Fireworks were not simply contained to bonfire night this week, with a big bang in equities, bonds and currencies, following the US election result. If that wasn’t enough, we had interest rate cuts from two prominent central banks on Thursday to cap off a busy week!
The main event this week was the US election. In what was expected to be a very closely run election, Republican Donald Trump won the presidential election, including the popular vote, securing nearly five million more votes than Kamala Harris. The Republicans also secured a majority in the senate. It’s still not finalised who will control the House of Representatives, although there is the chance for the Republicans to secure a clean sweep. There were big moves in markets, particularly the US on Wednesday as the results poured in. The biggest winner was the US equity market, with small cap equities performing particularly well, rising over 5% on the day. While equities rallied, US government bonds sold off aggressively. This was likely driven by the view that some of Trump’s policies, such as tariffs, could be inflationary, which would potentially delay interest rate cuts. The US dollar advanced against most major currencies, strengthening by around 1.5% against sterling. Commodities were under pressure, potentially due to concerns about China on the back of Trump tariffs. Equity returns outside of the US were muted on Wednesday. After an initial surge in early trading, European and UK markets gave up most of their returns in the afternoon session.
Yesterday the Bank of England (BoE) met for the first time since Labour’s first budget. As expected, the BoE carried on their interest rate cutting journey, reducing rates by 0.25% to 4.75%. Eight of the nine voting members supported the cut. The accompanying statement by the BoE pointed towards a “gradual approach” to reducing interest rates going forward.
By Thursday evening the US Fed had joined the BoE in reducing rates by 0.25%, following on from their bumper 0.5% cut in September. Governor Powell’s follow up comments to the cut appeared very hawkish, and it’s clear the US Fed will be data dependant and currently don’t see the need for deep cuts going forward. The interest rate cuts will favour some small businesses who typically have floating rate debt and therefore immediately feel the benefit of lower interest rates.
There were unscheduled political events in Germany this week. Chancellor Scholz fired the finance minister, after which two colleagues resigned, leading to the effective breakdown of the German coalition government. There is likely to be snap elections in the New Year in Germany now, which adds a level of uncertainty to Europe’s largest economy. The country is far from firing on all cylinders, with the economy predicted to have zero growth in 2024, while the IMF expects Germany to grow by only 0.8% in 2025. Increased energy costs since Russia’s invasion of Ukraine, coupled with China weakness has hit the manufacturing hub in Germany very hard.
After a strong week, Nvidia once again became the world’s largest company, with its market capitalisation rising above $3.4 trillion. Big technology companies in general saw strong share price movements in the wake of the election. However, given Trump’s previous comments around increased regulation in the technology sector and the sector’s bias against conservatives there is certainly a risk to this sector under a Trump regime.
The passing of the UK Budget and US Election means we are now through two events that created a great deal of uncertainty. Regardless of the results and outcomes, markets can now begin to price the risks and hopefully move forward. At a portfolio level we work hard on trying to spread risk, and typically try to avoid binary events having big impacts on portfolios.
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.