Markets rallied strongly last week, very much on the back of the latest inflation print from the US (more details below). The cooler than expected inflation has also combined with warmer than expected weather in Europe. In the midst of COP27 this weather is not a welcome long-term development, but it removes a powerful bargaining chip from President Putin’s bag of tricks. In the US, the Democrats performed better than expected and have retained control of the Senate whilst look to have lost the House by a lower than expected margin. Politics aside, there is a strong investment argument for a split Congress and the stalemate (read status quo) that it creates.
Much has been written over the weekend about the collapse of the FTX cryptocurrency exchange. This is certainly a big story, which will garner a huge amount of media attention. Comparisons such as ‘crypto Lehman or Enron’ could well be justified. However, at times like this it’s important to remain anchored in what and how people within Zurich funds are investing: Diversified Multi-Asset funds, with a consistent process and a robust governance framework. Stories such as FTX are interesting, but we must all be vigilant to the risk that it leads clients to refrain from investing for the long-term – to the detriment of both themselves and their dependents. Inflation and interest rates might not make for exciting reading but are much more pertinent than crypto travails.
As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.
Weekly Investment News
Last Thursday saw the release of the US inflation print for October. Headline inflation came in at 7.7%, below the 8% expected by economists. Core CPI, a measure which strips out volatile food and energy prices, rose 0.3% from September, below expectations of 0.5%. These figures caused markets to rise considerably as investors priced in the idea of the Federal Reserve slowing the pace of rate hiking. US equities rallied sharply in the trading session that followed, with the benchmark S&P 500 gaining 5.5% on Thursday, the largest one day increase in over 2 ½ years. The Dollar, which has been strengthened over the past few months due to cautious market sentiment, had its worst day in 7 years as risk-assets soared. The Euro/Dollar ended the week at 1.032. The cooler than expected inflation data also resulted in a plunge in US Treasury yields, with the US 10 Year falling below the psychologically significant number of 4%.
Despite markets being predominantly influenced by inflation, last week’s US Midterm election saw Democrats lose far less than expected seats to Republicans in the House of Congress and retain control of the US Senate. This has been viewed as a victory for President Joe Biden, as traditionally a sitting president’s party suffers large losses in a midterm election. The ‘red wave’ that failed to materialise leaves the US government more equally balanced and while this may cause gridlock in Washington, some analysts have taken the view that it may well bring much needed stability to investors. US equities finished the week up 5.1%, while the tech-heavy Nasdaq was up 7.2%, in USD terms.
In Europe and elsewhere, markets where largely guided by developments in the US, with Eurozone equities up 4.3% for the week. In Asia, the Chinese government announced a slight easing to its strict Zero Covid policy. While not a reversal entirely, the move is a well sought-after shift away from the growth-crippling strategy of the past two years. Hong Kong equities ended the week up 6.1%.
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