October Market News
Managing Director Piers Mepsted comments on the key events impacting investments in October 2024
Politics dictated the direction of markets in October, both in the UK with the first Autumn Budget delivered by the Labour Party in over 14 years, and the US presidential election building up to a headline-grabbing finish.
For once, global markets weren’t fixated on interest rates, but the European Central Bank (ECB) reduced its main rate by 0.25% to 3.25%. In the US, all eyes remain on the Federal Reserve and its post-presidential election actions. In the UK, the path for interest rate cuts remained unclear after the Budget, and several economists speculated the Labour Party’s economic stimulus package via larger-than-expected borrowing and spending could raise the risk of inflation overshooting the Bank of England’s 2.0% target.
The International Monetary Fund (IMF) also released its half-yearly World Economic Outlook earlier in the month, with mixed projections for the global economy. There were upgrades to 2024 growth forecasts for the UK and the US, but forecasts for China, the Eurozone and Japan were lowered. China remains a vital cog in the global economy, but its third-quarter economic growth came in at 4.6%, below that of the second quarter.
Budget proved less troublesome for UK investors, while inflation hit an important milestone
- Rachel Reeves, Chancellor of the Exchequer, delivered the first Autumn Budget by the Labour Party in over 14 years. The address felt like a traditional ‘tax and spend’ budget, raising £40bn in revenue, additional borrowing of £32bn and making big promises on public spending.
- There appeared to be a sigh of relief for investors, as the run-up to the statement saw investor and business sentiment deteriorating, pushing down company valuations. The Chancellor continued to emphasise the new government faced “difficult choices”.
- Away from politics, and in a milestone moment for the UK economy, the consumer prices index (CPI) declined to 1.7% in September, down from 2.2% in August, according to the Office for National Statistics (ONS). This marked the lowest inflation reading since April 2021, and was officially below the Bank of England’s 2% target, which boosted interest rate cut hopes for November.
- Encouragingly, the ONS also reported core CPI (which strips out the more volatile energy, food, alcohol and tobacco components) increased 3.2% year-on-year in September, down from 3.6% in August. Goods prices fell at a faster rate, as the CPI goods inflation index fell to -1.4% from -0.9%. Services inflation slowed from 5.6% to 4.9%.
US economy continues to show resilience, despite a jobs blip
- US inflation, measured by the personal consumption expenditures (PCE) price index, declined to an annual rate of 2.1% in September from 2.3% in August, according to the Bureau of Economic Analysis. However, core PCE inflation, excluding the volatile food and energy components, remained at 2.7%.
- US economic growth remained robust, as gross domestic product (GDP) expanded by an annual rate of 2.8% in July-September, the equivalent of 0.7% growth in the quarter. This was slightly below economist forecasts of a 3% annualised GDP rise, and a little slower than the 3% growth recorded in Q2.
- The US economy added 12k jobs in October, a surprising miss from the 100k expected by Bloomberg economists and one of the weakest jobs reports since the pandemic. Despite it raising questions about the economic health of the US, the weakness was attributed to the two hurricanes that struck the southeast and also major strikes as the jobs numbers were compiled
ECB president pulls few punches, as the Eurozone economy moves in the right direction
- In a surprise turn of phrase after the interest rate announcement, ECB President, Christine Lagarde declared the central bank was in the process of “breaking the neck” of inflation. However, she admitted the Eurozone economy is not sustainably at its 2% target, even though inflation fell to 1.7% in September. Lagarde highlighted that food, alcohol and tobacco prices across the bloc rose 2.4% over the last year to September –still too high for the ECB’s comfort and indicating more work is needed.
- The ECB voted to lower borrowing costs for a third time this year, moving its benchmark deposit rate from 3.5% to 3.25%. The decision was based on an updated assessment of the Eurozone’s inflation outlook and current dynamics, as well as the strength of monetary policy transmission.
- Eurozone GDP expanded 0.4% in the third quarter, twice as fast as expected. Ireland (+2.0%) recorded the highest increase compared to the previous quarter, and Hungary reported the sharpest fall (-0.7%). In a relief for Germany’s government, GDP expanded 0.2% in July-September, beating expectations of a 0.1% contraction. Germany’s economy is still suffering from high energy costs and problems in its car sector.
Global equity markets were relatively subdued over October, with political uncertainty weighing on short-term sentiment. Ironically, one of the bright spots was Japan, despite a turbulent general election in which new Prime Minister, Shigeru Ishiba, recorded the second-worst result in Japanese history. UK equities felt the brunt of the political fear, as companies faced mounting uncertainty over long-term implications from the Autumn Budget, which created some selling pressure. The impact on smaller companies was notable, including those listed on the Alternative Investment Market (AIM), with spending on future projects postponed until the picture became clearer. US equites were also mixed, with returns once again spearheaded by the latest earnings reports from the familiar tech giants. These companies are still in a race to rationalise the massive investments made into artificial intelligence (AI) after the arrival of OpenAI’s ChatGPT ignited a frenzy almost two years ago.
Interest rate risk reared its head again, as investors tried to understand the potential for inflationary impacts after recent events. For bond markets, it was a notably volatile month as prices fell across the UK and US, despite recent interest rate cuts and normalised inflation. The yield on ten-year UK government bonds climbed from 4.0% at the start of October to 4.44% by the end of the month. This was a clear signal that markets were spooked by the scale of additional borrowing by the new Labour government, and that some of it could fund current spending rather than investment, leaving little headroom. US government bond yields also climbed, with the ten-year US Treasury gaining 0.5% to finish the month yielding 4.28%, as investors worried over the potential inflationary impact of another Trump presidency.
Some alternative investments were impacted too, as the interest rate-sensitive Listed Property sector fell in value.
There were some strong performances in commodity markets, however, as the price of gold bullion burst through its $2,700 per ounce record, and then quickly past $2,800, before closing the month at $2,749. For context, gold has now climbed by approximately a third so far in 2024. The asset is perceived to be a ‘safe haven’ amid persistent geopolitical tensions and mounting uncertainty surrounding the US presidential election. Oil – thankfully for those worried about inflation – declined in value toward the end of the month due to Israel’s muted retaliation against Iran, but the price of a barrel of Brent rose slightly in October from $71.77 to finish at $73.16.