Halloween came and went on Monday with relative calm; however, it was US Fed Chair Jerome Powell who spooked markets later in the week.
The month of October closed on Monday, and it marked a strong month in assets, rebounding from a very challenging September. In the US the Dow Jones Industrial Average equity index recorded its best month since 1976, up 14%. The broader S&P 500 index rose an impressive 8% in local currency, although for sterling investors, such was the recovery in GBP, the return was closer to 4.5%.
After such a strong October, the focus shifted to US and UK central banks, who met on Wednesday and Thursday respectively. As anticipated, the US increased rates by 0.75%, taking the headline interest rate to 4%. Equities initially reacted favourably, however, during the press conference Powell made a series of hawkish comments, leading markets to believe interest rates would have to rise further still and with-it equities quickly reversed gains to end the day heavily in the red. The news also sent US government bond yields higher, with the two-year bond now yielding over 4.7%.
The Bank of England (BoE) followed suit on Thursday, raising rates by 0.75%, with the headline interest rate now at 3%. It was the largest individual hike since 1992 and interest rates are now at their highest since November 2008. While the US central bank were very hawkish in their language, the BoE struck a much more dovish tone, saying the peak in interest rates in the UK will be lower than what the market has anticipated. The BoE delivered a very gloomy message with their outlook for the UK economy, saying it expects the UK to experience the longest recession on record, with the unemployment rate expected to nearly double by 2025. Markets are forward looking, the news of a potential UK recession was not new news, and the reaction from UK equities has so far been fairly muted. There was however a reaction in currency markets, with GBP shedding around 2% versus the USD on the back of what could begin to be diverging interest rate policy.
Unemployment data from the Eurozone was positive this week, showing the current strength in labour markets is not just confined to the US or UK. Indeed, Greek unemployment, which was nearly 30% in 2014, is now at 11.8%. There was consensus beating unemployment rates from Spain and Italy. It is worth remembering unemployment data is a lagging indicator and it is likely to deteriorate as economies slow. Staying with employment, the once bullet proof technology-focused companies have begun to freeze or indeed cut jobs. Amazon has frozen any corporate hires for the rest of the year, while Apple has frozen hires outside of research and development (R&D). Twitter, which has recently been acquired by Elon Musk, has gone one step further and is expected to begin laying off staff as soon as today. At a national level, the release of US non-farm payroll jobs data this afternoon showed an additional 261,000 jobs had been added to the economy, beating expectations for the seventh straight month. This positive employment data was well received by the markets with US equities opening up over 1%.
It has been a very strong week for Chinese equities, with an estimated $1 trillion added to the value of stocks this week. Rumours of an easing in China’s zero-COVID policy and hopes of softening tensions with the US boosted the market. The prospect of China re-opening lifted commodity prices with copper up over 6% on Friday, while mining companies rose; Anglo American leading the UK large cap index higher today.
The up-and-down week is a reminder of the difficulty of trying to time markets. Our preference instead is to focus on time in the markets. That being said, we have used the recent volatility in bond markets to make changes which we will feel improve the defensive characteristics of the portfolios, while still providing attractive long-term return profiles.
Andy Triggs, Head of Investments
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.