Market Update – 19th October 2022.

Global equity markets started the week strongly, emphasising the strength of equity markets in the face of economic noise.

Jeremy Hunt, the newly appointed Chancellor of the Exchequer for the UK, delivered his first statement to the House of Commons on Monday, instead of waiting for the medium-term fiscal plan. He announced immediate changes to the mini-budget to reduce speculation of markets over the next two weeks.

Little remains of ex-UK Chancellor Kwasi Kwarteng’s controversial budget that threw markets into turmoil in recent weeks; the un-funded £43bn of tax cuts have now been reversed.

The new chancellor stated that the basic rate of income tax will remain at 20% indefinitely, until economic circumstances allow for it to be cut. The cut in the basic income rate had originally been promised by both Kwasi Kwarteng and Rishi Sunak this year.

The energy price cap guarantee is the biggest single expense in the growth plan and was initially put in place for the next two years, freezing annual household bills at £2,500. The cap will now only be in place for the next six months to support consumers over the winter. After April 2023 the financial support for the cap will be reviewed. The chancellor also announced the formation of a new economic advisory council to guide the government on economic policy going forward.

Both UK and European markets closed higher as markets welcomed the much-anticipated U-turns in the mini-budget, which will save the government around £20bn on debt costs. The 30-year UK gilt yield fell today falling to 4.3% from 4.8% earlier in the week, taking some of the pressure off fixed-income markets.

The annual inflation rate in the UK returned to July’s level of 10.1% in September. Whist inflation exceeded some expectations it met many economist predictions, including Bloomberg Economics. Core inflation, which excludes prices for energy and food rose to 6.5% up from 6.3% in August.

There are heavy expectations that the Bank of England (BoE) will need to aggressively raise interest rates, however, core CPI data demonstrates higher interest rates are not having the desired impact on inflation. Therefore, we don’t anticipate that the BoE will raise rates at the same pace that markets have priced in. As we have seen, it will likely be external factors that will ease the energy and food pricing pressures. The Monetary Policy Committee will continue to be data dependent when considering future interest rate hikes.

Housebuilders were amongst FTSE 100’s biggest gainers on Monday, as stamp duty cuts were one of the few policies not to be scrapped; Persimmon and Barratt Developments stocks rose by 5.7% and 4.9% respectively. The pound also neared a two-week high after the BoE said it would delay its plans to sell billions of pounds of gilts and the sterling touched highs of $1.141 against the dollar on Monday.

Looking to the US, stocks rallied on Monday with investors embracing an upbeat start to earnings season. Robust earnings from banks such as JP Morgan, Wells Fargo & Goldman Sachs illustrated that banks are starting to reap the rewards from monetary policy tightening by the Fed as interest rates have risen above their historic lows.

The Bank of America shares rose by 6.1% after it announced profit and revenue for Q3 topped expectations, which they attributed to strong consumers. Spending across credit and debit cards increased, and net interest income also jumped 24% to $13.8B, indicating that U.S. consumers are continuing to spend freely, and corporates are in good health despite worries about slowing economic growth. Johnson & Johnson also posted better-than-expected Q3 numbers on Tuesday, which were attributed to strong performance from its pharmaceutical division.

China delayed the release of gross domestic product data for Q3 which was due to be published on Tuesday. Figures are now due to be released from the 19th October. The National People’s Congress of China’s communist party continues this week, though there have been no real hints of any changes to economic policy. And whilst we don’t anticipate anything other than a strong anti-Covid stance from Xi, we continue to see many re-opening triggers which are positive for both Chinese and global markets. President Xi said on Sunday that China would focus on education and innovation to “renew growth”.

Still to come this week we have Eurozone inflation today, UK retail sales and consumer confidence. Chinese trade data, Japanese inflation and the Fed’s Beige Book.

Investment Management Team

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