Weekly Market Update - surprising shrinks and a story untold

The latest economic news and market highlights from the UK and abroad.

The key takeaways

📉 UK economy surprise shrink – GDP fell by 0.1% in October although a small rise was predicted. The fall was driven by drops in production and construction. 

✂️ EU cuts again – The European Central Bank (ECB) cut interest rates by another 0.25%, lowering the headline rate to 3%. All in an attempt to support a struggling economy. 

⚡US inflation drifts higher – US annual inflation rate rose slightly to 2.7% in November from 2.6% in October. Energy costs are still declining but by less than consumers saw in 2023. 

🏠 China promises spending boost – President Xi Jinping signalled the need to raise spending in 2025, with a focus on increasing domestic consumption because of US tariff threats. 

⬇️ UK stock market blow – in a blow to the London stock market, large FTSE 100 constituent, Ashtead, announced the move of its primary listing to the US, where the majority of its profits are made.

The UK economy shrank in October – defying growth expectations from economists. Budget uncertainty likely hindered growth rates and leaves the economy a long way off the government’s aim to have the strongest growth in the G7.

In Europe, a cut to interest rates was accompanied by signals that further easing is possibly on the way. Inflation nears 2%, and growth in the euro area weakens. With risks from global trade tensions, along with structural and political challenges, the ECB removed wording around a "restrictive" monetary policy stance, and revised down economic forecasts. However, over in the US, inflation continues to inch upwards and away from central bank targets. While a US rate cut is still very much on the table for December, these figures do not support such a move.

In China, an already struggling economy faces the threat of Trump's tariffs coming next year. Any boost to spending and consumption would be beneficial to the world’s second largest economy. But while this week appeared positive, the details remain light.

Chart of the week - Market performance ex-Nvidia

Source: Jeffrey Kleintop; Charles Schwab, Macrobond, S&P Global, MSCI

The above chart shows the performance of the MSCI European Economic and Monetary Union (EMU) Index compared to the US market (S&P 500), without the inclusion of Nvidia. The chart dates back to when markets bottomed-out in October 2022, before pulling back-up and entering a bull market.

Over this same period, the full S&P 500 index, including arguably its most important constituent of recent times, Nvidia, outperforms Europe by some margin. This has fuelled confidence towards the region as a whole and encouraged talks of US exceptionalism. However, once this one stock is removed, the results show a different picture, with Europe actually outperforming the remaining S&P 499.

The total return figures in the chart are shown in US dollars, so are affected by the euro's strong appreciation against the dollar, which skews the results. However, the message remains clear. With such a high percentage of total returns coming from just one stock, the concentration risk in the US market, and passive funds that follow it, can’t be ignored. Diversification remains key within and among different regions and sectors.

UK mixed performance – the FTSE 100 ended the week unchanged, while the FTSE 250 slipped as growth stocks, particularly in tech, took a hit. Investors moved into less risky areas such as consumer goods, while energy companies such as BP and shell benefitted from rising oil prices.

Tech stems US losses – in the US, tech stocks continued to shine, driven by a higher semiconductor demand, which helped the NASDAQ stay in positive territory. While the S&P 500 fell as healthcare and utilities struggled.

Asian markets gain – in Asia, The Nikkei 225 saw marginal gains, led by industrial and material companies. The Hang Seng had a strong week thanks to its tech-heavy composition and optimism around anticipated Chinese economic stimulus.

Growth for oil and gold – gold saw modest gains but remained relatively flat as traders await next week’s Federal Reserve decision on interest rates. Oil prices climbed, supported by geopolitical tensions and OPEC+ (Organisation of the Petroleum Exporting Countries) production cuts.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.