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Market Update Monday 31st October 2022

Technology names disappoint in earnings season.

This week’s headlines were dominated by the continuation of earnings season in the US as investors digested disappointing reports from large-cap technology names. Nearly $1 trillion was wiped off the value of the largest technology companies who all cited a slowing global economy and increasing cost pressures. Google parent Alphabet fell 9.1% on Wednesday after the company announced worse-than-expected growth in its core advertising business and Facebook owner Meta dropped 5.6% on the same day as it reported a decline in third-quarter revenue. Amazon on Thursday reported a weak revenue forecast for the rest of the year, whilst Microsoft was also punished by the market as the company provided downbeat forecasts despite resilient revenue growth on the back of growing cloud services demand.

Although the US technology sector finished lower for the week at -0.62% as of 12pm London time, the broader US index still posted a positive gain of 1.45%. It was also a mixed picture for the rest of the equity markets. Europe and the UK posted stronger gains with their main indices up 3.06% and 1.52% respectively. However, in Asia, Chinese stocks sold off in the wake of President Xi Jinping securing a third term as party leader. Investors fear continuing strict policy that could hamper the growth of tech giants with very few people who can challenge Xi’s policies. The Hong Kong index finished 8.32% lower whilst the Shanghai Composite fell 4.05%.

The European Central Bank raises interest rates as expected

With much of the year also focused on monetary policy and inflation, the European Central Bank (ECB) raised rates by 0.75%, pushing its deposit rate to 1.5%, the highest level since 2009, in a bid to tackle inflation. Inflation for the eurozone hit 9.9% in September. Meanwhile, a flash reading of the composite purchasing managers’ index, a gauge of manufacturing and services activity, showed a decline to 47.1 from 48.1 for September. Readings below 50 indicate a decline in activity, and this was the biggest contraction for almost two years, raising fears that the Eurozone is likely entering a recession.

UK bond market rallies as Rishi Sunak is confirmed as UK Prime Minister

Gilt yields (which move inversely to their bond price) continued to fall as Rishi Sunak was confirmed as the UK’s prime minister on Tuesday. Gilt yields returned to levels last seen before September’s ill-received “mini” Budget announced by former Prime Minister Liz Truss. Investors were reassured by what they perceive as a more fiscally prudent Prime Minister, who also retained chancellor Jeremy Hunt who has already scrapped the majority of Truss’s earlier proposed tax cuts. As of 12pm London time, the 30-year Gilt yield fell to 3.51%, whilst the 10-year gilt yield fell 65 basis points to 3.46%. Elsewhere major government bonds also rallied, with the 10-year German bund trading lower at 2.1% whilst the US 10-year Treasury yield fell 20 basis points to 4.01%.

European natural gas prices briefly drop below €100

The benchmark Dutch 1-month gas futures price dropped as low as €93.35/MWh on Monday, before finishing the week at €112 as of 12pm London time thanks to oversupply of natural gas and milder weather in Europe more recently. This marks an approximate 70% fall from its record price in August. Short-term Dutch gas spot prices for delivery within an hour, which reflect real-time European market conditions, also briefly dipped below €0 on Monday because of oversupply. With Russia cutting off their pipeline, Europe is attempting to secure as much fuel ahead of winter. However, storage facilities are close to full and tankers carrying liquefied natural gas are lining up at ports unable to unload their cargoes, sending prices lower.

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