by Tim Sharp
October has proved to be a significant month for markets. Global equities lost 2% reversing September gains, government bond yields rise, wars in Ukraine and the Middle East escalate, betting on the outcome of the Presidential election in the US is relaxed with interesting results, and the UK Labour Government holds its first budget since 2010 delivered for the first time in history by a woman.
US equities outperformed world equities although monthly returns were led by Japan (1.9%) after surprise election results while after a strong middle of the month the NASDAQ weakened (-0.52%) as the “MAG7” gave up 3.6% over the closing days versus a 1% monthly decrease in the S&P500. US Q3 earnings are currently surprising by 6%[i] led by Technology, with Banks in US and Europe also producing quarterly results above expectations. Furthermore, there appears to be a broadening out in Q3 earnings within the S&P493 (ex-MAG7) with growth running at 2%, 5.3% ex-Energy[ii], and European earnings results are also strong surprising by 7%[i].
Following the robust September US jobs report which added 254,000 jobs versus 150,000 expected, and saw the unemployment rate fall back to 4.1%, many investors questioned whether the Federal Open Market Committee would have agreed to cut rates by 0.50% instead of 0.25% if they were in possession of this data. The bond market started to reconsider its rate cutting forecasts particularly as the US Presidential Election date moves ever closer. Betting prediction sites particularly Polymarket which does not limit the size of bets that are made show a late improvement in the odds of a Trump win although opinion polls, traditional sites such as PredictIt that limit wagers, and companies such as Robinhood and Kalshi that offer derivative Event Contracts, seem to have the result too close to call.
The general press seems to believe that the late momentum is with Trump and markets are reacting to that[iii]. Despite stronger economic data resulting in higher real interest rates (adjusted for the effects of inflation), the chances of a Trump win, and the odds of a Republican clean sweep, increase the possibility of sweeping tax cuts, imposition of higher trade tariffs, and a sharper increase in the deficit. This has helped the 10-year US Treasury yield rise from 3.80% to 4.28% over the month as it moves to predicting only 50bps of easing by the Fed over the next three meetings from 100bps. John Authers further points out in his daily Bloomberg column that there is a striking comparison in the moves in the 10-year yield and Trump odds according to Polymarket[iv]. The MOVE bond volatility index remains at its highest levels for the year in stark contrast to the stable condition of the VIX stock market volatility index.
A Trump win is considered to be positive for equities which explains the leadership once more of Mega-Tech. However, the market considered most likely to benefit from a loosening of regulation under a Trump presidency is cryptocurrencies, underscored by his keynote speech at the Bitcoin 2024 Conference in July[v]. Bitcoin has rallied from $53,955 on September 6 to an all-time high of over $72,500 by the end of October with over $3.6bn of net inflows into Spot Bitcoin Exchange-Traded Funds (ETF’s)[vi]. It appears Bitcoin is also gaining traction as an inflation hedge with alternative investors. Gold – the classic inflation hedge – has also reached a new high of $2,777 on the back of its safe haven status and protection against extreme policy changes! We are less than a week away from election day but could be weeks away from a result being declared so we believe we will see increased volatility during the period of uncertainty.
Rachel Reeves delivered what has been reported as a blockbuster UK budget on October 30 second only to Norman Lamont’s 1993 budget. With the major themes of borrowing to invest, and to cover a contested hole of £22bn in the finances inherited from the last government, broadly telegraphed over the previous months, we feel the market reaction has still been surprisingly benign. Although the 10-Year Gilt has followed European and US Treasury counterparts higher from 3.94% to 4.41%, the move since the budget is approximately 6bps allaying any fears of a Truss-like mini-budget reaction to increased borrowing. Moves in £/$ and £/EUR have also been benign suggesting that the change in investment philosophy which has been echoed by the IMF[vii] appears to have been accepted by financial markets.
At a headline level, the budget involved £40bn in tax rises, £100bn in capital spending, and an extra £35bn to be funded through higher borrowing. Following a review of the main points we would like to highlight some changes that may affect investment decision-making.
In summary, tax receipts are expected to be £36bn higher on average and capital expenditure £24bn meaning public sector borrowing is set to rise £32bn per year on average. This means the new measure of debt defined as Public Sector Net Financial Liabilities will rise to 84.2% of GDP by 2026-27 from 83.5% now. The emphasis of the budget is to stimulate growth and ASR project that GDP growth will be 0.6% better in 2024-25 fiscal year, 0.4% in 2025-26, and 0.1% in 2026-27 all generated from central government investment. ASR further point out that the level of the UK government’s inward investment is significantly less than that carried out by its G7 counterparts and although this budget closes the gap by approximately 0.3% of GDP it remains little more than a step in the right direction[viii]. The importance of the Chancellor’s message regarding the direction of travel probably outlines a strategic change under this government that will require future action if it is to provide the improvements in productivity and growth that is required to compete with similar nations.
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[i] ASR _ Investment Committee Briefing November _ November 1, 2024
[ii] ASR _ Q3 Earnings – Looking for broadening _ October 31, 2024
[iii] Forbes _ Jay Ginsbach _ Trump-Harris Betting Markets And Swing States Odds With US President Projections _ October 31, 2024
[iv] Bloomberg _ Points of Return _ John Authers _ Helter-Skelter in bonds as markets doubt Fed cuts _ October 22, 2024
[v] https://www.youtube.com/watch?v=9UxAUryUKXM
[vi] Bloomberg _ Points of Return _ John Authers _ Bitcoin is boss, bonds at a loss _ October 31, 2024
[vii] https://www.reuters.com/world/uk/imf-fiscal-chief-says-uk-needs-bring-debt-under-control-welcomes-fiscal-rules-2024-10-23/
[viii] ASR _ Ben Blanchard _ “Invest, Invest, Invest”_ October 31, 2024
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