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What's moving markets
October was dominated by the fallout from September’s not so mini-budget, which was effectively scrapped, leading to the departure of Liz Truss –the UK’s shortest ever serving PM – and the arrival of Rishi Sunak at Number 10.
The first signs of change came at the Conservative Party conference, with the controversial 45% tax cut reversal just one of several u-turns during the month. This policy had caused significant instability in financial markets, with the pound plummeting, bond yields surging and the Bank of England intervening in gilt markets. Kwasi Kwarteng was subsequently fired and replaced by former Health Secretary Jeremy Hunt, who abolished a number of the budget’s remaining policies, including cutting the bottom rate of income tax and reducing corporation tax.
The reversal of the mini budget’s policies and Rishi Sunak’s leadership have helped to slightly reassure investors, with sterling now above pre-budget levels and 10-year gilt yields moderating towards 3.5% from a previous 4.6%. It also means a less aggressive interest rate rise than may have been needed, with the Bank of England raising the base rate by 75bps to 3% at the November meeting. Inflation remains persistently high, at 10.1% year-on-year to September, and amongst a number of domestic and international issues for Rishi Sunak to deal with.
In the US, hopes of a ‘Fed pivot’ to reduce or at least pause rising interest rates have been pushed back, as strong labour data and high inflation figures reinforce the need for their hawkish policy. On 2nd November, the fed increased the rates by 75bps to a range of 3.75% to 4%. This risks a ‘hard landing’, pushing an already slowing economy (as evidenced by recent PMI data) into a recession.
In Europe, inflation hit a record 10.7% in October. To dampen these numbers, the ECB raised the deposit facility rate by another 75bps to 1.50%, the highest level since 2009. As with the UK and US, a balance needs to be struck between moderating inflation without pushing the region into a recession. Elsewhere in Europe, Italy welcomed their first female Prime Minister, with the far right Giorgia Meloni sworn in.
In Emerging Markets, Xi Jinping was elected for a third term as leader of the Communist Party of China, with former leader Hu Jintao escorted unceremoniously out of congress, reinforcing concerns about the level of intervention in China. In Brazil, Lula was elected as the new leader on 31st October, having previously served between 2003-2010 during a period of strong economic growth and falling inequality in Latin America’s largest country.
Asset class implications
It was a mixed month across asset classes, as gilt markets recovered following marked selloffs in September, with contrasting performance between the developed and emerging equity markets.
The FTSE Actuaries UK Conventional Gilts All Stocks returned 3.12%, as reversing most of September’s mini-budget helped reassure investors that the UK would be more stable going forwards. The FTSE All Share also rallied on the return of some relative stability to UK politics.
The IA UK Direct Property sector posted negative returns, with the tighter financial conditions (particularly mortgages) meaning a more muted outlook. Despite this, it remains one of the few asset classes in positive territory over the last year.
The US and European equity markets experienced positive months, with the FTSE USA index up 4.63% and Europe 4.39%. This was despite some disappointing earnings from the mega cap tech companies such as Meta and Amazon, resulting in heavy selling. For example, social media company Meta Platforms sold off c.25% post-earnings and is now down over 70% year to date, with investors becoming increasingly concerned about slowing earnings and increasing costs.
The FTSE Emerging (-6.96%) and FTSE Asia Pacific ex Japan (-6.71%) indices had poor months, primarily due to the performance of the Chinese market (making up approximately 30% of each), with investors becoming increasingly nervous about the increased intervention of the Chinese government, and their continued commitment to their zero Covid policy.
Want to hear more?
Investment Manager Colin Morris discussed the markets in September with Patrick Ingram in the latest episode of our Let's Talk investing podcast. Listen now ➜
|FTSE Actuaries UK Conventional Gilts All Stocks TR in GB
|ICE BofA Global Broad Market Hedge GBP TR in GB
|IA UK Direct Property TR in GB
|FTSE All Share TR in GB
|FTSE USA TR in GB
|FTSE World Europe ex UK GTR in GB
|FTSE Japan TR in GB
|FTSE Asia Pacific ex Japan TR in GB
|FTSE Emerging TR in GB
Source: FE Analytics, GBP total return (%) to last month end
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