Global Markets to 05 November 2018
- Global equity markets experience a mixed week, but generally the mood seems less frenzied.
- US technology stocks continue to be in focus, with Apple weighing heavily on the sector.
- Signs of a trade agreement between the US and China help sentiment on the emerging markets.
- Further positive US economic data sees US Treasury yields react to the probability of further interest rate hikes.
- The UK budget is a rather subdued affair – as expected, given the possibility of a Brexit announcement later this month.
- We still consider equities to be a better investment than bonds, but it’s become a far more selective market.
Global Market Summary
After a dreadful October during which many major technology companies fell into bear-market territory, the sector began to rally back, giving the wider market some relief. Nevertheless, the spectre of October hit risk assets hard: US$5.5 trillion were wiped off share values, US$2.1 trillion of which from the S&P 500 index.
However, hopes of a breakthrough in the trade dispute between the US and China gave the emerging markets a much-needed lift with some positive sentiment, but it’s worth considering that President Trump might simply wish to be seen as a peacemaker in the run-up to the mid-term elections.
Further positive news came from the latest US non-farm payrolls report: more jobs have been created and hourly earnings have increased by 0.2% month-on-month, pushing the annual growth rate up to 3.1% and unemployment down to 3.7% – the lowest since December 1969.
The Federal Reserve Bank is clearly keeping an eye on these numbers, along with any rises in inflation, and a further 0.25 basis point rate hike in December is now all but certain. Further interest rate hikes are likely in the New Year, but the details remain to be seen. As one might have expected, there was a reaction on the Treasury bond market, with the 10-year Treasury reaching its highest point in almost two weeks.
In the UK, the Bank of England’s monetary policy committee left interest rates unchanged at 0.75%, citing the threat of further trade barriers and continuing uncertainties over Brexit. But the Bank did suggest it would adopt a more hawkish stance in the event of a soft Brexit. This would probably bolster the pound, and rumours that an announcement will be made on 21 November are likely to keep sterling volatile until then.
The Chancellor of the Exchequer presented his last budget before Brexit. As expected, it contained little, other than a modest give-away on income tax. But it was delivered in a slightly more light-hearted way by a Chancellor who tends to be rather subdued.
Elsewhere, Eurozone GDP slowed quite sharply in the third quarter, and Angela Merkel’s intention to stand down as chair of the CDU party that she has led for the past 18 years will herald another major change in Germany, as well as in Europe more widely. In China, meanwhile, further stimulus measures are being planned following yet more disappointing news for the world’s second-largest economy.
Last week’s equity markets were rather nuanced. There was both good and bad news regarding corporate profits, not helped by some downbeat future sales guidance statements from larger gorilla businesses, such as Apple. On the bond markets, US Treasuries reacted nervously to the likelihood of future interest rate hikes from the Federal Reserve Bank, while on the commodity markets, the price of crude oil continued to fall as numerous factors influenced the recent sell-off.
Equity markets will hopefully recover some of their recent losses over the remaining two months of the year as some of the large US corporates start implementing their buyback schemes after the closed period. The recent correction on the equity markets has given investors an opportunity to buy some quality business at significantly cheaper levels. But confidence took a major hit in October, so it remains to be seen whether or not we will return to bull-market territory any time soon.
We still consider equities to be a better investment than bonds, but it’s become a far more selective market. That is understandable after such a long bull market and given that central banks are shifting from quantitative easing to quantitative tightening – always a trying period for markets as they digest change.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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