A softening in the latest inflation data out of the US sent markets sharply up this week, with US equities recording their strongest day in over two years on Thursday. US inflation for the year to October came in at 7.7%, sharply down on the previous reading of 8.2% in September. Even once food and energy are excluded, the inflation numbers eased, coming in at 6.3%, down from 6.6%. Market expectations for the next US rate hike have come down to a 0.5% increase, with the peak in rates now priced in at 4.9%.
As of 12pm on Friday, London time, US equities rose 4.9% over the week, with US technology stocks rising by 6.1%. However, for overseas investors, equity gains in US stocks were dampened by a sharp sell-off in the dollar, which fell by 3.2% versus the Euro and Sterling. European equities increased by 3.8%, helped by better-than-expected German industrial production data released on Monday, which rose by 0.6% for the month of September, against a decline of 0.8% in the previous month. UK stocks rose by 1.3%, held back by news that UK GDP fell by 0.6% in September, a larger fall than forecast. However, within the more beaten-up area of UK small and mid-cap stocks, equities rose a whopping 8.2% over the week, responding to the easing in US inflation. The Japanese market increased by 3.3% and Australian stocks rose by 3.9%. Emerging markets rose by 5.2%, boosted by news that China shortened Covid-19 quarantine requirements for close contacts and international travellers.
US Treasuries rallied on the release of the inflation data with yields, which move inversely to price, falling to 3.8% on the 10-year. German bunds and UK gilts followed suit, now yielding 2.11% and 3.36% respectively.
Gold jumped by 5.0%, supported by lower expectations of future US interest rate rises, now trading at $1,761 an ounce. Although crude oil ended the week lower, with Brent crude falling by 2.1% to $96.5 a barrel, this masked a strong rally at the end of the week, having fallen under $92 on Thursday. European natural gas resumed its very helpful downward spiral this week, falling by almost 11% to €101.5 a megawatt hour, due to unseasonally warm weather.
In the US mid-term elections, the ‘red wave’ in favour of the Republican party failed to materialise. At the moment the Republicans look to have taken the lower house of Representatives, whilst the upper house of the Senate remains too close to call. Historically, markets have responded well to a divided Congress as it limits the amount of disruptive new regulations or tax increases that can be passed.
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