Market Overview|Quilter Cheviot

Rise in major global stock markets

Market Overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

The kitchen sink drama of the UK government continued apace last week as newly appointed Prime Minister Rishi Sunak formed his new cabinet. With a third of the “Trussties” losing their positions, familiar faces such as Michael Gove and Dominic Raab made a reappearance. Unsurprisingly, Jeremy Hunt was retained as Chancellor of the Exchequer. To most observers, this was a tactical cabinet designed to bring differing factions of the Tory Party into the main tent. What raised a few eyebrows was a subsequent decision to delay the Chancellor’s tax and spending review from the end of October until November 17th. On the face of it, taking another couple of weeks to figure out the best way of balancing the books may not seem too disruptive. However, it does mean that the Bank of England meet later this week to decide on interest rates without knowing what No.11’s plans are or having sight of the Office for Budget Responsibility’s forecasts for the economy. Nonetheless market forecasts suggest that this week’s interest rate rise will be 0.75%, the largest increase since the 1980s.

This week also sees the US central bank, the Federal Reserve, form its own decision on interest rates. Inflation may have peaked in the US, but is currently showing little sign of easing back. The newly vigilant Fed is expected to raise rates by another 0.75% following the Euro Area’s similar move last week.

Major global stock markets rose last week, with the US particularly strong. The company results season is in full swing with most corporations producing numbers broadly in line with expectations. Exceptions, however, have included titans such as Meta (Facebook) and Amazon, both of whom disappointed with their updates. Weaker guidance and a resultant downgrade in earnings forecasts is becoming a common feature in this reporting season, with higher costs and a strong dollar cited as headwinds within a picture of slowing demand. So why have markets risen against this backdrop? There is a growing sense that with a number of leading economic indicators pointing to a weakening economy and businesses now beginning to report the effects of this, that central banks may hit the pause button on interest rate rises at the end of the year and adopt a “wait and see” policy. It takes a while for the effects of policy changes to feed through to the real economy. Raising borrowing costs until inflation data starts to roll over could result in over-tightening, turning weaker economic growth into a full-blown recession – an outcome that no-one would cherish.

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