This past week saw relatively strong US economic data, particularly in retail sales, along with signs of sticky services inflation. Reasonably good wage growth was also observed. While this is good news for the economy, it presents challenges for the Federal Reserve and translates to worse news for the markets, something which was brought home in the last trading session.of the week.

Most major markets were down a few percent last week while the Nasdaq was down over 6% after a sharp sell-off on Friday in the US, compounding losses from the previous week. Ostensibly the latest downdraught was sparked by mounting geopolitical tension in the Middle East. As we discuss in more detail in this week's video (above), however, the oil price was relatively stable while selling was very much concentrated in the largest US tech stocks. The market has reacted badly to strong  results with weak outlook statements from banks and tech companies like  Netflix and Taiwan Semiconductor alike.  Interestingly though, cheaper cyclicals like the UK/Europe,  Australia, global small caps and emerging markets showed more resilience. There is growing evidence that US stocks, ans especially the largest most liquid ones are increasingly sensitive to central bank liquidity through retail and institutional trading flows alike. Gold was up another 2% and is now being called the 'everything hedge' as it seem seems to react equally well to fears around the US election, a growing US deficit/fears of debt monetization and equity market overvaluation.

Looking at inflation expectations, the US and Australia are now converging. One year out, and even as far as two and five years, both countries are approaching an inflation rate of around 3%. This "higher for longer" rate environment would likely mean higher interest rates. Reflecting this sentiment, 10-year bond yields have risen throughout the month, reaching about 4.6% in the US and just under 4.4% in Australia. In contrast to the Fed mixed employment data has given the Reserve Bank of Australia (RBA) some breathing room.

In terms of market performance, the UK and Australia proved more resilient last week, with Europe doing the best. Gold surpassed even that, rising another 2%, albeit with some volatility. The consensus in market chatter attributes this to a focus on the US election, growing deficit, and fears of debt monetization, alongside potential support from central banks in Asia.

Japan was also one of the weakest performers last week, with a notable difference between the export-oriented Nikkei and the broader TOPIX index. This could  also be due to noise/flow-driven factors as well as profit-taking (Japan remains one of the better-performing markets year-to-date despite the recent pullback).

Looking ahead, US earnings will likely dominate the news, particularly with big US tech firms reporting in the middle of the week. Recent results from Netflix and TSMC echoed those of big banks the previous week: strong cash flow and earnings but weak outlooks. This trend may continue as more companies report.