Market Overview

Summary of world markets in October

UK in flux: October was a month of political turmoil for the UK and financial markets were plunged into chaos as the Government saw its third Prime Minister and fourth Chancellor of the Exchequer since July. Just after the end of September, the Government rowed back on its plan to abolish the 45% additional rate of income tax following a storm of protest. Then it was “all change” at the Treasury as short-lived Chancellor of the Exchequer Kwasi Kwarteng was replaced by Jeremy Hunt who promptly reversed a planned cut in income tax and reduced the energy price cap from two years to six months. The measures raised hopes that inflationary pressures might prove less pronounced than previously feared. Former Chancellor of the Exchequer Rishi Sunak took over from Liz Truss as Prime Minister, and the Government’s “fiscal announcement”, planned for 31 October, was delayed until 17 November. Share prices stabilised, the pound rallied against the US dollar, and gilt yields subsided. Over October as a whole, the FTSE 100 Index rose by 2.9%, while the FTSE 250 Index climbed by 4.2%.

Ratings downgrades: Credit ratings agency Moody’s reduced its outlook on the UK economy from “stable” to “negative” during October, citing an unpredictable political backdrop and persistently high inflation. Ratings agency Fitch also revised its outlook from “stable” to “negative”. The UK economy posted an unexpected contraction in August, shrinking by 0.3%.

Hawkish BoE: The cost of living continued to bite in the UK as food prices rose by 14.6% over the year to September and the overall rate of consumer price inflation increased from 9.9% to 10.1% year on year. During October, Governor of the Bank of England Andrew Bailey warned that inflationary pressures could result in a larger-than-expected increase in interest rates.

Profit warnings hit consumer sectors: UK listed companies issued a total of 86 profit warnings during the third quarter of 2022, according to EY’s most recent quarterly analysis. This was two-thirds higher than in the same period in 2021, and the highest third-quarter total since the Global Financial Crisis. 57% of warnings cited rising cost pressures, while 23% quoted labour market problems. Profit warnings were particularly concentrated amongst consumer-related sectors with 11 in the Retailers sector, nine in Travel & Leisure, and seven in Food Producers.

IMF cuts growth forecasts: The International Monetary Fund (IMF) warned: “The worst is yet to come” as it predicted that more than one third of the global economy is set to contract in 2023, including the US, the EU and China. The IMF reduced its forecast for global economic growth from 2.9% to 2.7% in 2023, citing the impact of Russia’s invasion of Ukraine, the cost-of-living crisis, and China’s economic slowdown.

Fed remains vigilant: The Dow Jones Industrial Average Index rose by 14% during October and experienced its best month since January 1976, boosted by hopes that the Federal Reserve (Fed) might start to moderate the pace of its tightening measures. Nevertheless, recent minutes from the Federal Open Market Committee warned that “the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action”. Although the annualised rate of inflation eased slightly in September from 8.3% to 8.2%, this was still higher than expected, underpinned by double-digit food price inflation.

US midterms approach: The US economy grew at an annualised rate of 2.6% during the third quarter. Activity was boosted by an increase in exports that is, however, unlikely to prove sustainable in the face of persistent strength in the US dollar. Ahead of the US midterm elections in November, President Joe Biden maintained that he did not expect the US economy to slip into recession, but any recession that did occur was likely to prove relatively small.

ECB tightens again: The European Central Bank (ECB) raised its key interest rate by 0.75 percentage points to 1.5% during October and flagged further increases over coming months to address the problem of ongoing inflationary pressures. The eurozone’s rate of consumer price inflation was estimated to have risen from 9.9% in September to 10.7% in October. The ECB expects the eurozone’s economy to grow by only 0.9% in 2023. After a tough September, the Dax Index rebounded by 9.4% during October.

Question-marks over China’s growth outlook: Although China’s economy grew by 3.9% during the third quarter, investor sentiment was undermined by the ruling Communist Party’s 20th National People’s Congress in which President Xi Jinping’s leadership was reaffirmed for another term. The yuan continued its decline against the US dollar during the month and the Shanghai Composite Index fell by 4.3%.