US markets snapped a month-long winning streak and fell back by three percent while UK, European and Asian markets were up strongly. The negative sentiment in the US centered on the prospects for tech stocks, and the Nasdaq was down almost 6% with market heavyweights Apple, Google, and Amazon down by around 10% as investors fretted over the dual headwind of declining earnings and higher interest rates (to which they are particularly sensitive, as they are expected to earn a lot of their lifetime earnings far into the future). The US Federal Reserve raised rates by another 0.75% and the market initially jumped at even the slightest hint that the Fed might be ‘thinking about thinking about’ pausing. A few minutes later Fed Chair Jerome Powell made it clear that this was not the case, and the market immediately dropped several percent, underscoring just how obsessed the market has become by the future part of interest rates and the prospect of an imminent peak in short term rates. It is a confusing time for investors that are more focused on fundamentals, with last week’s strong jobs report and some fairly strong earnings results confirming the hitherto strength of the economy, while anecdotal evidence, including widespread layoffs in the tech sector and weak guidance across most industries, points to falling economic momentum and a possible deep recession in the near future. In Australia, the investors reacted positively to the RBA’s relatively dovish 0.25% hike and commentary, but earnings results were also mixed leaving the market up 1.6% for the week.

Elsewhere though the mood was more buoyant, or at least much less dismal than it had been. Chinese stocks led the way on news that the authorities were considering winding back the zero covid policy, which sent the stock market up 12% led by the large tech stocks. This was probably also why industrial metals broke out of their recent torpor and were up 5-10% for the week. It would be tempting to attribute the even sharper rise in Latin American stocks to the narrow victory of Lula da Silva in the Brazilian elections, but it was probably more down to the news coming from China as the local mineral producers led the way. Europe also benefitted through the UK’s materials stocks and the continent’s exporters, and overall, the week’s performance underscores not only the global economy’s persistent reliance on the world’s manufacturing hub, but also how quickly things can turn around when sentiment has been so poor in the most beaten down markets. Perhaps more interestingly, the Chinese authorities emphatically talked down the notion of an end to COVID zero in China or the use of Western vaccines on the mainland, but at the time of writing stocks in Asia were holding on to the gains of last week. Sometimes, it may help when the market doesn’t believe you.

Bond markets were actually quite subdued last week, given the commentary and moves from various central banks and the intraday volatility of US equity markets. Furthermore, measures of implied volatility (that track how much traders think markets will be moving around in the coming months) for both equity and bond markets eased. Credit spreads were also stable. Hunt Economics tell us that this is not unsurprising given that the Fed may have been subtly supporting the levels of bond market liquidity. However, there are reasons to believe that this benign liquidity environment could worsen in November, and we remain on high alert.        

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