020.

Deutsche Bank, Germany’s largest lender, reported its highest third-quarter pre-tax profit since before the financial crisis, thanks in part to rising interest rates.

Japan

The Nikkei 225 rose 0.9% over the week.

The Japanese government unveiled the equivalent of US$200bn in fresh spending to help ease the impact of higher commodity prices and the drop in the yen. The stimulus package includes subsidised electricity and gas bills for households.

Pacific ex Japan

Chinese equities dropped sharply after President Xi Jinping appointed a senior leadership team that was filled with loyalists focused more on national security and strict zero-COVID policies than on economic growth or supporting markets. Hong Kong stocks also slumped with the Hang Seng Index suffering its biggest one-day drop since November 2008.

China’s economy expanded 3.9% year-on-year in the third quarter. While that was better than analysts’ forecasts, it was well below Beijing’s annual target of 5.5%. The data release had been delayed, most likely to avoid a clash with the Communist Party’s Congress. Other delayed data included existing house prices, which fell by the highest month-on-month rate since 2014, and exports, which grew 5.7% in September compared with 7% in August.

Bonds

US government bonds rallied as investors continued to scale back expectations for how far the Federal Reserve will raise interest rates. The yield on the 10-year US Treasury bond dropped 23 basis points over the week to close at 3.99%.

The yield on the 10-year German Bund fell 31 bps to 2.10%, while 10-year UK Gilt yields closed at 3.47%, a drop of 58 bps over the week as they returned to levels seen prior to Kwasi Kwarteng’s mini budget.

Currencies

China’s renminbi hit its weakest level against the US dollar since 2007.

Commodities

European natural gas prices dropped below €100 per megawatt hour for the first time since Russia slashed supplies this summer, with warm weather and close-to-full gas storage easing concerns over winter shortages.

Russia pulled out of a deal that allowed the movement of grain out of Ukraine’s southern ports following an attack on ships in the port of Sevastopol in Crimea.