Please see todays Daily Investment Bulletin from Brooks Macdonald:
What has happened
Hopes of a Fed pivot towards less aggressive monetary tightening gathered pace yesterday after the Bank of Canada raised interest rates by 50bps instead of the 75bps expected. Bond markets quickly extrapolated this change in tone into the US Treasury market, reducing the expectations for interest rate hikes in the US next year. Despite this more positive tone, US equities struggled yesterday as investors absorbed the weaker-than-expected technology earnings from the previous evening.
Corporate earnings
Technology and Communications were the two underperforming sectors during the late US equity sell-off. Alphabet fell by almost 10% and Microsoft by almost 8% as the market repriced after the earnings releases. Given the size of these two heavyweights in the index, this helped drive the sector and overall index lower. After the closing bell last night, Meta (Facebook) released their earnings, missing expectations, falling by almost 20% in afterhours trading. Outside of technology the earnings have been more robust with Kraft Heinz, for example, reporting alongside Meta with an earnings beat and upside revision to the company’s future guidance.
ECB
Today sees the latest interest rate decision from the European Central Bank. The market is expecting a 75bp increase in European interest rates however it is the pace and timing of the ECB’s balance sheet reduction and the forward guidance that will be of most interest to financial markets. Quantitative tightening has been kicked down the road due to concerns over fragmentation risk which could see the difference in yields between Italian and German debt, soar. Looking further ahead, the bond market has less confidence around the future path of interest rates in December and into early next year. A hawkish tone is expected within the ECB’s statement as well as the subsequent press conference though investors will be eagerly searching for any signs that the ECB is considering a Bank of Canada style pivot.
What does Brooks Macdonald think
The Bank of Canada was one of the first central banks to start raising rates and also one of the first banks to embrace larger interest rate rises to ramp up its response to inflationary pressures. As a result, it is seen as somewhat of a bellwether for Federal Reserve policy. We have however seen many attempts this year at beginning a ‘pivot rally’ with the US central bank pushing back against the narrative each time.
These daily investment bulletins from Brooks Macdonald provide us with a short clear overview of what is happening in the global markets.
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Andrew Lloyd DipPFS
27th October 2022