Market Update

In the UK, Wednesday's Autumn Budget was met with caution following the Chancellor's warnings, but ultimately proved less severe than expected. A detailed breakdown of the budget is available on our website. After the Labour government's budget announcement, markets initially remained stable. However, as investors digested the details on Thursday, there was a sell-off, with concerns about the long-term impact of increased borrowing. The Budget’s tax hikes and £142 billion in new borrowing were seen as potentially limiting growth, without offering enough immediate economic boost. Key tax increases include a rise in employer national insurance, along with hikes in capital gains and inheritance taxes.
On Thursday, the yield on 10-year gilts briefly surpassed 4.52%, hitting a one-year high. This increase reflects higher borrowing costs for the government and signals higher interest rates on various loans and mortgages. By Friday, yields slightly eased to 4.45%. Market reactions were relatively contained, avoiding the extreme volatility seen after the 2022 mini-budget, underscoring the delicate balance involved in budget planning. The FTSE 100 ended the week down 0.9%, stabilising after the initial reaction. The Bank of England is also due to meet on Thursday, November 7, with markets expecting a 25-basis-point rate cut.
In Europe, third-quarter GDP growth came in at 0.4%, exceeding the 0.2% forecast, driven by contributions from France, Germany, and Spain, though some temporary factors likely influenced the results. While this growth alleviates some economic concerns, European Central Bank (ECB) policymakers remain divided on the pace of rate cuts, with some advocating for immediate action and others pushing for caution. Inflation reached the ECB’s target of 2% in October, partly due to lower energy prices from the previous year, reducing the likelihood of a December half-point rate cut, with current odds at 25%.
In the US, the economy continued its solid momentum in Q3, growing at an annualised rate of 2.8%, slightly below Q2’s 3.0%, driven by strong household spending. Earnings season remained a focus, with Meta falling short of user growth expectations and announcing significant investments in AI, while Microsoft reported robust growth in its cloud division, largely driven by AI demand. Job growth in October was notably lower than expected, with just 12,000 new jobs created compared to the forecasted 100,000, influenced by hurricanes, labor strikes, and election uncertainty. Inflation indicators remained stable, with the personal consumption expenditures (PCE) price index reporting 12-month inflation at 2.1% in September, aligning closely with the Federal Reserve's 2% target.
Markets grew more cautious ahead of the US election on Tuesday, November 5th. The race between Kamala Harris and Donald Trump remains closely contested, with both candidates keeping policy specifics vague. However, markets expect that either outcome will likely benefit domestic industries. Additionally, recent stability in the dollar, supported by a measured rate-cut cycle, continues to benefit importers. Following the election, the Federal Reserve is expected to announce a 25-basis-point rate cut on Thursday, reflecting recent data on a softer labor market and persistent inflation. This would follow September's half-point reduction.