Weekly markets review | 21 October 2024

By Thomas Hibbert, CFA , Multi-Asset Strategist.

Summary

• The European Central Bank (ECB) cut interest rates for the third time this year, highlighting progress on inflation and unexpected drops in economic activity
• European bond yields fell, with the 10-year German Bund yield down 8bps (basis points) to 2.18%
• UK inflation dropped to 1.7% in September from 2.2%, the first dip below the Bank of England’s (BoE) target since April 2021
• US equities rose supported by utilities and real estate sectors, as did growth stocks later in the week following positive earnings
• Chinese stocks gained on better-than-expected, although still lacklustre, GDP growth data
• UK equities rose 1.3% buoyed by falling inflation and bond yields
• Oil prices fell sharply due to easing fears of an Israeli strike on Iranian energy infrastructure and OPEC’s downward revision of its global oil demand forecast for 2024
• Gold reached fresh all-time highs supported by falling real yields and geopolitical tensions
• The week ahead: Key data to watch includes UK Manufacturing and Services PMI data on Thursday – it’s expected to show continued expansion and Tokyo CPI inflation on Friday, anticipated to slow from 2.1% to 1.8%.

Markets last week

European Central Bank

The statement from the ECB as they cut interest rates for the third time read: “The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity”. This represents a notable shift in stance since the September meeting, where policymakers appeared reluctant to cut rates at all.

Since then, headline inflation across the eurozone has fallen below the ECB’s 2% target, while economic data has disappointed. The region is grappling with a weakening labour market, declining sentiment, a manufacturing sector in contraction, and sluggish services activity.

Considering these developments, the Governing Council now appears committed to more interest rate cuts. Markets are already pricing in another rate cut at the ECB’s December meeting.

European bond yields fell over the week with the 10-year German Bund yield declining 8bps to close at 2.18%.

UK inflation

UK CPI inflation fell sharply in September, dropping to 1.7% from 2.2% in August, marking its first dip below the BoE’s target since April 2021. A significant part of this decline was due to falling services inflation, which contributed around 0.3 percentage points to the drop, largely driven by strong base effects.

With services inflation softening and pay growth also cooling, the latest figures support the case for the Monetary Policy Committee to proceed with a 25bps rate cut in November. The pace of further cuts will depend on upcoming economic data and the UK government’s budget on 30 October.

The larger than anticipated drop in inflation saw UK bond yields fall over the week with the 10-year yield declining 15bps to close at 4.06%.

Equities

Global equity markets ended the week higher. US equities gained, driven by strength in utilities and real estate sectors, while growth stocks, particularly in digital-driven sectors, bounced towards the end of the week on surprising positive earnings.

In China, stocks rose on better-than-expected economic growth data, although still lacklustre, and Hong Kong’s market lagged. UK equities performed well supported by the disinflationary progress and falling bond yields. Performance was broad based although utilities and industrials were the best performing sectors.

Oil, gold and geopolitics

Oil prices fell sharply last week as fears of an Israeli strike on Iranian energy infrastructure eased. This shift came after Israeli Prime Minister Benjamin Netanyahu reassured US president Joe Biden that any military action against Iran would target military assets, not oil or nuclear facilities. OPEC's downward revision of its global oil demand forecast for 2024 also contributed to the decline in oil prices. Crude fell 8.4% to close at $69.22/bbl. Gold reached fresh all-time highs as tensions in the Middle East remained elevated, closing the week at a high of $2721.46/oz.

The week ahead

Thursday: UK Manufacturing and Services Purchasing Manager’s Indices data

Our thoughts: The preliminary PMIs for October will provide an insight into economic performance for the final quarter of the year in the UK. Although risks remain, economists expect both manufacturing and services segments to remain firmly in expansionary territory.

Friday: Tokyo CPI inflation

Our thoughts: Tokyo inflation will provide important insights into broader inflationary pressures in Japan ahead of the Bank of Japan’s (BoJ) policy meeting at the end of October. Japanese inflation slowed in September for the first time in five months, and Tokyo inflation is expected to follow suit. Economists anticipate Tokyo inflation to slow from 2.1% to 1.8%. The BoJ is expected to continue cautiously raising rates, with the next hike priced in for mid-2025.

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