Market Commentary - October 2024

Introduction

Labour’s first budget for 14 years dominated the headlines, but with a US election in early November and constant attention paid to inflation figures, corporate results and interest cuts around the world, there was plenty of other financial news throughout October.

UK

£40bn of additional tax revenue was announced by the new Chancellor, Rachel Reeves on the 30th October in her first budget.

Despite the rumours, the usual tax reliefs for ISAs and pensions remained unchanged. It was employers who were hit first with an increase in employers NI from 13.8% to 15%. Whilst the Chancellor argued this was worth around £25bn, others argued that this would inevitably lead to lower pay increases, less recruitment, redundancies, and ultimately less money in the economy, reducing this figure in real terms dramatically.

There was also a change announced for 2027 for pensions, when any unused fund or death benefits would be subject to inheritance tax.

This is being used, along with some borrowing and anticipated private investment, to spend on the UK’s infrastructure. A list of projects has been announced. Reeves’ great gamble is that this notable expenditure will stimulate the growth that the UK has lacked for a number of years. If it doesn’t work she will put this government under enormous pressure heading into the next General Election. The OBR were reserved in their analysis, seeing some uptick in GDP in the short term but less in the final two years of this government’s five year term. Reeves’ has argued the time horizon for these investments to pay off is well beyond five years, but the electorate may not be that patient.

Much is made of immediate market reactions to major financial policy announcements such as these, usually too much. This was not a Kwarteng/Truss budget, which destabilised bond markets. However, there is an assumption that it may make inflation a little harder to bring under the 2% target this year and as a result Bank of England interest rate cuts may be less aggressive than originally thought. We shall see. Another interest rate committee meeting is due on 7th November, with a 0.25% cut the outcome many commentators and analysts are predicting.

Europe

The European Central Bank (ECB) made its third cut of the year, taking off another 0.25% to bring the rate to 3.25%. This was not unexpected with inflation remaining under control, and the dovish messages from President Lagarde.

The ECB have acknowledged that  economic momentum is weakening in Europe. This is more pronounced in the manufacturing sector, as the service sector continues to perform. Industrial and car manufacture decline is a concern, with Germany in the centre of the malaise.

As in the UK, economic stagnation is a primary concern with US growth outstripping the performance of other western developed economies by some way. European sovereign bonds were down 0.1% for the month as a result of the global weakness in fixed income markets.

United States

The US election hit fever pitch in October before the vote on 5th November. With no clear indication of who the winner will be ahead of the result, it looks inevitable that it will be decided by small margins in the usual swing states.

Markets may have been pricing in a Trump win, but there has been considerable volatility so it is best to avoid too many hard conclusions. Equities, bond yields and the dollar have all been touted as future winners from tax cuts under Trump. Harris may be seen as bringing clearer trade policy and international relations but, despite her promise to cut taxes for lower earners, continues to be associated with higher taxes and is perceived as less favourable to business. How many of these perceptions are based in truth we don’t yet know, but with such a close fought race both candidates have a big incentive to throw everything at it to attract a few extra votes.

As we have said many times before, markets are not political, so once the election is out of the way they will do what they will do whoever wins.

The Fed will meet 7th November and are expected to make a 0.25% cut regardless of who wins the election. They remain more concerned about the job market than inflation.

Third quarter GDP growth came in at a healthy 2.8% quarter-on-quarter annualised, confirming that the US economy continues to grow at an above average rate compared to other developed economies. Third quarter earnings season began with strong results from the banking sector. Results were mixed for technology companies, particularly those reliant on semiconductor demand, which caused some volatility. However, the banking sector delivered strong results. There is a continuing belief that whilst the big tech stocks may not be delivering at the pace set in recent times, there is plenty room for other sectors and stocks to grow, and recession will be avoided.

Far East

It is still too early to assess the impact of China’s state support measures designed to manage the real estate bubble and boost consumption. It has renewed interest in China’s equity market. In October new initiatives were introduced to allow local governments to use special local government bonds to purchase land from troubled developers.

Japanese stocks performed well. There have been concerns that the need for tighter policy and a stronger yen could impact export-oriented companies, amidst political uncertainty created by recent election results. They do not seem to have caused any problems. Core inflation, which had been a concern, came in at 1.8% year-over-year in October, supported by positive wage momentum. The Bank of Japan held interest rates at the same rate.

Emerging Markets

Emerging markets were pressured by a strong US dollar in October. High services inflation remains a problem despite goods price inflation being contained. Manufacturing improved in October but remains relatively weak for 2024. Oil prices were also choppy in the month.

Should Trump win, and kick off a trade war with China, there is an expectation that China will look to emerging markets as alternative source of demand for its exporters, although this is not without a number of problems which would need to be overcome first, most notably an exchange rate adjustment.

Indian stocks have performed well in 2024 but corrected sharply in October as a result of some poor corporate results.

Conclusion

It is hard not to notice the intense political climate with a budget and a US election dominating the headlines, alongside ongoing tensions in the Middle East. However, it is worth remembering that these moments are passing and markets are rarely interested in them once clarity is provided.

Interest rate normalisation continues as expected, and we hope that a soft economic landing in the US, rather than a recession, will appear in 2025.

And Finally…

Did you know that Mount Everest grows about 4 millimeters each year?

The growth each year is due to the movement of tectonic plates and this gradual rise occurs because the Indian and Eurasian plates continue to collide, pushing the mountain higher over time.

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