A tale of two cities

• Longer-dated (+25 years) UK gilts strengthened by +1.02%
• Sterling firmed by +0.68% versus the euro and +0.24% versus the dollar

• Equities generally slid, with China (-4.72%), India (-3.42%), and Italy (-3.31%) the laggards
• Silver slipped -5.86% in dollar terms

(All equity data is MSCI; all bond data uses ICE Bank of America indices unless otherwise stated; all data in sterling unless otherwise stated)

The Bank of England is all-but certain to raise interest rates in November after more data indicated last week that the UK’s fiscal gloom may be overdone. The economy added almost 102,000 jobs in August, far outstripping economists’ expectations of just 10,000, and the unemployment rate fell to 4.7% from 4.9%. A set of forward-looking data called Purchasing Managers’ Indices (PMIs) was also stronger-than-expected. With a figure above 50 signalling expansion, the composite PMI for both services and manufacturing hit 53.1, 1.2 points higher-than-expected. Meanwhile, the UK’s annual inflation rate hit 3.5% in September, with core inflation – which strips out more volatile items like food and energy – at 2.8%. Both figures were 0.1% higher than forecasts. Undoubtedly, the lagged effect of higher energy costs feeding into inflation means both rates will likely climb into the new year.

Total UK government debt exceeded £3trn for the first time in September as monthly borrowing hit its highest level this year. The government borrowed £24.5bn in September, and £6bn more between April and September than the Office for Budget Responsibility forecast, at £97.8bn. All eyes on London, then, for Chancellor Healey’s first Budget, after he reportedly decided against raising Capital Gains Tax rates, removing one source of uncertainty for investors. You can follow our coverage here:

Investment insights | TrinityBridge

The UK’s economic scorecard contrasts sharply with France’s. According to the International Monetary Fund, the UK’s fiscal deficit is forecast to narrow, possibly recording a net surplus by 2031. France’s deficit is around 5%, with reforms to shrink it gummed up by political wranglings ahead of next year’s elections. 

In France, there are early signs that the fallout from recent riots and looting may be denting consumer confidence. French supermarket giant Carrefour reported that the social and security situation may weigh significantly on consumption, disrupt store operations, and increase the security costs of keeping stores open. It estimates an €80m-€200m hit to its recurring operating income. The impact is broader than direct damage, and includes weaker traffic and footfall, shorter opening hours, unplanned closures and supply disruption risk. Carrefour’s shares fell more than 15%.

Reflecting this unease, France now pays investors roughly 1.7% more per year than Germany, and 0.48% more than Italy, to borrow more than 10 years. Their 10-year yields are currently 5.04%, 3.36% and 4.58%, respectively. France’s is its highest since 2002.

The bottom line is that policymakers in Paris need to impose budget cuts. This is not merely a battle with the EU’s requirements but rather is fundamental. Without major reform, the French budget deficit is set to outstrip that of the US on one-fifth of the economic growth rate.

• UK housing market softens – A growing number of UK homeowners are reducing asking prices, suggesting conditions remain challenging. Rightmove reports sellers are cutting asking prices on 3,000 properties a day 
• US mortgage rates finally ease – US mortgage rates declined for the first time in eleven weeks, offering a modest boost for housing affordability. The benchmark US 30-year fixed rate mortgage dropped to 7.32% from 7.40% according to Freddie Mac
• AI demand supports Asian exports – Strong semiconductors and AI-related technology demand continue to boost export growth across Asia. In the year to September, South Korean exports rose 89.8%, while Taiwanese export orders increased 62.4%, highlighting the strength of global investment in AI infrastructure
• SpaceX momentum continues – SpaceX shares rose after reporting stronger-than-expected revenues across its key space, connectivity and AI businesses. Investor sentiment was also supported by speculation over closer strategic ties with Tesla
• Canadian political stability – Alberta voters rejected proposals that could have advanced greater separation from Canada, reducing political uncertainty. The result may strengthen confidence in Prime Minister Mark Carney’s current government’s economic agenda
• German economic sentiment remains fragile – Germany’s ZEW economic sentiment index weakened in October, suggesting the economic outlook remains challenging. Sentiment fell to 28.1 in October, down from September’s seven-month high of 34.7 and below market expectations of 30. High energy costs continue to act as a headwind for both German businesses and consumers 
• Chinese growth remains resilient – China’s economy expanded by 4.5% in Q3, keeping growth broadly on track to achieve the government’s annual target range
• Indonesia faces index downgrade – MSCI’s warning over a potential downgrade to Indonesia’s equity market status highlights concerns around market accessibility and governance standards. While Indonesia represents a small weight in emerging market indices, the announcement has triggered significant market volatility

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.