Market Update – 26th October 2022.

26th October 2022

Shares of Chinese companies listed in the US fell on Monday after President Xi Jinping secured a historic third term and packed the Politburo standing committee, the core circle of power in the ruling Communist Party of China, with Xi loyalists. The swift decline presented a buying opportunity for investors given an expected growth recovery, gradual Covid reopening and economic stimulus packages. China’s Q3 GDP data was released on Monday after being delayed last week by the ruling Communist Party Congress. China’s economy grew by 3.9% on the year for Q3, exceeding the market forecast of 3.4% and far greater than 0.4% reported for Q2.

Whilst growth still lags behind China’s target of 5.5%, industrial production rose the most in 7 months, rising to 6.3% and beating market expectations of 4.5%. China’s export growth significantly beat expectations by a large margin rising to 5.7% from the previous year in September. Beijing has stated that it will continue to release measures to bolster growth as the economy starts to reopen and Covid restrictions ease.

The Swiss bank UBS delivered an upbeat earnings report this week. The world’s biggest wealth manager reported a smaller-than-expected 24% slide in third-quarter net profit. Chief Executive Ralph Hamers stated the confirmation of President Xi for another term is a confirmation of consistency going forward, he also added that over time China is a very attractive place for investments.

Rishi Sunak is the UK’s new Prime Minister (PM) and leader of the Conservative party. He makes history as the UK’s first British Asian PM and at 42, the youngest leader in more than two hundred years.

The new PM warned the country faced economic challenges; he has since warned of spending cuts and pledged to correct the financial “mistakes” made by his predecessor, Liz Truss. After accepting an invitation by King Charles III to form a government, the PM began his cabinet reshuffle yesterday afternoon, reappointing Jeremy Hunt as Chancellor who, at the time of writing, is due to deliver his medium-term fiscal plan on 31 October. Markets will be looking to see how he plans to fund the £40bn hole in the public finances.

Financial markets welcomed the news and London stocks closed higher on Monday; sterling gained and government bond yields fell below 4%. Investors are hopeful that the appointment of Sunak will provide some stability for markets and help restore credibility to economic policymaking.

HSBC posted higher-than-expected profits yesterday. It reported a pre-tax profit of $6.5bn, compared to $5.5bn a year earlier. Asia accounted for 55% of the profit in the third quarter whilst the $1bn increase was driven by a global rise in interest rates.

The bank’s outlook on revenue remains positive and they have upgraded their net interest income guidance for 2022 to $32bn, based on global central bank rates they see that income increasing to at least $36bn in 2023.

UK retailers rose on Tuesday after the online platform group THG said that it has made a “positive start” to Q4, with JD Sports and B&Q owner Kingfisher up whilst ASOS surged 13.82%.

Eurozone flash composite Purchasing Managers’ Index (PMI), which is typically perceived as a good guide to overall economic well-being, fell to 47.1 from 48.1 in September. Factories have been particularly hit by energy price rises and supply chains are still trying to recover from the pandemic. The flash PMI data offers more evidence that the Eurozone is falling into recession as inflationary pressures persist.

European gas prices fell below 100 euros per megawatt-hour for the first time since Russia cut supplies, making prices 65% lower than their heights in August.

The European Central Bank is due to deliver a decision on monetary policy tomorrow (27 October), where they are expected to raise rates; markets are pricing in another 75bps hike increasing rates to 1.5%, still, a historically low level compared to previous rates. The ECB will have to consider the size of the hike and consider data indicating slowing growth whilst also looking at tackling inflation which hit 9.9% in September. Some European governments have raised concerns about the pace and extent of monetary tightening as further moves could weaken growth further.

More than 80% of stocks in the S&P 500 index closed in the green on Monday and US shares closed higher on Tuesday as investors evaluated falling yields and new data for further signs into the health of the US economy. General Motors and Coca-Cola rose 3.6% and 2.4%, respectively, after reporting stronger-than-forecasted earnings.

Whilst the latest earnings from banks and corporates help demonstrate the resilience of the consumer there are signs of slowing growth elsewhere. Google and Microsoft earnings disappointed, but this was partly due to the weakening of the US dollar; the results support claims that the Fed may soon start reducing the size of its rate hikes.

Data released on Monday showed that manufacturing in the US contracted slightly at the beginning of October. Flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 47.3 this month from 49.5 in September. The figure was below the market’s expectations and indicates a contraction in the services and manufacturing sectors. Signs of slowing growth will fuel reports that the Fed may soon start to reduce the magnitude of its interest rate hikes.

The pound benefitted from a slump in the US dollar yesterday following a record slowdown in US house price growth. The average prices of single-family houses with mortgages guaranteed by US mortgage firms Fannie Mae and Freddie Mac rose to 11.9% year-on-year in August 2022, the least since December 2020.

Still to come this week we have the European Central Bank interest rate decision. US durable goods, Q3 GDP, durable goods orders and the Bank of Japan’s interest rate decision.

Investment Management Team