This week Chief Investment Officer, Patrick Farrell, reflects on market movements from the past week, provides an outlook on the economy more generally, and considers the implications of what is unfolding.
Erica: Thanks so much for being here for this episode of Market Moves. My name is Erica Whyte alongside our Chief Investment Officer, Patrick Farrell, here to break down the market moving events of the last week, namely gold has officially hit record highs, Bitcoin is surging, and meanwhile oil prices fell.
But what is the impact on markets? Well, Patrick is here to break it all down.
Patrick: I would say last week was just the continuation of still a very, very strong November. So we saw for the month of November, which closed on Thursday (28th Oct) we've seen some very substantial moves on equity markets.
So the S&P 500 was up 9% in price terms, the NASDAQ was up over 10% and a lot of the other major markets, with the notable exception of China, was actually up quite strongly.
The FTSE 100 was still a little bit of a drag, sort of pushed down as you mentioned, oil prices coming down, pushed down the energy spectrum, in the FSTE 100 and also the stronger currency, probably working against it, working more as a headwind, but ultimately it was still up just under 2% for the month. So that was a good result. And more importantly, the FTSE 250. So some of the smaller companies actually had a nice little pop. So, that was a good result.
Bond markets also did extremely well. So yields falling as far as they did over the course of November, really did propel fixed income prices and markets to some very, very nice returns over the course of November. So it was a very, very good month for investors, let's put it that way.
Erica: So what are the implications of these moves here?
Patrick: Well, look, coming back to what is the, what's been the key driver over the course of the whole month? It's just the realization and the confirmation that a lot of central banks have basically done in terms of their interest rate hikes. And now some of the commentary coming out of central banks is not, is still quite strong talking, um, still fighting inflation rate higher for longer.
Nothing's changed in relation to that aspect, but where some of the market expectations have moved towards is that actually we're starting to see the cracks in the US economy and we're starting to see obviously inflation continue to fall at a faster rate. So that disinflation impact is very beneficial to where markets now sort of think, well, the job is much closer to being done.
Erica: We've maybe reached the peak?
Patrick: Yeah. And we, yeah, we're, and we're coming down and now a lot of the talk, because markets hate a status quo type environment, I'm sorry, but they end up, if we're not gonna tighten rates, then we must be going to cut rates. So this higher for longer talk is not necessarily gravitating in the market. So what the market is now looking for is when do we actually start to cut rates or when do central banks start to cut rates? So this is the expectation that we've got at the moment. And so the market, if I look at the probabilities of a 25 basis point cut in the US, it looks like around 60% chance of that happening by March of next year.
Patrick: Now, I feel that from a market perspective, that's way too optimistic. You know, that yes, we could still see inflation fall, we can still see growth actually start to ease a lot more than what it has. And that's gonna be good news for a lot of central banks, which will be good news for markets.
And I get asked the question, which is quite funny. Um, is good news good news? And is bad news bad news? The way I characterize it is that yes, you, you will start to see that good news is going to be okay news. Bad news is going to be on the edge, not so great, but really bad news is actually gonna be good news. So you do end up, you do end up in a scenario that if, if growth starts to really come off in the US then the Fed will be in a position where they could, uh, cut rates a lot sooner than, um, what our general expectations are and what their general expectations are because they potentially have tightened too much. Now, I'm not saying that that's the case. But, um, yeah, this is where I'd sort of characterize the fact that if you get some really bad employment numbers coming through in the US you would see the market rally aggressively off the back of that. Right. So it is funny because that's good news. Because it's really bad news! Which is actually good news for markets.
So yeah, it's, it's, it's a very fluid situation. We are very data dependent as we sort of look forward as are central banks around the world as well.
Erica: So looking ahead, what could all this mean?
Patrick: Well, again, I think what we'll need to do is, is look at the data as it does come out. Uh, we do get the US employment numbers later on this week. They will be critical. Absolutely critical. But I do think that, you know, without some of the earnings numbers that we've sort of gone, just basically gone through the earnings reporting season, you know, we'll have no other steer, uh, apart from some of the economic indicators that are gonna come out. So therefore we have to watch those quite closely. And, you know, we have to see how the US consumer, which is 70% of the US economy, how they're going to behave going forward.
Erica: Fascinating, Patrick. Thank you so much for all your expertise here today.
Patrick: Awesome, thanks Erica.
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