Market overview
The MSCI All Country World Index declined by -1.3% (19.3% YTD) last week after six consecutive weeks of gains, as investors prepared for major upcoming macro events including the UK budget and US election. The oil market has come under pressure at the start of this week after Israel’s latest attacks on Iran avoided refining facilities.
United States
Large-cap stocks finished the week down by -1.0% (23.1% YTD), influenced by U.S. Treasury markets reflecting a shallower Fed rate-cutting cycle. Still, large-cap stocks outperformed small-caps, and growth stocks fared better than value stocks. Tech-heavy stocks saw a slight increase of 0.2%, largely driven by Tesla’s impressive performance, which marked its best daily gain (22%) in over 11 years.
Some profit taking after a strong run higher should not come as too much of a surprise, especially considering the key events in the next fortnight. This week stocks accounting for around 40% of large-cap benchmarks, including most of the Magnificent Seven, will announce their latest earnings figures. On the macro front, this Friday will see the release of the latest monthly jobs report before the US election and Federal Reserve monetary policy meeting next week.
United Kingdom
In the UK, an early estimate from a leading purchasing managers’ index (PMI) reading indicated that the composite fell to an 11-month low of 51.7 in October – down from 52.6 in September – due to a slowdown in new order growth. Additionally, a survey by market research firm GfK revealed that UK consumer confidence in October reached its lowest point this year, suggesting concerns over potential tax hikes. The recent decline in confidence has been attributed by some to the forthcoming budget, with the government paving the way for substantial tax increases.
In the markets, UK large caps declined by -1.3% (10.0% YTD), while mid-caps pulled back by -1.5% (8.7% YTD). The British Pound remained stable against the US dollar, ending the week at 1.30.
Europe (ex UK)
European stocks ended the week -1.1% lower (9.9% YTD), reflecting moves in global markets. . Major European stocks also declined, with German large caps losing -1.0% (16.2% YTD), France falling by -1.5% (2.3% YTD), and Italy dropping by -1.2% (19.5% YTD).
Economic news out of Germany has done little to raise the mood in recent weeks, with the eurozone’s largest economy expected to contract in 2024. This comes after a 0.3% contraction in 2023 and if the prediction is correct will mark the first two-year recession for Germany since the early 2000s. Volkswagen has announced plans to shut at least three German plants, cut tens of thousands of jobs and implement a 10% cut to pay in response to slowing sales and its costly transition to electric vehicles. Europe’s largest carmaker has 10 plants and 300,000 employees in Germany, and the closures would mark the first domestic plants to be shut in its 87-year history.
Oil Prices Drop Amid Middle East De-escalation
Following Israel’s weekend attack on Iran which avoided oil and nuclear facilities, Brent crude futures fell by 5.2% to US$72.11 per barrel. This decline was influenced by Iran’s measured response to the strikes, which saw little retaliation and potentially pointed to a de-escalation within the conflict. The U.S. had urged Israel to avoid Iran’s critical sites, and Iran’s initial reaction focused on supporting a ceasefire in Gaza and Lebanon, rather than escalating the conflict.
The size of the decline also potentially speaks to market positioning and could be seen as a reflection of some geopolitical premium coming out of the price. Brent crude has fallen to its lowest level since the start of October and is now trading around US$3 above its 2024 low.
Prepare for the Autumn Budget
Wednesday’s UK Autumn Budget is expected to address a large shortfall in UK finances with around £40bn of tax rises and spending cuts planned. While the government has committed to not raising income tax, national insurance on employees, or VAT, the budget will likely include a mix of measures to shore up the public purse.
Labour’s first budget in 14 years is eagerly anticipated and is predicted by some to include more government borrowing to fund capital investment. A relaxation of fiscal rules could allow potentially £50bn a year of extra borrowing for capital investment, although somewhere in the region of £20bn is closer to consensus. An extra £24bn per year is needed just to maintain current public investment at 2.4% of GDP, rather than seeing it fall to 1.7% in 2028-29 as planned by the previous chancellor, Jeremy Hunt.
Over the past few months, we have been proactive in anticipating any potential changes and have already discussed these matters extensively. As the Autumn Budget is announced, we will bring you in-depth reactions from our team of specialists to help you navigate any new developments, including webinars, tax tables, and expert commentary. Keep an eye on our LinkedIn and article hub in the coming days for more information.
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