Market Overview|Quilter Cheviot

Stocks rise on hints of Fed slowdown

Market overview | Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

There were steady gains for global equities last week, with the MSCI All Country World Index adding 1.5%. Most the move higher occurred after the release of minutes from the Federal Reserve’s (Fed) policy meeting in early November, which suggested the central bank may soon begin slowing the pace of interest rate increases. Investors welcomed the news on a week where volatility was also dampened by the Thanksgiving holiday, meaning a shortened trading week for US markets.

Second-tier US economic releases painted a mixed picture but, on the whole, showed a weakening in economic activity. This feeds into the present dynamic of bad-news-is-good-news whereby the markets react positively to softer economic figures as it is seen as applying pressure on rate-setters to adopt a less aggressive approach in raising interest rates.

Along these lines a widely followed purchasing managers’ index (PMI) fell to a two-year low and initial jobless claims rose to a three-month high. However, consumer spending seemingly remains robust with durable good orders coming in much stronger than expected and early retail sales figures covering Black Friday suggesting a sizable pick-up compared to the previous year.

Large cap stock benchmarks in the US (+1.6%), UK (+1.5%) and Europe (+1.0%) posted similar-sized returns on the week, boosted by the reassurance investors took from the latest Fed communication. Bond markets also responded in kind, with the US 10-year Treasury yield falling by 15 basis points on the week to end at 3.68%. Government bond markets in the UK followed a similar trajectory with the 10-year gilt yield ending at 3.12%, down by 11 basis points and falling to its lowest level since early September.

Sterling extended its gains against the US dollar, rising back above the 1.20 handle for its highest weekly close in three months. The GBP/USD exchange rate is now around 16% higher than its record low, made in late September following the UK’s “mini-budget”. The euro also edged higher against the US dollar and the release of the minutes from the European Central Bank’s latest meeting showed less inclination among policy makers for an imminent dovish shift, compared to their US counterparts.

Covid concerns in China

Reports over the weekend of largescale protests in China against strict Covid-19 controls are a cause for concern. Shanghai, Beijing, Wuhan and Chengdu were among 10 cities where mass demonstrations occurred, sparked by outrage following a deadly apartment fire blamed on coronavirus restrictions. Several cities have reimposed broad restrictions on movement and brought back mass testing after daily Covid-19 cases approached all-time highs. The cities have not yet been placed in full lockdown, but the widespread measures will disrupt economic activities across the country, providing another headwind to a slowing Chinese economy and also adversely impacting global supply chains.

Last Friday the People’s Bank of China announced a 25bp decrease in banks’ reserve requirement ratio, pledging to utilise monetary policy tools to maintain liquidity. The country’s zero-covid approach has taken its toll on economic activity and authorities are implementing measures to support growth.

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