Market Update

Inflation and interest rate expectations dominated the market's attention this week, spurred by comments from various Fed policymakers. They indicated that while further monetary tightening was necessary, future interest rate hikes might be smaller in magnitude to mitigate the risk of excessive tightening. As reflected in the accompanying table, this news had a very positive impact on market sentiment.
A similar narrative unfolded in the UK, with Ben Broadbent, the Deputy Governor of the Bank of England, confirming a point we've consistently made in these commentaries: market expectations for UK interest rates are excessively high. This suggests that bond yields will decrease, potentially leading to lower rates on new fixed-rate mortgages.
Equity markets enjoyed a boost this week, driven in part by corporate earnings reports surpassing expectations. For instance, in the US, not only did banks benefit from higher interest income and a resilient consumer, but Netflix also gained 25.9% after announcing strong Q3 results and subscriber growth. Lockheed Martin, a prominent aerospace and defense company known for products like the F-35 fighter jet and Javelin anti-tank missiles, saw its stock rise by 16.74% after revealing positive Q3 earnings, along with an increased dividend and share buyback program.
Out of the 99 companies in the S&P 500 that have reported earnings so far, 71 have exceeded analyst expectations, with aggregate earnings surpassing estimates by 4.50%. However, consumer discretionary companies, such as Carnival Cruises and Nike, have been a drag on this data due to economic challenges like rising food and energy costs and stagnant wage growth, which mirrors the situation faced by households in the UK.
In other news, the Japanese government intervened in the currency markets for the second time this month to support the yen. This action aims to counteract the yen's depreciation against the US dollar, which has occurred due to geopolitical uncertainties and low-interest rate policies. Despite this intervention, the yen has still weakened by nearly 22% against the US dollar since the start of the year, compared to the pound's 16.8% depreciation.
Meanwhile, in the UK, the political reshuffling continued. To maintain some sense of continuity and stability, many hope that whoever moves into 10 Downing Street at the end of the week will keep Jeremy Hunt in residence at 11 Downing Street.