There was more volatility in markets last week, led again by US markets, driven in turn by US rate speculation. The final leg up on Friday, which left US markets up around 2% for the week seemed to be sparked by an article written by a prominent, and apparently very well connected, Wall Street Journal correspondent, who has been dubbed the Fed Whisperer. In the article Nick Timiraos suggested that some members of the Federal Reserve committee were starting to hint that a pause or slowing in the hiking cycle might be in order as they wait to see if their actions this far are having the desired impact of slowing the economy. Central banks around the world are cognizant that there is a long lag between rate hikes and their impact becoming evident in the inflation numbers. The RBA’s last meeting minutes, issued last week, confirmed that they are very much of the view that the costs of ‘killing inflation’ also have to be taken into account.  There is also a suggestion that the Fed is in the habit off doing the ‘whispering’ via this source and they may want to send the message now that they are being open minded, in order to counter the accusation that they are perennially acting to late and being forced to overreact. Certainly in this cycle, there is a broad consensus that they left it too late and will now hike rates until they ‘break something’. Yet now that the Bank of England has seemingly headed off the bond market vigilantes, markets are starting to hope that this doesn’t not need to the case and that maybe a soft landing is possible.    

It has also helped that companies have been effective at guiding earnings expectations sharply lower only to surprise on the upside, as is very often the case. 100 companies in the S&P 500 have now reported and there is an emerging picture of earnings and revenue slowing but at a less precipitous rate than expected, often due to surprisingly strong pricing power in everything from consumer staples to airline flights to video streaming. On the other hand, those companies that have disappointed have been marked down aggressively, so Snap being down 30% earlier in the week was an ominous sign for tech stocks until Netflix changed the tone with a strong increase in both subscribers and margins. That was enough to send the larger tech stocks like Amazon, Apple and Microsoft sharply higher in sympathy accounting for the largest part of the week’s gains. This was still tempered by forward guidance that is even more negative and most companies believe that there is a limit to the pricing power they are currently benefiting from as the cash from COVID stimulus checks that is still washing around the system is whittled away.

Having missed that late Friday rally, European shares were up just slightly, and Asian shares were left in negative territory although at the time of writing both regions had caught upas the risk on rally continued this week. Bond rates pushed higher again last week, as they have for most of the month so far, but there was sense that markets and economies are perhaps a little more resilient than expected and the risk of default implied by corporate credit spreads is actual lower than it was at the start of the month despite the worrying headlines, mainly emanating from the UK. While energy prices have been rising again (after the OPEC Cartel decided to limit oil production earlier in the month) most commodities have also been fairly range bound). This all adds up to October looking like a holding period for markets, albeit a quite volatile one, and most markets outside of the US up by around 2% and the US breaking even. In fact when you zoom out, despite rising interest rates and quite a lot of negative press commentary, share markets have really been range bound since mid-June (even in the UK) which perhaps suggests that, as long as something else does break then markets have found a degree of valuation support. One can see this clearly in the chart below while there is also a less obvious silver lining for Australian investors whose holding of US equities have ‘only’ lost around 10% this year due to the relative weakness of the AUD against the USD.

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