The US stock market hit its 66th all-time high this year, setting the market up for its second-biggest number of annual records ever, only behind that of 1995, as large-cap technology companies continue to outperform with strong earnings and positive outlooks. This contrasts with the emerging markets which have been hit by a number of headwinds, including a policy-induced economic slowdown in China, rising inflation leading to a number of emerging market central banks tightening monetary policy, a slower Covid vaccine rollout and a strengthening US dollar.
As of 12 pm London time on Friday, US equities rose by 0.5% for the week, having risen by over 25% year to date. European equities were down 0.1%, whilst the UK stock market fell by 1.6%, as energy and financial stocks sold off. Japanese equities were up 0.2%, whilst Australian stocks dropped 0.6%. Emerging markets were down 0.9%, with Latin America falling particularly hard, losing 4.9% over the week. The US dollar strengthened by over 2% versus a basket of emerging market currencies, piling pressure on those countries dependent on overseas financing.
Despite US retail sales data for October coming in ahead of expectations, rising 1.7% over the month, and raising further questions as to how long the US Federal Reserve can hold out before raising rates, Treasury yields, which move inversely to price, fell.
It was a similar story for the UK, as inflation came in higher than forecast at 4.2% and retail sales climbed by 1.6% in October (excluding auto fuel), also ahead of expectations, yet gilt yields also fell. 10-year US Treasury yields are currently trading at 1.53%, with German bunds and UK gilts trading at -0.34% and 0.86% respectively. However, both the US dollar and the British pound strengthened versus the Euro, with the European Central Bank not expected to raise rates anytime soon.
Within industrial commodities copper fell just over 2%, now priced at $9,508 a tonne, and iron ore rose just over 3%, but still having given up close to 60% versus its year to date high reached in May. Brent crude fell 4.3%, now trading at $78.7 a barrel, as both China and the US said they were considering releasing reserves to ease price pressures. Gold is trading at $1,866 an ounce, broadly flat for the week, but having rallied over 8% since the end of September, benefitting from rising inflation whilst central banks continue to sit on their hands.
The new Japanese Prime Minister, Fumio Kishida, has begun to prepare a new fiscal stimulus plan equivalent to $350 billion, however, so far investors appear somewhat underwhelmed. The proposal involves distributing ¥100,000 (equivalent to $873) to households with children younger than 18 years old. However, last time this was done, it is estimated that recipients of the cash hoarded 70% of the money in bank savings rather than spending it. Few see any reason why it would be different this time around. At the same time, public debt to GDP stands at a massive 266% in Japan, something that will likely only deteriorate even further with such a proposal.
The central bank of Turkey, under pressure from President Erdogan, cut interest rates for a third time since September, down to 15%. This is despite inflation spiralling out of control, having hit 20% in October. President Erdogan considers high-interest rates as part of the inflation problem. However, the Turkish lira has fallen by over 20% versus the US dollar since the rate-cutting cycle began, with the currency having weakened by close to 40% since its February peak this year.
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