Market Commentary – Week of the 6^th November 2023

Stock Markets seem to have regained a more positive outlook as continued good news on inflation has allowed Central Banks to pause on interest rates.  Both the Federal Reserve, in the United States, and the Monetary Policy Committee (MPC), in the UK, left interest rates unchanged for the second consecutive time after their meetings in the first week of November.  Jerome Powell, the chair of the Federal Reserve, in his Press Conference after the meeting, gave a very dovish assessment for interest rates going forward, as labour data in the US is showing a slow-down in jobs growth and rising unemployment. The trajectory for interest rates in the largest economy in the world looks to be headed lower and this is also the position in the Eurozone, as the ECB announced inflation data showing a steep fall for the latest reporting period.  In the UK the picture is slightly more clouded.

The Office for National Statistics (ONS) is struggling to generate accurate labour market data on employment and wages, which is hampering the MPC in being able to predict the direction of these important economic indicators.  The data that is available for this area does indicate that the UK labour market is cooling rapidly and if this is the case then there would seem to be little incentive for the MPC to take interest rates higher without impacting the economic backdrop unnecessarily. By no means are we out of the woods yet but the impact of tighter liquidity, brought about by Central Bank Interest Rate policy, is clearly having the desired impact of reducing inflationary pressure within the global economy.

Attention now turns therefore to the gradual reduction of interest rates at some point in the future.  Equity Markets are already assessing the impact of reduced borrowing costs for companies as a direct result of that process.  Markets are forward-looking and they are starting to re-price improved fundamentals for companies going forward.  This type of economic backdrop, where interest rates and inflation are moving downwards would seem, on a medium to longer-term outlook, to be a good time to be allocated to a risk-on asset mix subject to the assessed risk profile for the specific individual.

For the first time since Central Banks started to tighten interest rates in December 2021, Equity Market fundamentals are starting to point to the potential for growth in well diversified actively managed assets.  It may take a while for this trend to build traction, but the market fundamentals look to be in place to facilitate this.

It would be foolish to ignore the economic, never mind the humanitarian issues, caused by the military action in Gaza. Geo-Political issues invariably impact commodity and asset prices as the uncertainty they bring causes sentiment to be impacted negatively and risk assets tend to suffer the worst during this type of period of uncertainty. The issues in Gaza will continue to be a headwind in the short-term but should not create longer term market damage if they can be contained.