The sprightly start to November which had lifted markets came to an abrupt end, with comments from Federal Reserve Chair Jerome Powell revealing that he was resolutely sticking to his guns.
Indeed, while bullish investors had been anticipating the end of the rate hiking cycle and beginning to factor in rate cuts next year, Powell’s speech was unequivocal. The ultimate target of 2% inflation has not yet been achieved, while the underlying resilience of the US economy despite the tightening monetary environment leaves the door ajar for further hikes should the data dictate.
In addition, the Fed is “not confident” that rates are high enough to finally douse the inflation fire, and warned that “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”
The resulting resurgence in Treasury yields piled pressure on the equities market, where early gains completely evaporated. A weaker-than-expected bond auction added to investor jitters, while the issue of a potential US government shutdown loomed back on to the agenda. After the previous near miss in September, a divided Congress now needs to agree a deal within the next week in order to avoid running out of funding, a situation which would have far-reaching and damaging implications.
While Powell’s comments were not new news, they have impacted market consensus on the likelihood of interest rate cuts, which are being pushed back to later next year. Indeed, at the current time there does not seem to be a case for cuts even being on the table.
In the meantime, the view remains that there will be no further rate hikes this year, although any economic data which surprises to the upside would inevitably lead to more hawkish Fed discussions which would pull the rug once more from markets.
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The resultant uncertainty has again slimmed gains for the main indices, although not to the extent of detracting from a year which on the whole has been positive as the narrative has moved towards a peak to the hiking cycle, as opposed to how high rates could go, as was the case in previous months.
In the year to date, the Nasdaq remains the outperformer having risen by 29.2%, while the S&P500 and Dow Jones have added 13.2% and 2.2% respectively.
Asian markets were slightly unsettled by the hawkish Fed rhetoric, although issues closer to home were more impactful. The Nikkei rose in Japan following strong earnings from Casio and Nintendo, with oil stocks also receiving a boost.
In China, however, real estate sector concerns have never been far from the surface in recent months, and a 10% drop in the shares of Country Garden followed serious doubts on the possibility of the company being rescued. At the same time, general economic demand remained fragile, while international investors have been leaving the area in their droves in the absence of any sustained monetary and fiscal easing from the authorities.
The UK was similarly bruised at the open, with the reverberations of the Fed comments landing on these shores. At the same time, the latest GDP reading was entirely flat against expectations of a marginal decline in the three months to September.
While the data may keep the possibility of recession at bay for the time being, it also underlines the fragility of an economy where interest rates remain higher in the face of persistent inflation.
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The outlook thus remains on a knife-edge and investors were in no mood to take risks or prisoners. The so-called domestic barometer which is the FTSE250 fell sharply in early exchanges, leaving the index trailing by 6.4% in the year to date.
The premier index also opened lower, with a broad markdown signalling another session where a risk-off approach prevails. Quite apart from the cautious comments emanating from the other side of the pond, the ongoing turmoil in China also impacted stocks such as Burberry Group (LSE:BRBY) and Prudential (LSE:PRU), while the housebuilders were shaved once more as the latest data underlined the current economic challenges. As a result, the FTSE100 dipped into negative territory for the year yet again, now down by 0.5%.
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