Weekly Market Update Monday 9th October 2023
Over the last week markets endured a choppy period in which bond yields moved higher and equity markets moved lower. Continued strength in economic data, tough talk from the US Federal Reserve and the ongoing conflict in Gaza saw equities fall over the week, with US equities falling 2.5%, whilst 10 year US Treasuries continued to touch levels last seen in 2007.
Another key driver of higher US Treasury yields has been the expanding Government deficit, as increased fiscal spending has enlarged the need for Government funding through debt issuance. With the total amount of US Treasuries issued in auctions expected to climb to over $3 trillion this year, higher than at any year over the past decade, this comes at a time when the Federal Reserve is reducing its holdings of US Treasuries as part of its Quantitative Tightening programme.
In the UK consumer price inflation unexpectedly held at 6.7% in September, remaining the highest of any major advanced economy and keeping alive the possibility of another rise in interest rates. A rise in petrol prices between August and September was the main factor stopping a fall in the annual rate, however, core inflation and services prices – were also robust, which is likely to leave some Bank of England policymakers worried about longer-term price pressures.
Subdued expectations for US earnings season were scaled back slightly as a second week’s batch of quarterly results came in. As of Friday, third-quarter net income was expected to decline 0.4% compared with the same period a year earlier, based on S&P 500 companies that have already reported combined with projections for those still scheduled to report. In the previous week, analysts had forecast growth of 0.4%.
US equities fell, 2.5% over the week whilst US technology also fell, 3.2%, and almost re-entered bear market territory as it finished 19.5% lower than it’s 2022 peak. European equities ended 3.44% lower, UK equities 2.6% lower, amid uncertainty about the outlook for interest rates and fears that the conflict in the Middle East could escalate. Chinese equities fell 3.4% despite the announcement that the economy grew at a faster-than-expected pace in the third quarter, expanding by 4.9% year on year. The stronger figures partly reflect increased consumer spending, which rose by 5.5% in September.
The US 10-year Treasury yield crossed 5% during the week whilst European government bond yields also broadly climbed as investors weighed the prospect that interest rates could remain higher for longer due to sticky inflation. Germany’s benchmark 10-year government bond yield rose, ending the week just shy of 2.9%. In the UK, the yield on the benchmark 10-year government bond rose to 4.65% after inflation data came in as unchanged instead of slowing further.
Amid escalating geopolitical tensions, oil rose 2.2% over the week to close at $89 per barrel whilst the price of gold rose more than 3% to the highest level in five months. Gold futures on Friday were trading just below $2,000 per ounce.