Global Markets End The Week Lower. Buying Opportunity? TPP Weekend Review.

In the first Labour government budget in 14 years, UK Chancellor of the Exchequer Rachel Reeves announced extra spending of £70 billion over the next five years, funded by tax increases of GBP 40 billion and additional borrowing of £32 billion.

She confirmed that she would loosen the fiscal rules to allow for higher-than-expected borrowing. The Office for Budget Responsibility reacted to the plans by saying higher taxes would weaken long-term growth. It now expects the economy to grow by just over 1% this year and 2% next year.

Reeves moved to reassure nervous investors as the budget triggered a sell-off in the bond market. She said that the “number one commitment” of the Labour government was “economic and fiscal stability.” She insisted that "we have now put our public finances on a stable and a solid trajectory."

Not only has the budget failed to create any growth but the added spending is also inflationary which may cause the Bank of England to pause sooner on rate cuts. This could curb economic growth moving forward. While the budget was a fairly sensible one for stability, it is hard to see how it was in any way pro-business or pro-growth.

Not a great start for Labour, but as Chancellor Reeves stated, "This is not the sort of Budget we would want to repeat," she told the BBC's political editor Chris Mason.

"But this is the Budget that is needed to wipe the slate clean and to put our public finances on a firm trajectory."

The FTSE 100 was down -0.29% on the week although gained 0.83% on Friday to close out at 8,177.15 points. The more domestic FTSE 250 rose 0.45% to 20,479.74 points but still ended the week down by -1.45% giving a truer reflection of how the equity market reacted to the budget.

In currency markets, sterling was last up 0.4% on the dollar to trading $1.2950, as it rose 0.72% against the euro to close at €1.1937.

“On the first day of the month European and US stock indices regained recently lost ground ahead of the US presidential election,” said IG senior technical analyst Axel Rudolph. “This week's late October rout in stock indices was followed by a positive start to the month as bargain hunters stepped in.

UK manufacturing activity contracted in October for the first time since April, as the S&P Global purchasing managers’ index fell to 49.9, down from 51.5 in September. The index’s dip below the 50.0 mark signalled contraction, influenced by sluggish economic growth, stretched supply chains, and concerns over the potential impacts of the forthcoming Budget.

The sector reported a slowdown in new orders and a near halt in output growth as market optimism waned. UK retail footfall meanwhile also saw a downturn in October, reversing the gains made in September.

Data from the British Retail Consortium and Sensormatic showed footfall down 1.1% on the month, with high streets experiencing a 3.6% decline and shopping centres down by 1.6%. Retail parks continued to see increased activity, albeit at a slower pace, rising 4.8% after September’s 7.3% boost.

Elsewhere, house price growth in the UK showed signs of easing, with prices inching up just 0.1% month-on-month in October, according to Nationwide.

Annual growth also decelerated to 2.4% from 3.2% in September.

Europe

The STOXX Europe 600 Index ended the week -1.52% lower. Concerns about the potential for escalating conflict in the Middle East, some poor corporate results, and moderating expectations for the European Central Bank’s interest rate cuts contributed to the weakness. Major stock indexes also fell. France’s CAC 40 Index lost -1.18%, Germany’s DAX dropped -1.07%, and Italy’s FTSE MIB sank -1.42%.

The eurozone economy expanded in the third quarter by 0.4% sequentially, double its second-quarter growth rate and exceeding a consensus estimate of 0.2%. Germany unexpectedly avoided a recession, growing 0.2%. France and Spain also reported stronger-than-expected economic growth. However, Italy’s economy stalled.

Meanwhile, annual headline inflation accelerated slightly faster than forecast to 2% in October from 1.7% in September as the decline in energy prices last year dropped out of the annual comparison. Services inflation steadied at 3.9%. Core rate, which excludes prices for energy, food, alcohol, and tobacco, was unchanged at 2.7%.

US

The major indexes finished mostly lower after an exceptionally busy week on the macro (economy) and micro (earnings) fronts. The technology-oriented Nasdaq Composite and S&P MidCap 400 Index reached record intraday highs on Wednesday before falling back sharply on Thursday. Growth stocks generally lagged value shares, due partly to cautious earnings reports from Facebook parent Meta Platforms and software giant Microsoft. Small-caps also held up much better than large-caps.

Roughly 42% of the companies in the S&P 500 Index were expected to report third-quarter earnings over the week, including five of the Magnificent Seven mega-cap technology-oriented stocks: Meta and Microsoft, Google parent Alphabet, Apple, and Amazon.com. As of Friday, analysts polled by FactSet were expecting overall earnings for the S&P 500 to have increased by 5.1% versus the same quarter a year ago. This would mark a faster pace of growth than what was expected before the start of reporting season, when analysts expected earnings to grow by 4.3%.

