IN BRIEF
- US economic releases following the end of the government shutdown increase the likelihood of rate cuts.
- Geo-political tensions in Europe and Asia subside after an uncertain start to the month.
- Markets rally into month end, the start of a Santa or relief rally?
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The month of November
It’s fair to say that after a strong year of returns, we were expecting some volatility to return to the system as the year draws to a close. Whilst November started negatively, rising expectations of interest rate cuts in the US and UK, combined with reduced geopolitical risks between Japan and China and Russia and Ukraine buoyed markets into month end, leading to a flat month overall.
The leading market was surprisingly the UK, with the FTSE 100 index ending the month up +0.4%. The main driver for this was a UK Budget that was less eventful than many had feared. The calming measure of delivering greater fiscal headroom (extra room in government finances to manage spending and debt) was also met with a further hike in the tax take, although much of this was backloaded to future years. From a bond market perspective, there were no shocks, leading to a fall in borrowing costs. Without significant stimulation to growth, this also increases the probability of the Bank of England cutting interest rates in December. It is worth noting the disparity between the UK 10-year government bond yield (the return investors get for lending to the UK government for 10 years) and that of its US counterpart, the US Treasury, remains wider than usual.
In the US, the main driver of sentiment was dominated by the results of one company, Nvidia. The leading supplier of computer chips across the world posted positive results, however the market became concerned about its lofty valuation. Encouragingly, a staggering 81% of US companies reporting beat their consensus earnings over the quarter.
This positive corporate reporting backdrop, combined with the end of a 43-day government shutdown, calmed the market concerns at the start of the month. However, the main support for the market came from several Federal Reserve speakers (the US central bank that sets interest rates) who promoted a greater likelihood of interest rate cuts in the December Federal Reserve meeting.
On the negative side, the MSCI Emerging Market Index (a benchmark tracking stocks in developing countries) fell -3.2%. Part of this was driven by weakness across Asia and China as technology valuations weighed on indices. This is seen in Taiwan, with Taiwan Semiconductor Manufacturing Company (TSMC) making up a large share of the market, whereas South Korean indices have Samsung and SK Hynix as the two biggest names. Concentrated markets, combined with a sell-off in AI driven names, will consequently weigh on these markets.
Over the past three months, Japan experienced a pullback (a decline in market prices) after Sanae Takaichi spoke of Taiwan’s independence from China. The backlash from China included a suggestion that Chinese citizens should not travel to Japan as it was dangerous. While these tensions were de-escalated by month end, it has not been positive for relations.
On the positive side, the Japanese Prime Minister announced the country’s biggest stimulus package since the Covid pandemic, totalling $273 billion (a stimulus package is government spending aimed at boosting economic activity). While this spending pledge is positive, it adds to inflation concerns and increases the probability of interest rate hikes. As a result, Japanese government bonds fell on this announcement.
The final comment on equities goes to Europe. European markets bounced back on the expectations that peace talks between the US and Russia could finally see an end to the conflict.
Across Fixed income markets, the probability of interest rate cuts in the US and UK meant the 10-year Government Bonds (Gilt and Treasury) both rallied towards the end of the month. However, similar to equities, the month end rally only gained what had been lost at the start of the month.
Gold once again rallied during this period of uncertainty, starting the month from $4035 to $4,208 oz, a gain of 7.2% (gold often rises when investors seek safety during economic uncertainty). Much of this is based on ongoing uncertainty for the progress of US economic data. Jobs data during the month pointed to hiring slowing while unemployment started to creep up. The rise in unemployment was a fate that also affected the UK during the month.
What’s to come? December will be focused on the central bank meetings in the US, Europe and UK, where expectations are for a US rate cut, an outside chance of one from the Bank of England, and a Hold from the European Central Bank (ECB). It is also likely that we now see a rate increase from the Bank of Japan, following higher inflation readings and the announcement of fiscal stimulus.
As the year draws to a close, so too does corporate reporting, with a two-month window before this restarts again in the US. As such, investors will only have the official economic data to help guide their decisions. It is hoped that this data does not present any surprises over the remaining weeks of the year. If that is the case, it should only be good for equities and fixed income. Let us hope that geopolitical risk does not get in its way!
Key positioning for the portfolios
- The last changes to portfolios were on the 14th November.
- The committee aligned equity and fixed income allocations to target weights focusing on positive earnings growth, interest rate cuts and government spending.
- Risk management remained the highest priority, selling holdings that had performed well.
- The Emerging markets remains an area of positivity based on supportive government policy, specifically across Asia.
Slowing hiring market in the US and rising unemployment
- Chris Robinson
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