Markets in a Minute November 2024
President-elect Donald Trump stole headlines in November as he secured his second term in office. This was one of the key determinants for investment returns over the month. His win – combined with a Republican ‘red sweep’ of the US Congress – puts Trump in a strong position to start implementing his economic and political agenda in early 2025. Of note was his proposed trade tariffs, which many argue could provoke inflation and a global trade war, dampening global growth prospects and posing risks for Asia and Europe, which are known for being export-reliant economies. Despite the noise, developed central banks continued their steady interest rate reduction plan. Although rates appear likely to continue declining, the probability of a “higher for longer” rate environment has increased, thanks to the unpredictability of Trump’s policies that could lead to volatility over the coming months.
UK interest rates continue their slow descent, but recent economic data clouds the forward outlook
- The Bank of England’s Monetary Policy Committee voted by a majority of 8–1 to reduce interest rates by 0.25%, to 4.75%. One member, Catherine Mann, preferred to maintain Bank Rate at 5% citing an increase in demand associated with the Autumn Budget.
- UK inflation increased by more than expected in October, with the Consumer Prices Index (CPI) rising to 2.3%, marking a significant increase from the 1.7% seen in September and more than the 2.2% forecast. The rise was primarily due to an increase in Ofgem’s energy price cap, which resulted in electricity prices rising 7.7% and gas prices rising 11.7%.
- Figures from the Office for National Statistics (ONS) showed that UK government borrowing increased to its second-highest level on record in October. Public sector borrowing rose by £1.6bn year-on-year to £17.4bn, as the budget deficit increased by £0.4bn to £12.7bn.
- The ONS also revealed that UK gross domestic product (GDP) was estimated to have increased by 0.1% over the three months to September – a marked slowdown from the 0.5% growth seen in the second quarter of the year and below expectations of 0.2% growth.
Donald Trump manoeuvres his way into a second term in office and investors capitalise on the ‘Trump Trade’
- President-elect Donald Trump won his second term in office, and US indices rose to record highs over the week (ended 8th November 2024). Investors wagered that the Republicans’ capture of the White House and Senate – a so-called “red sweep” – could result in looser regulation, lower corporate taxes, and stronger earnings growth. This is also known as the ‘Trump Trade.’
- Away from politics, inflation increased over 2.3% in the year to October, as measured by the US Personal Consumption Expenditures (PCE) Price index, up from 2.1% in the previous month. Core PCE, which removes the volatile effects of food and energy, increased to 2.8% from 2.7%.
- A tick up in inflation didn’t stop the US Federal Reserve (Fed) from lowering interest rates by 0.25% at its November meeting, with rates now standing at 4.5% to 4.75%, down from a decades-high level of 5.25% to 5.5%.
- The second reading of Q3 annualised US real GDP growth was reported at 2.8%, in line with expectations and followed the 3% growth delivered in Q2, and 1.6% seen in Q1. US GDP has defied expectations throughout 2024, having been helped by strong consumer confidence levels, rising real wages, and falling interest rates.
French politics raises concerns over its impact on the economy, and the wider Eurozone brace for Trump’s presidency
- France’s government found itself in a precarious position as Prime Minister Barnier struggled to pass the 2025 budget through its fractured parliament. The proposed €60 billion package of spending cuts and tax hikes met fierce resistance from both the left and the right, causing their stock market to plummet from the uncertainty.
- Looking to the wider eurozone, consumer prices increased 2.3% in the year to November, according to a flash estimate from statistics body Eurostat, up from 2% in October. This was largely attributed to the services sector, where prices increased 3.9% over the same period, while food, alcohol & tobacco prices rose by 2.8%.
- Investors and economists are bracing for further economic pain in Europe from a second Donald Trump presidency that could lead to tariffs on European exports to the US. As a result, Berenberg (the world’s oldest merchant bank) trimmed its 2025 annual growth forecasts modestly. Growth in the eurozone next year has been lowered from 1.1% to 1.0%, for France from 0.8% to 0.7%, and for Italy from 0.9% to 0.8%.
- Economic growth – as measured by gross domestic product – in the eurozone rose 0.4% quarter-on-quarter to the end of September, up from 0.2% in the second quarter and in line with initial estimates. The year-over-year figure increased to 0.9% from 0.6%.
It comes as no surprise that the strongest dominance across global equities came from the US, as the prospect of further tax cuts and an expansionary fiscal policy boosted returns. However, it was in fact domestically exposed US smaller companies that topped the table over the month, as they appeared to be the largest short-term beneficiaries of the political fallout. In terms of sectors, financials and tech stocks were big winners. Conversely, renewable energy, real estate, and infrastructure did not welcome the headwinds from potential higher rates and Trump policy shifts. Outside US markets, the election result was met with some caution. Of note were Chinese equities which declined on the prospect of trade tensions between the two economic powerhouses, and ongoing government support issues continued to weigh on pricing.
Bond markets only marginally benefitted from the news, as Trump’s policies have the potential to be inflationary in 2025 and subsequently reduced interest rate cut expectations by the Fed to three over the coming 12 months. The yield on a 10-year US Treasury (US government bond) fell from 4.28% to 4.17% over the month. However, it was in fact Chancellor of the Exchequer Rachel Reeves’ ‘tax and spend’ Budget that created headwinds in the UK, with 10-year Gilt (UK government bond) yields rising sharply in the days after the budget. This has since calmed, and the same Gilt now offers a yield of 4.24% in comparison to 4.44% last month. Japanese government bonds continued to suffer due to expectations of ongoing Bank of Japan interest rate hikes and an accelerated pace of balance sheet reduction in 2025.
In summary
We are in regular contact with our investment partners and want to reassure investors of the following:
- While US markets present opportunities, due to the volatile global landscape we continue to ensure a diversified approach to mitigate potential risks, especially in trade-sensitive regions.
- Inflationary pressures and shifting interest rate expectations globally could impact portfolio allocations, particularly in fixed income and we will be keeping watch of this.
- Staying agile amid geopolitical uncertainty, particularly in Europe and Asia, will be essential for balancing risk and return in 2025.