The Cambridge Weekly – 19th October

Geopolitical developments were at the forefront of markets again last week as the US administration agreed a deal to bring Russian diesel back into global markets. The deal will initially involve more than 300,000 tonnes, followed by a further 500,000 tonnes in November, and 1 million tonnes thereafter. The US administration stated that the additional supply is expected to provide relief for elevated global fuel prices, though some analysts have questioned how impactful this will be on US inflation, ahead of the upcoming November mid term elections. This agreement was publicly challenged by the Ukrainian President, during a week where he travelled to London on Wednesday for talks with UK Prime Minister Andy Burnham, and Brussels on Thursday to seek further financial and defensive support to Ukraine.

US Equity Market:

AI stock performance was in the headlines last week, after the leaked revenue revision from OpenAI reduced its expected annual revenue by $20bn. This fed into chipmakers’ stock prices, and caused the share prices of Nvidia, Dell and AMD amongst others to slump, amid fears that chipmakers were overspending. This was particularly notable given the International Monetary Fund (IMF) warned last week that an AI share crash could significantly impact the financial stability of the global market.

Third-quarter corporate results began to emerge last week, with notable updates across the technology and banking sectors. Ahead of its expected stock market listing this quarter, Anthropic (the company which created Claude) reportedly told prospective investors that third-quarter revenues had risen 45% to $16.8bn, up from around $11.6bn in the previous quarter, and stating it was profitable on an adjusted basis. Comparatively, the US banking sector delivered mixed third-quarter results. JPMorgan reported net income of $15.3bn and revenue of $50.9bn on a managed basis, both higher than a year earlier, although earnings fell short of the market expectations laid out by analysts surveyed by LSEG. This caused the stock price to drop by 0.5% last Thursday.

Elsewhere, data released by the Federal Reserve indicated slight to moderate growth for the US in the near future, but noted that rising diesel and fuel surcharges were intensifying cost pressures across the supply chain. The S&P 500 index closed the week down 1.94% off the back of the higher-than-expected US inflation figure, and poor performance in the AI and technology sectors.

UK Equity Market:

The UK GDP announcement was the key news story last week. The data release indicated growth of 0.1% in August, surpassing analysts’ expectations for a 0.1% contraction, and indicating a recovery from a broadly stagnant summer. This data point, alongside the announcement from the IMF that it upgraded its growth outlook for the UK, such that it is projected to become the second-fastest-growing G7 economy this year, will come as a welcome boost to Chancellor John Healey ahead of his crucial 28th October Budget. The Budget remains a key talking point, with the Chancellor rejecting calls to equalise capital gains and income tax rates last week.

Elsewhere, Nvidia has pledged $250 million to UK AI safety research, a boost to the UK in its bid to become a global centre for AI governance and security. This comes as AI is increasingly being deployed in the public sector, with the Financial Conduct Authority signalling its intention to use AI to automate financial regulation. The government also announced new measures last Monday to strengthen national defences against growing AI-related risks.

The FTSE 100 Index closed the week up 3.17%, as comments from the Bank of England’s Chief Economist eased concerns of a rapid hike in interest rates, and strong performances from healthcare, medical equipment and financial stocks contributed positively. Sterling currently trades at around 1.33 against the US dollar.

Inflation, Interest Rates and Bond Markets:

Tensions in the Middle East were a key driver in US inflation rising to 3.7% in September, up from 3.4% in August and above Bloomberg forecasts, while core inflation (which excludes volatile food and energy prices) increased from 2.4% to 2.6%. This print applies further pressure on the Federal Reserve to raise interest rates again later this month, with investors now attributing a near 33% chance of a 25bps hike.

10-year Treasury yields rose to almost 5.33% off the back of the inflation announcement, before falling to around 5.09% as some investors shifted from equities into bonds, increasing demand and pushing bond prices higher and yields lower. As a reminder, bond prices move inversely to yields. Elevated yields continue to attract investors, with third-quarter investment reportedly reaching record levels, as investors look to lock in historically high yields.

What’s on the horizon

Geopolitical events will continue to be front of mind for investors this week, as has been the theme of late. However, investors will also be awaiting some key macroeconomic data points this week. This morning China has released its third quarter GDP figures (accelerating as exports remain strong). The Consumer Price Index (CPI) for September will be issued in the UK on Wednesday, and Japan on Friday.  Purchasing Managers’ Index (PMI) data releases will close out the week, with the US, UK and Eurozone all set to publish October numbers on Friday. As a reminder, the PMI is an important data point that provides an indication of the strength of an economy, by indicating whether it is expanding or contracting.

Earnings season continues this week, with major tech firms such as Meta and Tesla set to report their Q3 figures. This will give investors further insight into AI and the state of the sector’s strength.

This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.

Past performance is not a guide to future performance.

The value of your investments can go down as well as up and you may get back less than you originally invested.

Source of financial market data: MorningstarDirect.