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The Cambridge Weekly – 5 November 2018


5th November 2018



Good-bye cathartic October
What a difference one month can make. At the end of September, one of the biggest conundrums of 2018 was the divergence of stock market returns between the US (strongly positive) and the rest of the world (flat). October’s stock market correction brought falls of similar magnitude to all markets, but clearly originated in the US, before contagion spread around the world. Initially, it was caused by concerns that rising US bond yields would diminish stock returns, as higher costs of finance eat into corporate profit margins and geared share investments on the back of cheap credit becoming less attractive.

‘Shocktober’ was spooky but have markets undershot fundamentals?
Well that felt scary.
Global equity markets suffered a collective $8 trillion valuation loss during October – leaving many indices in correction territory (a drop of -10% from a peak). While the longest bull market on record rumbles on (it would take a -20% drop to break it), a significant amount of shorter-term confidence damage has been done. And it could take some time to repair before a full recovery in risk appetite sets in.

Turbulent year in global stock markets – overshooting first, now undershooting?
It is entirely possible that further limited declines will occur in the short-term, as investor positioning adjusts to the apparent re-pricing of economic growth forecasts and previously overly optimistic consensus earnings expectations. While risks remain, we think October’s sell-off looks to have overshot fair value and robust economic fundamentals.

Budget boost if Brexiteers behave
Austerity is “finally coming to an end” declared a triumphant Philip Hammond on Monday. In his third budget unveiling since becoming Chancellor of the Exchequer, Hammond seized upon better-than-expected tax receipts this year to announce the biggest increase in government spending since 2010. Recent tax receipts – which were £68bn higher than forecast by the Office for Budget Responsibility (OBR) back in March – have given the Chancellor some extra cash to play with, and will all be put towards boosting public services.

Read the full commentary here