Please see the below article from Brooks Macdonald, analysing the key factors currently affecting global investment markets. Received this morning – 17/10/2024
What has happened?
Markets had a decent day on Wednesday, as headline inflation pressures this week have broadly appeared to ease on both sides of the Atlantic – both UK (yesterday) and Canada (Tuesday) have this week seen their latest annual ‘all-items’ consumer inflation prints come in weaker than expected. That helped buoy equity markets yesterday as well as sending government bond prices up as their corresponding bond yields fell. Within equity markets, that theme of lower inflation lifted hopes for interest rate cuts, which in turn helped drive some rotation away from larger capitalised companies towards smaller peers, where the later are seen as more sensitive to interest rate expectations.
Chinese equities fall into correction territory
Earlier this morning, the Chinese CSI300 equity index ended down for the third day in a row, falling -1.13% in local currency price return terms, and tipping into correction territory (defined as a fall of -10% or more versus a previous high), falling -11% from its 8th October high. The latest disappointment came as a China Housing Ministry briefing earlier today underwhelmed investors – plans to increase loans for unfinished residential projects was seen as largely just reiterating previous announcements. For Chinese domestic investors, the recent stock market falls have been a reminder that extreme market moves can cut both ways: according to a Bloomberg news story, on one day last week, the phrase “close securities account” cropped up 56 million times on social media platform WeChat.
ECB meets with an interest rate cut on the cards
The European Central Bank (ECB) concludes its latest meeting today and is widely expected to cut interest rates by 25 basis points (bps), which would be their third-such-sized cut this year. If they do cut by 25bps, that would take the ECB deposit rate to 3.25%. Supporting rate cut hopes, the region’s economic background remains relatively soft – the Euro Area composite Purchasing Managers’ Index (PMI) recently dipped into economic month-on-month contractionary territory for the first time in seven months, while annual inflation rates have continued to fall, with the provisional Euro Area year-on-year headline inflation published earlier this month coming in at +1.8% for September, below the ECB’s 2% target.
What does Brooks Macdonald think?
Yesterday’s weaker than expected UK consumer inflation print has led to markets to price in a greater cumulative amount of rate cuts over the coming year. Indeed, by the close of trading yesterday UK derivative markets were pricing in 114bps of cumulative interest rate cuts by the Bank of England (BoE)’s June 2025 meeting, up some +9.8ps on the previous day. The BoE are next due to meet to decide on interest rates on Thursday 7th November.
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Alex Kitteringham
17th October 2024