15 November 2022
A tale of two continents
As one goes up, the other must come down. Or so it seemed last week, as we witnessed a drop in UK GDP while US inflation figures increased.
Across the pond, US headlines were dominated by midterm elections announcements, which had citizens glued to their screens amid predictions of a ‘Red Wave’. This would have seen the Republicans take control of both the Senate and the House of Representatives from President Joe Biden’s Democrats. At the time of writing, the Republicans look likely to win a small majority in the House of Representatives, while the Democrats were confirmed to hold onto the Senate.
On Wednesday, when the first results began to filter in, US equities fell as financial markets came to terms with the unexpectedly close race and the short-term uncertainty as a result.
On Thursday, however, inflation quickly became the main topic on everyone’s minds once again.
US interest and inflation
Thursday saw the US Bureau of Labor Statistics reveal that inflation of consumer goods and services fell to 7.7% in September. This is down from August’s 8.3% and the year’s highest interest rate of over 9%. Could this mean that US inflation has indeed peaked?
This led to hopes that the Federal Reserve might be able increase interest rates at a reduced speed in upcoming months. And as a result, markets began estimating a 0.5% rise in December.
But what do lower interest rates mean? Well, they would make it cheaper to borrow and help growth-oriented shares jump. That said, gains were found across much of the US market.
The S&P 500 grew 5.5% on Thursday, while the NASDAQ index finished at 7.4%. The day concluded as the best single day of trading in two and a half years, with the two indexes up 5.9% and 8.1% respectively by the end of the week.
It’s prudent to remember that markets remain in a challenging place despite this exciting news, with the very real possibility that the US may still enter some form of recession in the next two years. On the other hand, the Fed were discussing ending its period of quantitative tightening – where banks consider how to reduce the amount of money supply in the economy, including by increasing interest rates – only two weeks ago.
Filippos Papasavvas, Markets Economist at Capital Economics, notes that periods of tightening are often followed by a recession, and that he predicts one in the US in the near future. He adds:
“Admittedly, we forecast a fairly mild US recession. But it’s not clear that investors are prepared even for that. So, for now we’re sticking with our view that equities’ struggles will resume, and the dollar’s rally will return.”
Markets worldwide rise and fall
Equity markets in other economies were driven by the news in the US too. Last week saw European indices trending higher, such as the MSCI Europe ex UK that rose by 4.7%. This increase came even though the European Commission revised its own future expectations for inflation in Europe.
And in Asia, thanks to improved investor sentiment, the Japanese Nikkei 225 ended the week 3.9% higher.
In the UK, the FTSE 100 notably trailed behind last week and fell slightly following the latest GDP figures. This comes as the last Quarter saw the UK economy shrink and hinted at what many expect to be the start of a long recession.
However, investors should look further than just UK GDP when considering investing in large UK companies, suggests Ben Gutteridge, Director of Model Portfolio Services at Invesco.
“We have long argued that UK equities offer significant value, with good earnings momentum, in a now particularly lowly valued currency. It should be remembered that the fundamental strength of the FTSE All-share index is not simply determined by the state of the UK economy – less than 25% of the revenues of the Index are from the UK, with 75% from overseas. The FTSE All-share index is home to many world-class, internationally orientated businesses, among the leaders in their field.”