Market Commentary: Week to 25 October 2022

Market News

Stock markets managed to build on their rally of the previous week as the flow of news turned from unremittingly bad to merely “mixed”, and the steady drumbeat of company profit warnings was occasionally drowned out by some surprisingly upbeat reports. Stock markets were even able to shrug off another dismal performance by bond markets, helped by a relatively steady week for the US dollar.

The quarterly parade of earnings reports was the highlight of the week for investors, with notable disappointments in Tesla, Adidas, US banks in general, and the on-line advertising sector. Fortunately, expectations seem to have been reduced to such an extent that a lot of the bad news is already priced in. About three quarters of reporting companies have beaten expectations, though the extent of the outperformance is low by historical standards. Positive surprises were reported by several companies, including Netflix, United Airlines, LVMH and IBM (for more detail see the Stock Focus section).

Comments from officials at the US Federal Reserve, to the effect that rates would have to rise to “well above” 4% this year and then to stay at such high levels, threatened to derail the rally. Fortunately, these were more than countered by Friday’s Wall Street Journal article suggesting other Fed officials are not keen to continue hiking rates so aggressively at every meeting. As the week ended, sentiment in Europe was helped by falling natural gas prices after European leaders agreed joint action on a package of measures designed to constrain energy costs. Natural gas prices fell over 20% during the week and are now down 70% from their August peak. The news that Rishi Sunak’s leadership bid would be uncontested calmed British asset markets, and gilt yields fell significantly as buyers gained more confidence.

The publication of China’s latest batch of economic data had been suspended during the 20th Party Congress, giving rise to fears that it would either be disastrous, or subject to manipulation. In the event, China’s economy appeared to have enjoyed a post-lockdown bounce in the third calendar quarter, produced by a combination of growth in industrial production, construction and services. The property sector remained the main drag, but even this moderated from the rate of decline in the previous quarter. The positive data, however, were overshadowed by the consolidation of power announced at the Party Congress under President Xi Jinping, which dashed hopes for a rapid end to China’s rigorous anti-Covid policy. Xi’s loyal prote′ge′, Li Qiang, will become second-in-command despite having little top-level experience and being blamed for Shanghai's disastrous lockdown earlier in the year. Li Qiang will be responsible for running the economy at a time of the slowest growth China has seen for decades — mainly caused by Xi’s refusal to ease the zero-Covid policy. Chinese stock markets reacted to the news by plunging across the board, with the Hong Kong-based Hang Seng Index falling below a level reached in 1997. The Chinese currency depreciated further against the US dollar and is now at the level last seen during the Credit Crunch. So far, the impact has been restricted to sales of Chinese assets by foreign investors, but the geopolitical implications run deep and, unfortunately for investors, China remains the world’s main engine of economic growth.?

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