Quilter Cheviot|Weekly Comment

Wall street ends higher after strong jobs number

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Global stock and bond markets ended lower once more last week, although a recovery into the weekend pared the declines with US equities rallying into the close to snap a four-week losing streak. The MSCI All Country index ended -0.4%, trimming year-to-date gains to +10.1%.

The main event for investors last week was the October US jobs report, which showed 336k nonfarm jobs added, around twice as many as the consensus forecast. The unemployment rate remained at 3.8% and average earnings dropped to 4.2% annually, the lowest level since June 2021. The stronger than expected headline number caused a sharp move lower in stocks as bond yields surged, although the moves reversed around the time of the Wall Street open.

The reversal could be attributed in part to the data suggesting a strong level of demand but less strong inflationary pressures as the wage growth number cooled and the participation rate came in at its highest level since the start of the pandemic, at 62.8%. It may also be a reflection of market positioning and bonds and stocks being relatively oversold from a short-term perspective. Overall, we don’t see the report as a game changer for the Federal Reserve and this was reflected in the yield on the policy-sensitive two-year Treasury yield ended the week little changed at 5.08%. Its strength may increase pressure a little on rate setters to deliver another raise in the Fed funds rate, but much will depend on other data released before they next convene. 

US large-cap benchmarks ended the week 0.5% higher (+13.6% YTD), led by technology stocks where indices were up 1.6% (+29.2% YTD). The yield on the US 10-year Treasury note increased 23 basis points on the week, closing at 4.80% but down from a high of 4.89%. The US dollar ended the week little changed against sterling and the euro, at 1.22 and 1.06 respectively.  

UK stocks ended the week down 1.5% (+3.7% YTD) as the 10-year gilt yield remained closed to a 15-year high at 4.57%. The MSCI Europe ex UK fared similarly, decreasing by 1.1% (+8.0% YTD). The German 10-year yield increased by 4 basis points to 2.88% and the spread on Italian government bonds increased further in a sign of cautious investor sentiment.

Middle East conflict

Hamas attacks on Israel on Saturday morning have caused a clear market impact at the start of the new week with the oil price spiking higher, stock markets declining and safe-haven assets such as government bonds and gold catching a bid. Comparisons have been made to the 1973 Yom Kippur war and the impact that the oil embargo had on driving US inflation higher but at present the implications seem less far reaching, from the markets’ perspective.

Oil benchmarks gapped higher by around 3%-4% when they re-opened after the weekend, but they remain lower than at the start of last week. There is no immediate risk to supply, although a geopolitical risk premium in the price may be justified, especially if there is an escalation and other countries in the region, notably Iran, are drawn into the conflict.

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