Global stocks fall, as investors get nervous. Where now? TPP weekend wrap.

Global Stocks end the week in the red.

London stocks ended Friday in negative territory, weighed down by losses in pharmaceutical shares and a surprise slowdown in UK economic growth during the third quarter.

The UK economy slowed unexpectedly in the three months through September. Gross domestic product was measured at 0.1%, down from 0.5% in the preceding quarter and below the consensus forecast of 0.2%. A contraction of 0.1% in September, mainly due to weaker manufacturing output, contributed to the slowdown. The services sector grew 0.1% over the three months but the main upside lift was a 0.8% increase in the construction sector.

Meanwhile, annual wage growth excluding bonuses averaged 4.8% in the same three-month period, the lowest level in more than two years. Bank of England Chief Economist Huw Pill said after the data release that inflation pressures remained too high for the 2% target.

On London’s equity markets yesterday pharma giants GSK and AstraZeneca were among the day’s losers, falling 3.55% and 3.26%, respectively.

The sector came under pressure following news that US President-elect Donald Trump had chosen Robert F Kennedy Jr to lead the Department of Health and Human Services, sparking investor concerns about potential regulatory changes.

“The announcement of vaccine-sceptic Robert F Kennedy Junior as health secretary pick for the incoming Trump administration has spooked investors in the sector, with US drug companies also seeing their shares come under significant pressure overnight,” said Russ Mould, investment director at AJ Bell.

On the upside, Land Securities Group climbed 4.57% after returning to profitability in the first half, posting a pre-tax profit of £243m compared with a £193m loss a year earlier. The company also raised its full-year earnings guidance, buoyed by a recovering property market and rising demand.

Burberry Group added 3.27%, continuing its rally following Thursday’s announcement of a £40m cost-saving turnaround plan aimed at addressing its sales challenges.

Europe

The STOXX Europe 600 Index ended -0.69% lower, falling for a fourth consecutive week. Concerns about the incoming Trump administration’s trade policies and political upheaval in Germany weighed on sentiment, as did Federal Reserve Chair Jerome Powell’s cautious comments on U.S. interest rates. Major stock indexes were mixed. France’s CAC 40 Index fell 0.94%, Germany’s DAX was little changed, and Italy’s FTSE MIB was one of the few winners this week advancing 1.11%.

Euro area data kept hopes of a soft landing for the economy alive. A second estimate of GDP from Eurostat confirmed the surprisingly strong 0.4% expansion in the third quarter. In addition, the European Commission projected growth of 0.8% in 2024, although Germany’s economy is expected to contract by 0.1%. Other data showed the labour market remained stable. Employment rose by 0.2% in the third quarter, after increasing by 0.1% in the preceding three months.

European Central Bank policymakers unanimously backed October’s quarter-point interest rate cut, arguing that “the disinflationary trend was getting stronger” and that it was important to avoid “harming the real economy by more than was necessary,” according to minutes of the meeting. The ECB acknowledged the decision was also motivated by “prudent risk management” and provided insurance against downside risks that could lead to an undershooting of the inflation target. The central bank reiterated that decisions would remain dependent on incoming economic data and that it was not pre-committed to a future rate path.

The US

Yesterday was ugly in the US as stocks gave back a portion of the previous week’s gains. The Nasdaq 100 fell -2.4% on the day to end the week -3.42%. Nvidia and Broadcom fell over 3% each while Amazon, Meta and Eli Lilly all dropped more than -4%.

Uncertainty over the incoming administration’s policies appeared to continue driving the ‘Trump Trade’. The potential policy implications for corporate earnings were visible in the wide dispersion of sector returns, with financials and energy shares continuing to benefit from hopes for deregulation and merger approvals. Likewise, at its peak Wednesday, the price of Bitcoin had surged by nearly a third (32.46%) since the eve of the election, as investors anticipated looser regulation of digital currencies.

The announcement of Kennedy as health secretary had an immediate impact with the iShares Biotechnology ETF declining -4.79%. Moderna fell as much as -7.3% and Pfizer and Eli Lilly weren’t far behind with falls or -4.7% and -4.9% respectively.

The week’s economic calendar was highlighted by Wednesday’s inflation data, which were largely in line with expectations, with headline prices rising 0.2% in October and core (less food and energy) prices rising 0.3%. Due largely to stubbornly high housing costs, however, year-over-year headline inflation rose for the first time since March, from 2.4% to 2.6%. Monthly headline and core producer price inflation, reported Thursday, rose in line with expectations and their consumer counterparts.

