In our latest Weekly Comment, Head of Fixed Interest Research Richard Carter, CFA provides his insights into the most recent market developments, including Federal Reserve (Fed) delivering a quarter-point rate cut, tech sector jitters, market breadth improvements and regional highlights.
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Market overview – Richard Carter, Head of Fixed Interest Research
Last week was eventful from a stock market perspective – a US rate cut, markets hitting all-time highs, oh and the usual dose of tech sector jitters.
Starting with US rates, the Federal Reserve (Fed) did not disappoint all those futures traders and economists who had overwhelmingly predicted a quarter-point cut in the Fed Funds Rate to 3.50%-3.75%. There was dissent though. Three of the 12 on the policy-setting board voted against the quarter-point cut, the biggest revolt since 2019, as policymakers were torn between a softish/softening labour market and a stubbornly high inflation rate. Two of the three advocated no change, while the third was pushing for a larger 0.5% cut. Furthermore, questions remain over how many rate cuts there will be in the new year.
The Fed rate decision was enough to send major US stock indices to new highs, all the more impressive as there were tech sector wobbles to deal with too. Oracle acted as the trigger. The share price was marked down after quarterly revenue growth failed to meet analyst expectations. Not the best time then for the company to announce another hike in its already eye-catching artificial intelligence (AI) spending plans.
Chipmaker Broadcom suffered a double-digit fall in its stock price too. Gross margins were a concern, specifically worries that a US$21bn order from OpenAI rival Anthropic will have a negative impact due to higher costs. Broadcom’s quarterly sales and earnings topped expectations though, and quarterly revenue guidance was raised. But after such a strong run, markets, it seems, are increasingly demanding of the big tech names.
Just as well then, that US equity markets were able to shrug off Oracle’s news and go on to set record highs thanks to a broadening out in market leadership. Old world sectors such as financial, consumer discretionary, industrial and materials all stepped up and posted strong gains. Broadcom’s release the following day did mean the main US equity benchmarks failed to end the week at record levels. But if the increase in market breadth is a sign of things to come then that could bode well for stock markets going into the new year. After all, a broader market is a healthier market.
Weekly economic announcements:
The MSCI All Country World Index (MSCI ACWI) ended the week nursing a small 0.2% decline. Year-to-date (YTD), the index still boasts an impressive 22.1% gain.
United States:
One swallow does not make a summer and all that but the potential broadening out of US equity markets can be seen in the numbers. While the overall main US stock index ended the week off 0.6%, small caps, which are typically more interest rate sensitive, were up 1.2%. This means the smaller end of the market is catching up with larger peers on a YTD basis — up 15.8% compared to 17.5%. The same is true of growth and value stocks. Growth stocks, which count the previously all-conquering tech sector among their number, shed 1.5% (+18.0% YTD), while value added 0.6% (+16.1% YTD).
US Treasuries had a mixed week. At the short end, yields ticked lower following the Fed cut – the yield on the 2-year Treasury edged four basis points lower to 3.52% (down 72 basis points YTD). By contrast, yields on longer-term notes finished slightly higher - the 10-year Treasury yield added five basis points to end the week at 4.19% (down 38 basis points YTD).
United Kingdom:
UK large caps matched the global index with a 0.2% decline, although the YTD gain is still an impressive looking +22.1%. Mid caps fared worse, finishing the week off 0.8% (+9.8% YTD). Soft gross domestic product (GDP) data would not have gone down well with the more domestically focused medium-to-smaller end of the market. GDP contracted 0.1% in October, matching September’s reading and falling well short of the 0.2% expected expansion. The hope is the weak number is down to uncertainty in the elongated run up to the Budget and that, now this is out of the way, future readings will be more positive.
The October GDP data did not stop sterling’s recent run against the dollar, with the pound ending the week at US$1.34, up from US$1.33. UK government bond yields ticked modestly higher, with the 10-year UK Gilt yield rising six basis points to 4.54% (down four basis points YTD).
Europe ex UK:
For the second consecutive week European equities were the week’s outperformers with the MSCI Europe ex-UK Index up 0.1%. YTD the index is up 17.2%. Not having as much skin in the AI game would have helped. So too, comments from European Central Bank (ECB) president Christine Lagarde that the European economy is coping with global trade tensions rather well. This could lead to the ECB revising its growth forecasts upwards when the rate-setting committee meets this week. The market is expecting no change to rates.
As with the previous week, German stocks led the way with a 0.7% weekly gain (+21.5% YTD). Italy was not far behind with a 0.2% rise (+33.7% YTD). By contrast, Switzerland and France were among the laggards. Swiss stocks were 0.4% lower (+14.7% YTD), while the main French index closed down 0.6% (+13.0% YTD).
Like sterling, the euro edged higher against the US dollar, closing at US$1.17 compared to US$1.16 previously. And like UK Gilts, the yield on the 10-year German Bund rose six basis points to 2.86% (up 50 basis points YTD).
