Please see below this week’s market commentary from Brooks Macdonald received yesterday afternoon – 25/10/2021
Weekly Market Commentary | Equities perform well ahead of bumper week for US earnings
25 October 2021
Read detailed economic and market news from our in-house research team.
By Edward Park
- US earnings season continues to show strong momentum with a bumper week ahead
- Inflation expectations surged last week which set a rocky backdrop for the sovereign bond market
- The UK Budget and Spending Review is likely to contain few carrots, given the outdated fiscal data the government has chosen to use
US earnings season continues to show strong momentum with a bumper week ahead
Last week saw inflation expectations surge across the US and Europe but this was counterbalanced by continued strength in US earnings numbers. Spurred by the earnings season, equities performed strongly with around one quarter of US companies having now reported and another bumper week, which includes many of the heavyweight US technology companies, ahead.
Inflation expectations surged last week which set a rocky backdrop for the sovereign bond market
Last week saw US 5-year inflation breakevens (a proxy for inflation expectations) increase to 2.9% and 10-year breakevens move to 2.64%, setting post financial crisis records1. European expectations also rose with the ‘5-year, 5-year’ inflation expectations (5-year inflation starting in 5 years’ time, used to assess medium term expectations), rising to 2% for the euro area2. 2% may seem mild but against the context of an European Central Bank that has struggled to reach 2% in recent history, despite negative interest rates, this is impressive movement. With higher inflation expectations now incorporated into the medium-term figures, this suggests a bond market that is moving away from its pure focus on the transitory inflation narrative to a more balanced position.
The UK Budget and Spending Review is likely to contain few carrots, given the outdated fiscal data the government has chosen to use
Next week sees the Bank of England’s November policy meeting and it is widely expected that it will contain the first hike since the summer of 2018. Whilest the Bank of England have made it clear that they want to reduce some of their monetary support, there are many question marks over the future for UK fiscal impulse. This week’s 2021 Spending Review will be the Chancellor’s opportunity to set the path of government spending for this parliament and perhaps more importantly for markets, determine the balance between near-term fiscal restraint and promised spending. This week’s budget is likely to focus on the updated economic forecasts as well as the pre-announced national insurance increase and dividend tax rate hike. There are a few areas that the Chancellor could consider in order to increase the government’s tax take but most of them, such as pension reform or Capital Gains Tax hikes, would have political ramifications.
It is likely that this will be a UK budget with few sweeteners given the Chancellor has chosen to use September fiscal numbers which paint a slightly weaker picture for the UK economy. This serves three purposes, political validation for what is expected to be a tighter budget, justification for setting new fiscal rules to achieve fiscal balance, but also setting a lower bar for future performance.
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Charlotte Clarke
26/10/2021