What’s going on in financial markets? Which macro themes should you watch? Drawing on our depth and breadth of market and economic expertise, Market Pulse brings you insights on the latest investment themes to help preserve and grow your wealth. 

Market views

• Financial markets were in a summer lull since the last Market Pulse at the end of July. World equities are flat in euro terms although down almost 2% in local currency terms. Fixed income markets were also relatively dull, the Euro Agg Index delivered -0.5% over the period.
• Over the last month the fixed income markets were digesting the idea that interest rates were going to remain higher for longer than had been previously thought two or three months ago. The result was a move up in longer dates yields, in particular in the US. Expectations of interest cuts in 2024 have all but disappeared.
• Equity markets were undermined by these movements in the fixed income markets. A positive theme through the last month was the continued resilience in the US economy and growing belief that the US will achieve a ‘soft landing’. Hence cyclical sectors (Industrials, Financials, Commodity sectors) were the leaders. Fears about the Chinese economy have been increasing and the Asia Pacific Region has been weak but the outlook for the USA economy is much more important to world equity markets than the outlook for the Chinese economy.
• We are pleased to see the developments in the fixed income markets. Our main fear was that interest expectations in the marketplace were too optimistic and that has now gone. We are more confident now about investing in the fixed income markets than we have been all year. We still believe that equity markets are somewhat complacent about the potential economic growth rate especially if we have the ‘higher for longer’ interest rates.

Macro views

• In China several large property developers have got into financial difficulties and one of them, Evergrande, filed for Chapter 11 bankruptcy in the US. This has put further pressure on an economy that was already losing momentum. However, the Chinese authorities have decided to act by cutting interest rates, easing deposit requirements, and encouraging banks to support the mortgage market. It will probably give some stability to the economy but the overreliance on the construction industry remains.
• There was better news from the US. Consumption remains robust with retail sales again beating expectations. The industrial sector remains in difficulties, but the last two ISM (Institute for Supply Management) Manufacturing surveys showed improvement on a month-on-month basis which indicates we could see a stabilisation in this sector soon. Meanwhile inflation data was encouraging. Core inflation rose at the lowest month-on-month rate since the first quarter of 2021. The jobs report showed a big jump in the participation rate (the proportion of the population looking for employment) which would normally mean less wage inflation.
• In the euro area the news continues to be grim. There was a large drop in the Composite PMI (Purchasing Managers’ Index) as the Services sector PMI dropped below 50. As in the US the industrial sector could be stabilising, but a rapidly slowing services sector would swamp this positive impulse. There was a quick spike in natural gas prices due to fears of a strike in the natural gas industry in Australia which reminds us that the euro area still has energy vulnerabilities.

Chart of the week: The US the only show in town

The economic surprise indices tell you how an economy is performing relative to forecasts. The US is the only region that has been beating forecasts (index above zero) over the last number of months and showed stronger momentum in recent releases. In the other two regions growth forecasts have been cut, but they are still underperforming and the euro area weakening further of late. Our concern is that the US cannot keep outperforming. It will face a tighter fiscal stance going forward and US consumers will have to start paying back their student loans for the first time since the Covid-19 pandemic. If that happens forecasts for global economic growth will come under pressure.

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