Equities enjoyed a positive week, as some green shoots of optimism began to emerge across the investment landscape. Economic data was mixed, which may be just enough for the Fed to at least pause for thought as the expected next 75bps interest rate hike draws closer. In the UK, the recent political and economic sideshow could well be drawing to a close as the new Chancellor Jeremy Hunt calms markets. Over the weekend, Boris Johnson withdrew his candidacy to return as Tory leader as the party appears to be rallying around Rishi Sunak. There is much left to write in this tale, but on the surface, a combination of Sunak and Hunt would win (at least initially) approval from investment markets, and most importantly gilt investors.
We had mentioned previously that the Q3 earnings seasons would give key insights to the strength of companies in the face of rampant inflation and so far, so good. About 1/5 of companies in the S&P 500 have reported, with nearly ¾ exceeding forecasts – slightly above average. The large banks have come through relatively unscathed and last week Netflix, whose value has halved this year, gained some respite after topping expectations. All eyes on ‘Big Tech’ earnings this week, along with the ECB on Wednesday (0.75% rate hike forecast).
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Weekly Investment News
Last week saw volatile yet positive gains within equities. US equities had their best weekly gain in almost four months as earnings season kicked off. The major push came as investors reacted positively to news that the Federal Reserve may begin to slow their aggressive pace of rate hiking that has so far depressed markets. The US market ended the week up 2.2% in euro terms. Earnings reports were largely mixed, however the financial statements of large banks such as Goldman Sachs and Bank of America came in above expectations.
Within fixed income, the US 10 Year Treasury yield rose to a 14 year high of 4.33% last week, before falling back to 4.18%. This came as a result of hawkish comments from the Federal Reserve which spooked investors, emblematic of the volatility that marked last week. As a result, the market has lowered its expectations for the level of US interest rates in 2023 . Despite positive sentiment on Friday, the path of the Fed still remains uncertain with indicators such as last week’s US Jobless claims report displaying a tight labour market, prognostic of higher rates. Whereas US existing home sales fell 1.5% last week, demonstrating the slowing effect higher rates are having on the economy.
Within Europe, the resignation of UK Prime Minister Liz Truss and the resulting write-off of her proposed fiscal policies helped UK markets rise, although rate hiking fears saw the broad eurozone market losing -0.2% last week. The UK inflation print was also released last week, which showed inflation rose to a 40-year high of 10.1% year on year in September. UK 10 Year gilt yields rose above 4% as a result. In Germany the 10 Year yield also moved higher, topping an 11 year high of 2.49% on Friday. This comes as the ECB meets this week, investors are expecting a large 75bps rise.
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