Weekly comment: Stocks surge on hat-trick of good news

Market overview: Alan McIntosh, Chief Investment Strategist

Global equities enjoyed a strong start to November, boosted by a trio of favourable developments in the United States, with the MSCI All Country World index rising 5.3% last week. The gain takes year-to-date returns to 11.6%. Bond markets also rose as investor’s reacted positively to news of plans for a reduced level of long-dated US Treasury issuance, a seemingly dovish update from the Federal Reserve and signs that economic data is softening – taken as reducing the chances of further interest rate increases.

Expectations for any tangible change in policy were low heading into last week’s Federal Reserve (Fed) decision, but chair Jerome Powell’s signalling that the recent rise in long-term Treasury yields had achieved a tightening of financial conditions was warmly welcomed by the markets. Investors took the comment as evidence that the Fed are reactive to market developments and won’t continue to plough their own course blindly.

This stance was further supported by the October payrolls report, which seemed to strike the sought-after balance of showing sufficient loosening in labour market conditions to act against the case for further Fed rate increases while, at the same time, demonstrating enough strength to suggest that employment in the world’s largest economy remains in rude health.  

150,000 jobs were added in October, below expectations and the lowest level since June but still a fairly solid print. The previous month’s blowout reading was also revised down to stand at 297k, 39k lower than the original. Wages also rose less than expected and the annual pace now sits at 4.1% - the lowest level in two years.

A few hours before the Fed announcement the first, and arguably least significant, of the three positive catalysts occurred, as the US Treasury declared it plans to sell US$112bn of longer-term securities at its quarterly auctions, down from the US$114bn previously planned. Although the US$2bn downward revision is small in relative terms, its signalling power is potentially significant. Along the same lines as Powell’s comments, the move reveals that the US Treasury is sensitive to market developments and ready and willing to react in a supportive manner should it feel it necessary.

US stocks jumped 5.9% last week after closing out October with a 2.1% decline. The move higher was the strongest weekly gain of the year and takes 2023 returns to 15.0%. It was a busy week of earnings and while the market reaction so far has been mixed, there was a sense towards the end of the week – especially after the jobs data – that several potential sources of bad news in the near term have been navigated with little sign of serious concern. 

BoE pause again

For the second successive meeting the Bank of England (BoE) head its base rate at 5.25%, the highest level in 15 years. The vote split was slightly stronger in favour of a hold compared to the last time, with 6 of the 9 member panel voting for no change.

Unlike his US counterpart, BoE governor Andrew Bailey was less dovish, stating that rate setters are closely watching to see if further increases in the rate are needed and that is much “much too early” to consider cutting rates. The central bank’s projections showed inflation proving stickier than previously expected and now not forecast to dip below the 2% target until the end of 2025.

UK stocks underperformed on the week, rising 1.7%, after closing out October with a 3.7% loss. They remain higher by 2.7% for 2023. There was notable decrease in UK government bond yields last week and the 10-year gilt yield fell 26 basis points to close at 4.28%.