Market Overview|Quilter Cheviot

Sunak becomes the UK’s new prime minister

Market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Rishi Sunak will become Britain’s next prime minister after the withdrawal of rival candidates left the former chancellor unopposed for the role. Sunak received the clear backing of Conservative MPs, meaning the leadership contest was not required to go to a vote among party members. Financial markets reacted in a fairly sanguine manner to the news, with the pound rising back near its highest level in over a month and government bond yields falling lower after former prime minister Boris Johnson withdrew from the race over the weekend. This left just Penny Mordaunt, House of Commons Leader, as an opposing candidate, but she pulled out just ahead of the 2PM Monday deadline.

UK markets had already largely recovered from the fallout of last month’s “mini-budget” as Liz Truss’s government U-turned on the majority of the proposals, and investors will likely see Sunak as a safer pair of hands and unlikely to pursue as unorthodox fiscal measures in the foreseeable future. Shortly after the news broke gilt yields were near their lowest levels since before the “mini-budget”, with the 10-year gilt yield seen at 3.78%, down sharply from a peak of 4.63% earlier this month. This is in part reflective of an expected lower peak in the Bank of England base rate, which money markets now have at around 5%, down from a high of more than 6%.

That is not to say the new PM won’t have his hands full after the economy contracted in October at its fastest pace since January 2021, according to a widely viewed leading indicator of economic activity.

A UK composite purchasing managers index (PMI) reading fell to 47.1 for the month, down from 49.1 in September and marking the third consecutive sub-50 reading – indicative of the majority of businesses reporting a contraction in activity.

The latest news on the inflation front also did not make for nice viewing as the consumer price index rose 10.1% year-on-year for the month of September, above the previous month’s 9.9% reading and matching July’s 40-year peak. A sharp fall in fuel sales and bank holiday for Queen Elizabeth II’s funeral contributed to a 1.4% drop in retail sales volumes last month, compared to August.

Shares gain on Fed hopes

Global equities gained last week with the MSCI All Country World Index rising 3.2% as investors seemingly grew more hopeful of a forthcoming moderation in the pace of Federal Reserve (Fed) interest rate increases. US markets led the way, with large-cap benchmarks ending almost 5.0% higher for their best weekly gain in nearly four months.

US stock markets were already trading slightly higher on the week following a series of better-than-expected, or at least not-as-bad-as-feared, quarterly earnings results, but the bulk of the gains occurred on Friday after the release of a story in the Wall Street Journal, which hinted at a more dovish Fed policy going forward.

According to the piece, some officials have started signalling a desire to slow down the pace of interest rate increases and to stop raising rates in early 2023, to allow an opportunity to reflect upon the degree of economic slowdown caused by the tightening thus far this year. The story had extra credence as it came from Nick Timiraos of the Wall Street Journal, who has gained a reputation for accurately reporting, in advance, previous changes in Fed policy.

Fixed interest markets also reacted to the article, with US Treasury yields falling, although they remained higher on the week. The US 10-year Treasury yield ended the week at 4.22%, up from 4.02% a week earlier, but down from a 14-year high of 4.34% before the story broke.

Chinese stock markets came under pressure on Monday after President Xi Jinping secured a third term as party leader and the latest economic data showed gross domestic product lagging the target for the third quarter. An annualised reading of 3.9% quarter-on-quarter was better than consensus forecasts but retail sales figures disappointed. Technology shares were particularly hard hit, and benchmarks on the sector are now down by around 40% year-to-date.

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