Signs that interest rates in the US and Europe have reached a definitive peak sent global stock markets surging this week following a grim October
The clearest indications yet that the Federal Reserve expects its next rate move to be downwards, despite continued resilience in the American economy, was welcomed by investors around the world. Recent falls in the price of oil have helped to reduce inflationary pressures, giving central banks more breathing space as they try to balance their efforts to contain rising costs against the potential economic damage that tighter monetary policy can create.
There remain some clouds on the horizon. However, the World Bank warned earlier in the week that the conflict in Gaza could drive oil prices up by more than 50% if it spreads across the region. Meanwhile, the ongoing crisis in China’s real-estate sector shows little sign of abating.
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 4.4% up for the week so far, with the S&P 500 likewise surging 4.9%. While the Fed’s decision on Wednesday, to extend the recent pause in its programme of interest rate hikes, was not a surprise, investors were particularly pleased to hear comments from Fed chair Jerome Powell that strongly suggested there would be no further tightening of monetary policy. After recent gloom, markets reacted with glee, putting US stocks on track for their best week of 2023 so far.
In the UK, the FTSE 100 closed on Thursday 2.1% up for the week so far, with falling oil prices limiting gains in London in comparison to markets in Europe and the US. The Bank of England followed the Fed’s lead and left rates unchanged on Thursday, although officials’ predictions for the British economy were decidedly mixed. While inflation is now expected to dip below 5% by the end of this year, the rate is expected to remain above the Bank’s 2% target until 2025. Meanwhile, growth is on course to stagnate this year and next, with unemployment set to become an increasingly serious problem.
In Frankfurt, the DAX index ended Thursday’s session up 3.1% for the week, while France’s CAC 40 gained 3.9%. Weakness in the eurozone economy – it shrank in the third quarter – allied with further falls in inflation means the European Central Bank is also now expected to stop raising interest rates, having pressed the pause button at the end of October. Recent data showing a decline in output among European manufacturers, however, highlighted the impact that high rates and falling confidence are having on private sector activity.
In Asia, the Hang Seng index in Hong Kong dipped 1.0% as concerns about the health of one of China’s largest property developers persisted. Latest Chinese manufacturing data came in weaker than expected, adding to worries about the strength of the country’s post-pandemic recovery. Japan’s Nikkei 225 index of leading shares advanced 3.1%, meanwhile, buoyed by the Fed’s pause as well as the Tokyo government’s announcement of a $113 billion stimulus plan to help households and businesses cope with recent rises in inflation.
Hong Kong Hang Seng
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 2 November 2023.