Speaking Thursday, Federal Reserve Chair Jerome Powell seemed to dampen sentiment a bit by remarking that “the economy is not sending any signals that we need to be in a hurry to lower rates.” As measured by the CME FedWatch Tool, expectations priced into futures markets for a quarter-point cut in December fell moderately over the week from 64.6% to 58.4%. Whether because of Powell’s comments or new policy signals from the incoming administration, expectations for a full percentage point of cuts by the end of next year fell more considerably, from 41.3% to 32.6%.

Asia

Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling 2.2% and the broader TOPIX Index down 1.1%. The weakness of the yen lent a degree of support, but the prospect of President-elect Donald Trump’s incoming administration raising tariffs weighed on the outlook for those Japanese companies that are heavy exporters to the U.S.

The yen weakened to the JPY 155 range against the U.S. dollar, from about JPY 152.6 at the end of the previous week. Authorities again warned that they would take appropriate action against excessive currency moves. The Japanese currency has come under pressure as the greenback strengthened on Trump’s victory in the U.S. presidential election, which stoked some expectations that his administration’s policies could prove inflationary and alter the Federal Reserve’s plans to lower borrowing costs. Uncertainty about the timing of future interest rate hikes by the Bank of Japan (BoJ) also weighed on the yen.

Chinese equities declined as evidence of persistent deflation and worries about potential US tariffs under incoming US President Trump hurt investor confidence. The Shanghai Composite Index fell 3.52%, while the blue-chip CSI 300 gave up -3.29%. In Hong Kong, the benchmark Hang Seng Index plunged -6.28%, according to FactSet.

China’s consumer price index rose a below-consensus 0.3% in October from a year earlier, down from 0.4% in September, largely due to lower food and energy prices. Core inflation, which strips out volatile food and energy costs, increased 0.2%, from September’s 0.1% rise. The producer price index fell 2.9% year on year, more than the 2.5% decrease predicted by analysts and accelerating from September’s 2.8% drop, extending the deflation in factory gate prices that began in late 2022.

Other data painted a mixed picture of the economy. Retail sales expanded a better-than-expected 4.8% from a year ago, up from September’s 3.2% rise and marked the strongest growth since February. Industrial production rose 5.3% from a year earlier, lagging forecasts and September’s 5.4% increase, amid weaker auto sales. Fixed asset investment remained steady at 3.4% in the January to October period, while property investment in the period fell 10.3%. China’s urban unemployment rate eased to 5%, from 5.1% in September.

The Week Ahead

Inflation will dominate macroeconomic headlines next week after news the UK economy barely grew during the third quarter. Expectations are for the headline rate of inflation to have ticked up to 2.0% throughout October, against September’s 1.7%, according to IG analysts.

This opened the door for a second cyclical interest rate cut by the Bank of England in November, with an anticipated growth in price rises again pushing expectations for the next reduction into next year.

However, news most recently that the gross domestic product increased by just 0.1% in the three months to September may see this change, according to analysts, leaving focus on the upcoming consumer price index reading on Wednesday.

“The surprising fall in GDP in September means the economy almost ground to a halt in [the third quarter],” Pantheon Macro analysts said, “supporting the case for more rate cuts”.

Retail sales figures on Friday will add to the picture of the UK’s economic health, alongside purchasing managers index data from S&P and consumer confidence numbers.

Elsewhere, Eurozone inflation figures are also due next week, alongside retail sales data from the US.

Several sectors will be on show when Imperial Brands, Mitchells & Butlers, Severn Trent, JD Sports and Royal Mail owner IDS report next week.

First, Melrose's update on Monday will offer a glimpse into the aerospace industry as pressure has increasingly built about supply issues recently.

Tobacco firm Imperial Brands will report on Tuesday, hot on the heels of news the UK government was to ban disposable vapes from next summer.

Wednesday then brings figures from Severn Trent as new regulation for the water sector looms and from Mitchells & Butlers after pubs have slated tax hikes in the recent Budget.

Nvidia will also be on focus as it reports from across the Atlantic on Wednesday, before a busy Thursday as updates come from JD Sports, Close Brothers, IDS, and Halma.

That’s it from TPP this week. Well done to the short-selling active strategies this week; as for the long strategies, be patient, the dip rarely lasts.

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