Markets hit a rocky patch in October as investors became more concerned about longer term inflation. Ever since the US Federal Reserve’s jumbo 0.5% rate cut in mid-September markets have become anxious about the longer-term consequences of falling rates and renewed economic strength. Cutting by too much too soon risks stoking the inflationary embers further out.
What’s more, with a second Trump presidency growing more likely as the election edged nearer, and his spending plans having an uncertain effect on prices, markets have grown more wary of a Fed policy ‘mistake’.
The effects were mixed for shares as the US economy still looks in decent shape. Utilities and other interest-rate sensitive areas were underperformers. For bonds, the jump in yields abruptly ended the steady upward trajectory in prices over the summer.
Market reaction to Budget puts gilts and UK smaller companies under pressure
With investors’ interest rate expectations once again changing tack and nervousness around the Budget, UK gilts were under pressure. This was despite some near-term good news on inflation earlier in the month. UK CPI came in at 1.7% for September, lower than forecast, increasing the likelihood the Bank of England would increase the pace of interest rate cuts. A reduction is still likely for November, but expectations of a cut in December have now diminished owing to uncertainties presented by policies announced in the Budget.
Jitters about how much the Labour government would plan to borrow increased in the aftermath of the event, which unveiled some £40bn of tax rises and £28bn more borrowing than previously planned. Gilts yields rose (meaning prices fell) as the market digested the extent of the extra gilt issuance, and the pound fell in currency markets. It was a sour end to the month for UK shares too. Smaller companies and more domestically exposed retail and hospitality businesses in particular were under pressure. Albeit there was a small bounce for the AIM market where fears of a full removal of IHT relief were alleviated.
Gold shines on
Star of the show was, for another month, gold. The precious metal has surged this year and gold mining equities have ridden the trend. The continued strength of bullion is a bit of an enigma as real interest rates (the interest available on cash versus inflation) remain firmly in positive territory. This increases the opportunity cost of owning gold and ordinarily puts buyers off.
Yet the emergence of dominant, less price-sensitive buyers in the form of emerging market central banks, motivated more by geopolitics and diversification from the US dollar, has seemingly overwhelmed some of the usual drivers. In addition, conflict continues to blight the Middle East, and Chinese retail investors appear to be viewing gold as an increasingly important safe haven.
These trends appear entrenched but given the meteoric rise of the gold price, up almost 40% over the past year, a pullback at some stage wouldn’t be unexpected. Other commodities have generally been weaker, and despite no end to the Middle Eastern hostilities appearing in sight the oil price has remained noticeably subdued.
Read more: How to invest in gold, silver and other commodities
Earnings results impede share markets
Elsewhere in equity markets, a slightly better showing in the election polls for Donald Trump, who favours tariffs on imports, combined with robust economic numbers painted a positive backdrop for domestically focused US companies.
The tech sector also enjoyed a rally following a poor period over the summer as bellwether stocks Nvidia and Tesla posted strong returns. However, there was a sell-off late in the month as some concerns over the extent of AI spending surfaced. Meanwhile, US banks were also in vogue as higher interest rate expectations boosted assumptions about their profits.
Turning the weaker areas, Japanese equites endured a turbulent time and, unusually, the larger internationally facing stocks failed to respond much from renewed weakness in the yen.
Typically, softness in the local currency is supportive of these stocks as it flatters their earnings numbers, so recent action reveals investors are more sceptical about the Japanese corporate picture. European markets also sold off as some weaker results among some of the region’s key stocks such as Novo Nordisk and ASML weighed.
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