Market news and views from the Managed Portfolio Service investment team
In brief
- Equities finally pick up on the higher interest rates in 2025 story.
- The Labour Party leaks Budget plans in build up to the announcement.
- Trump is really trumping in the polls.
Rollercoaster
As our recent comments anticipated, things came to a head this week when equity markets finally reacted (negatively) to the sharp increases we’ve seen in Government bond yields. The US equity market has started to interpret stronger data as good for economic growth but a hinderance on the lower rates later in 2025. New home sales above forecast, lower unemployment claims and expanding private sector activity were notable positives in the US. For now, financial markets continute to reflect confidence there will be two interest rate cuts in the US this year but next year they may not be cut as quickly.
The polls swinging in Trump’s favour has been widely reported. US equity markets tend to weaken ahead of elections and rally following, with the risk of the unknown being worse than the known outcome. Where are we compared to past elections? Well, in 2016, with Trump’s first election win we saw wider dispersion in markets, with the S&P 500 Index and the Russell 2000 Index rallying. Of course the promise of tax breaks and the subsequent delivery led to a real easing. The rally in US equities in recent months can be attributed to consumer spending and higher money supply. Trump is unlikely to have levers he pulled in the past, and unlikely to have control of the upper and lower houses following the election. This limits his ability to make changes if he wins. With a few weeks of campaigning to go, there is still a lot to be said and heard so we won’t get ahead of ourselves just yet – however, opportunity may arise!
The fiscal stance in the UK is doing little to provide business optimism. Labour are trying their best not to break promises made only a few months ago, but Thursday’s reaction to comments from our Chancellor about higher borrowing levels have done little to calm bond markets. It is worth noting that higher interest rates tend to be good for the FTSE 100 Index, where a large financials exposure benefits from higher borrowing costs. It seems we may know the Budget before it’s offically announced by this Labour Government.
In Europe, company surveys, also known as purchasing managers indices, reflected the uncertainty we’ve seen for months. French manufacturing provided its weakest survey since 2020. German manufacturing showed slowing order logs. Interestingly, equities have remained upbeat as earnings have beaten expectations and rate cuts look highly likely. For example, Renault led the automotive sector higher on Thursday as it posted record third quarter earnings growth – this doesn’t quite align with corporate surveys. We think political turnover in the year of elections may be swaying the surveys when the reality is much better for the corporates.
Now it may seem like this is a rather downbeat weekly comment, but clearly the earnings season is speaking volumes. We could have noted five or six significant beats and improvements across the UK and Europe this week alongside the banks last week. One thing we know is that political noise is just noise and the economics remain favourable. The Santa rally may have paused for now, but it’s only a pause.
Looking ahead
Next week brings three signifcant events. One is the bank of Japan’s interest rate decision. Whilst rate increases aren’t expected due to recent inflation numbers, it could bring one forward to counteract recent currency weakness. Alongside this is third quarter results from Apple, a significant sign of global consumption and the Chinese economy. Oh, and a UK Budget…. How could we forget?!
