Weekly Market Update - certainty is valuable

The latest economic news and market highlights from the UK, US and Asia.

Key takeaways:

💷 Bonds sell-off – compensation for longer-term lending (term premium) has returned to the bond market, as investors are now seeking higher returns for longer-term debt, pushing the US 10-year Treasury yield above 4.2%.

💼 UK Purchasing Managers’ Index falls – the PMI slipped to 51.7 in October, missing the general estimate of 52.5. Both new orders growth and business optimism fell due to uncertainty around the Budget.

✂️ Chinese banks cut key lending rates – the one-year loan prime rate dropped to 3.10% from 3.35% and the five-year rate to 3.60% from 3.85%.

📊 Mixed US jobs data – new unemployment claims fell to 227K, however those continuing to claim increased to 1.897M, suggesting that while layoffs are low, jobs are getting harder to find.

📉 Canada cuts rates – the Bank of Canada dropped interest rates by 0.5% to 3.75%, meeting expectations.

UK and US governments are set to take centre stage over the next two weeks.

On the eve of Halloween, Chancellor Rachel Reeves, will hope her first Budget doesn’t cause the fright to the UK economy that some fear. Speculation has been rife over the possibility of various tax hikes, so when clarity finally arrives that should be a relief in itself. Gilt yields rose above 4.2% this week, amid a fall for government debt yields in other countries. This was in response to news that the government will change their fiscal rules to allow greater borrowing for infrastructure investment.

Nerves have also been jangling across the pond, as both Presidential candidates in the US election have presented stimulative policies in a bid to win on 5th November. The national debt has increased by almost $500bn over the first three weeks of October alone, and is expected to exceed 100% of GDP next year. High budget deficits are expected to continue, regardless of the winner. Markets are beginning to show sensitivity to the possibility of a Republican clean sweep - with betting markets pricing the odds close to 50%. The uncertainty has driven volatility in the bond markets higher, with the MOVE index hitting its highest levels of the year.

For long-term investors, uncertainty presents an opportunity. The extra yield on offer can provide greater eventual returns for those who can look past the short-term ambiguity.

Chart of the week 

Source: Bloomberg, J.P. Morgan Asset Management Guide to the Markets - UK. Data as of 30th September 2024

The chart looks at the link between starting bond yields and the subsequent five-year annualised returns. A higher yield has historically increased the likelihood of stronger medium-term returns.

Whilst recent uncertainty has brought volatility to the bond markets, history shows us that these are healthy yield levels for generating returns over the coming years.

Electric earnings - US stocks generally retreated this week, with the rise in yields bringing some headwinds alongside the seasonal weakness. However, a strong earnings beat from Tesla gave the automaker its strongest daily return in over a decade, rising 22% and supporting index returns.

Consumer woes - UK consumer confidence slipped in October, generally dragging the FTSE down despite good performance from commodity and precious metal linked stocks.

Nikkei not so fine - Japanese stocks slumped this week after new PM Shigeru Ishiba called a snap general election in response to a political funding scandal.

Bottom of the barrel prices - oil prices rebounded this week after heavy falls last week, and so far this year.

Gold medal returns - the uncertain geopolitical and market backdrop helped to advance the often-described safe haven asset higher again this week. Gold remains firmly ahead of other assets year to date.

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.