Markets Update

04-11-2024

Weekly Markets Review

Summary

  • Reduced expectations for rate cuts drove bond yields higher; the US 10-year Treasury yield increased to 4.38% and the UK 10-year gilt yield rose to 4.45%
  • The Labour Party presented its first budget in 14 years, creating some volatility in UK markets as investors assessed the impact of fiscal changes
  • US economic data was mixed, reflecting a deceleration in job growth alongside continued GDP growth
  • Most global equity markets declined, with the notable exception of Japan
  • The US presidential election remains too close to call.

The week ahead

  • The race between Vice President Kamala Harris and former president Donald Trump is highly competitive, with polls showing a near tie for the election on Tuesday 5 November; swing states like Pennsylvania, North Carolina, Georgia, and Arizona will be key battlegrounds, making the outcome unpredictable
  • The market anticipates a 25 bps (basis point) rate cut at the Federal Reserve (Fed) meeting on Thursday; investors will watch closely for the Fed’s guidance on future policy, as expectations for additional cuts have softened
  • The Bank of England (BoE) is also expected to announce a 25 bps rate cut when it meets on Thursday, with recent UK fiscal changes and inflation expectations likely influencing its decision.

The week ahead:

Tuesday: US election

Our thoughts: The US presidential race is extremely close, with polls showing Harris slightly ahead nationally but Trump leading in some swing states like North Carolina, Georgia, Arizona, and Nevada. Harris leads narrowly in Michigan and Wisconsin, while Pennsylvania remains a toss-up. This election’s outcome may hinge on last-minute voter shifts in these battleground states, making it highly unpredictable.

Thursday: Federal Reserve Meeting

Our thoughts: The Fed is expected to cut interest rates by 25 bps to 4.75%. Markets will be attentive to the Fed’s statement for indications of future policy direction as expectations for further rate cuts have moderated recently.

Thursday: Bank of England Meeting

Our thoughts: Similarly, the BoE is anticipated to reduce rates by 25 bps to 4.75%.

Markets last week

UK

Following the Labour government’s budget announcement, UK markets experienced noticeable shifts across bonds, equities, and currency. The UK 10-year gilt yield rose significantly, reflecting investor concerns over increased government borrowing and potential inflationary pressures. This has led markets to reconsider the likelihood of future rate cuts by the BoE, effectively reducing expectations for two rate cuts over the next year.

In equity markets, both the FTSE 100 and FTSE 250 ended the week lower. Investors showed caution, particularly in the FTSE 250, as concerns grew about the long-term impact of higher government debt on growth and inflation. The British pound initially depreciated amid fears of increased inflation due to higher government spending and borrowing. However, it recovered slightly after Chancellor Rachel Reeves presented the budget, as markets assessed the long-term impact.

Rest of the world

Globally, most equity markets ended the week lower, with Japan being the exception. In the US, markets declined amid a mix of key economic data and broader uncertainties. October employment data showed a significant slowdown, with only 12,000 jobs added, well below expectations, marking the weakest growth since late 2020. Despite this, the unemployment rate held at 4.1%. Q3 GDP growth was 2.8% annualised, slightly down from Q2 and just below the expected 3%.

Investor sentiment was weighed down by anticipation around major technology earnings, the upcoming presidential election, and the Fed meeting. Tech companies, such as Microsoft and Meta, saw declines, with Microsoft dropping over 6% at one point on a disappointing earnings outlook. Broader challenges, including high expectations and AI growth uncertainties, pressured the technology sector.

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