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Global equities ended last week flat in local currency terms after a bounce in the US on Friday following the release of stronger than expected labour market data. In sterling terms, however, markets were up 1.6% as the pound retreated against a stronger dollar to $1.31 from its recent high of $1.34.
Dollar strength meant US equities managed a 2.5% gain in sterling terms while the UK was down 0.6%. But for the second week running, China was the stand-out performer rising a further 14.5% on the back of a further surge on Monday ahead of the market closing for the Golden Week holiday. Chinese equities are now up over 30% from their low and easily the best performing major market this year and year-to-date are now even ahead of the Magnificent Seven.
Monday’s surge came on the back of encouraging comments from the Politburo and President Xi which suggested that the monetary stimulus already announced will be followed up by fiscal stimulus. This will be crucial if the government is to counter successfully the deflationary pressure coming from the downturn in the property market and the cautious consumer. If Xi lives up to his words, this should give a further boost to Chinese equities where valuations are still on the cheap side with a price-earnings ratio of 11.5x, even if they are no longer rock bottom as they were a couple of weeks ago.
These gains left Emerging market equities overall up 3.5% over the week. Elsewhere, European stocks were down 1.8% on the back of the gloomy outlook for the Eurozone economy and Volkswagen issuing a second profit warning. Meanwhile, the Japanese market continued on its volatile path, losing 3.4% in sterling terms and reversing most of its gains the previous week. The loss was driven by a renewed weakening in the yen following ill-timed comments from new Prime Minister Ishiba that a further rise in interest rates would be inappropriate.
But back now to the main event of the week, the US labour market data. Not only did US employment post an unexpectedly strong gain in September but the unemployment rate also edged lower, easing concerns over its recent rise, and wage growth ticked higher. Along with a surprise bounce in business confidence in the service sector, which made up for earlier news of continued weakness in manufacturing, the data eased any lingering fears of a sharp slowdown in the US economy.
Market expectations for a rapid reduction in US interest rates were duly scaled back. Notably, there is now seen close to zero chance of the Federal Reserve cutting rates by 0.5% in November, as it did in September. Instead, it looks set to revert to a more normal 0.25% reduction.
In the UK, by contrast, hopes for rate cuts were bolstered by Bank of England Governor Bailey’s remark that it could be a bit more aggressive in cutting rates if inflation pressures continue to wane. A further 0.25% cut to 4.75% on 7 November is now seen as all but certain with a 50/50 chance of another reduction in December. While inflation remains the key to monetary easing, a downward revision to second quarter growth will at the margin also increase the pressure on the BOE to lower rates. The latest figures showed GDP rising 0.5%, a bit less than the 0.6% gain seen in the first quarter.
The European Central Bank also looks very likely to lower rates by a further 0.25% to 3.25% at their next meeting on 17 October. This follows last week’s encouraging news that the headline and core rates of inflation fell further to 1.8% and 2.7% respectively in September.
Despite the bond-positive news in the UK and Eurozone, bond yields rose over the week on the back of the US data. UK Gilts were lost 0.9% while US Treasuries were down 1.4%.
Lastly, oil prices rose 9% over the week on fears related to the widening of the war in the Middle East and concern that Israel might target Iranian oil facilities in retaliation for its missile attack. Even so at $78/bbl, crude oil prices remain well below their high of $90 earlier in the year and comfortably below levels likely to prompt significant market concern.
The coming week is relatively light on economic data other than the ever important US inflation numbers on Thursday. These are forecast to show the core rate unchanged last month at 3.2% but the headline rate falling to 2.3%. But on Friday, attention will be moving back to corporate earnings as JP Morgan’s results will kick off the start of the third quarter US reporting season.
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