The week also brought several closely watched economic reports. The week’s labor market data drew particular attention, although it arguably sent some widely divergent signals. On Tuesday, the Labor Department reported that the number of job openings had fallen to 7.44 million in September, its lowest level since January 2021. The number of Americans leaving jobs remained relatively unchanged, however, with the number of those quitting voluntarily, seen by some as a better measure of labour market conditions, also staying roughly steady.

Asia

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 0.4% and the broader TOPIX Index up 1.0%, as the Bank of Japan (BoJ) held rates steady amid political uncertainty. Japan’s ruling Liberal Democratic Party (LDP)-Komeito coalition failed to secure a majority in the country’s lower house election on Sunday, October 27, with the opposition capitalizing on public discontent in the LDP corruption scandal and the higher cost of living. The key parliamentary election left Prime Minister (PM) Shigeru Ishiba’s LDP facing the prospect of a minority government as it sought the support of smaller parties in an effort to maintain control of the lower house.

The yen initially weakened against the U.S. dollar on the election outcome, on expectations that a period of political uncertainty would ensue, potentially impacting future fiscal policy and the outlook for the BoJ’s monetary policy. At its October meeting, the BoJ held its policy rate steady at 0.25%, as widely expected.

Chinese stocks retreated despite data showing a pickup in economic activity. The Shanghai Composite Index fell 0.84%, while the blue chip CSI 300 gave up 1.68%. In Hong Kong, the benchmark Hang Seng Index lost 0.41%, according to FactSet.

China’s factory activity expanded for the first time since April amid better demand. The official manufacturing purchasing managers’ index (PMI) rose to an above-consensus 50.1 in October from 49.8 in September, according to the country’s statistics office, topping the 50-mark threshold separating growth from contraction. The nonmanufacturing PMI, which measures construction and services activity, increased to a lower-than-expected 50.2 in October from 50 in September. The rise in services activity was partly attributed to increased spending during the country’s Golden Week holiday. Separately, the private Caixin/S&P Global survey of manufacturing activity rose to 50.3 in October from the prior month’s 49.3 amid new order growth.

The Week Ahead

Next week promises to bring a busy period on the macroeconomic front as the knife-edge US election finally arrives and central banks on both sides of the Atlantic make rate calls.

Eyes have been glued to the race between Kamala Harris and Donald Trump ahead of the Tuesday, November 5 election, with polls still showing a deadlock between the two.

Investors are braced for potentially several days of uncertainty until a winner is announced. “There are [...] concerns that there’s no immediate clear winner,” Trade Nation analyst David Morrison noted.

“That would be the worst outcome for financial markets and, while it’s unlikely to be the case, investors are mindful of the fact that it took four days to conclude the result in 2020.”

Aside from the election, both the Federal Reserve and Bank of England will also make their latest decisions on interest rates on Thursday.

According to IG analysts, a 25 basis point cut is now widely expected in the US when the Fed meets, following September’s 50 basis point cut.

Thursday is also expected to see the Bank of England cut base interest by 25 basis points. This would follow the decision to hold interest at 5.00% in September after August’s initial 25 basis point cut.

“With activity slowing in recent months, opening up downside risks to the Monetary Policy Committee's growth projections, price dynamics have continued to normalise,” Deutsche Bank analysts said.

Next week also brings a score of updates from the housebuilding and retail sectors, as investors eye initial reaction from October's Autumn Budget.

Primark owner ABF and ASOS lead the way with updates on Tuesday, ahead of Wednesday updates from M&S and Wetherspoon, where Budget fallout is likely to be in focus.

Persimmon will kick off a string of updates from the housing sector in the meantime on Wednesday, before Taylor Wimpey and Vistry later in the week.

Thursday then sees BT, Sainsbury's, ITV and Rolls-Royce report, before British Airways owner IAG heads up the week's final day of updates.

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Our exposure on TPP:

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We always said last week would be an eventful one and so it proved.

With the markets retracing hard on the last day of the month on Thursday, many of our active strategies took advantage. Some have been stubbornly holding onto 'short sell' trades for much of this year, and it's on days like that where having exposure to these types of strategies pays off.

Most TPP portfolios should be built with leveraged trackers and our long or flats, but for the larger portfolios having an active strategy or two, certainly adds an extra element to ones portfolio.

After a topsy-turvy last week of the month, it will be interesting to see how the race for strategy of the month ended.

Here’s to a good week in the market and a US election without too much added drama. Have a great weekend.

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