The Cambridge Weekly – 2nd November

Global markets had a mixed week as investors assessed Brazil’s presidential election, developments in Russia-Ukraine peace discussions, major technology earnings, the UK Budget and major central bank interest rate decisions.

Brazilian markets fell sharply following Luiz Inácio ‘Lula’ da Silva’s unexpected presidential election victory. Investors had anticipated a win for Flávio Bolsonaro and a subsequent shift to more market-friendly economic policies. The result prompted a 14% decline in Brazilian equities and an 8% fall in the Brazilian real against the US dollar, as markets reassessed the outlook for government spending and economic reform. Bolsonaro subsequently travelled to the US and was granted a visa by Washington.

Elsewhere, attempts at reaching diplomatic agreement between Ukraine and Russia remained in focus. US officials discussed the possibility of allowing American oil companies to return to Russia as part of a broader peace agreement, although significant political and legal barriers remain. Energy markets were also affected by renewed concern surrounding supply disruptions in the Middle East. Brent crude briefly surpassed $117 per barrel last Monday, before traversing a bumpy path down to $110 by Friday.

US Equity Market:

US equities moved lower over the period; the S&P 500 Index fell marginally across the week, with the NASDAQ 100 down circa 2%. Technology earnings painted a mixed picture, with Alphabet shares falling 10% after the Google parent revealed that AI spending had increased cash outflows by $51bn. Investors have generally supported investment intended to strengthen companies’ AI positions, but remain sensitive to whether this spending is producing sufficient revenue and profits. By contrast, Microsoft reported Q3 revenue of $92.3bn, above the expected $90.6bn, supported by continued growth in its cloud-computing business.

Technology earnings painted a mixed picture, with Alphabet shares falling 10% after the Google parent revealed that AI spending had increased cash outflows by $51bn. Investors have generally supported investment intended to strengthen companies’ AI positions but remain sensitive to whether this spending is producing sufficient revenue and profits. By contrast, Microsoft reported Q3 revenue of $92.3bn, above the expected $90.6bn, supported by continued growth in its cloud-computing business.

AI developer Anthropic also filed documents for an initial public offering, the process through which a privately owned business lists its shares on a public stock exchange. The 355-page filing highlighted both the company’s rapid growth since its founding in 2021, and the substantial funding required to develop increasingly advanced AI models. The proposal comes as tech businesses continue to compete for the capital, computing capacity and electricity needed to expand their AI infrastructure.

UK Equity Market:

The UK Budget was the main domestic headline last week, with Chancellor Healey announcing measures intended to ease household costs, support growth, and balance public finances. These included higher taxes on banks to help fund energy support, low- or no-interest loans for solar panels and heat pumps, and the reversal of proposed cuts to tax-free cash savings accounts. A new Founders’ Relief will also apply a 10% capital gains tax rate to up to £10mn of lifetime gains, supporting entrepreneurs and small-business owners.

However, the Office for Budget Responsibility (OBR) downgraded its UK growth forecast for next year, and projected that real household disposable income per person would be only 1% above its pre-pandemic level by 2030. Elsewhere, estate agents warned that higher taxes on property and savings income could encourage landlords to sell. This came as UK lenders approved the fewest mortgages since 2023 in September, with elevated borrowing costs continuing to weigh on demand.

In UK equities, HSBC shares fell 7.3% last Tuesday morning after missing Q3 revenue estimates by $0.4bn, reporting $18.6bn against the $19bn expected. The FTSE 100 index closed the week up 0.37%, as investors assessed an Autumn Budget that was broadly in line with expectations. Strong earnings from Shell also supported the index. Meanwhile, sterling trades at around $1.34 against the US dollar.

Inflation, Interest Rates and Bond Markets:

In the US, the Federal Reserve voted 10-2 to hold rates at 3.75%-4.00%, with the two dissenters preferring a rate increase. This comes as US personal consumption expenditure, the Fed’s primary gauge of inflation, was announced as 3.6% in the year to September. Markets are now pricing an 83% probability of a rate rise at the Fed’s December meeting.

Treasury markets remained volatile following the announcement, with the 10-year yield initially rising by around 4 basis points to 5.04%, before falling back to around 4.98% last Thursday morning. Investors will be paying close attention to this week’s midterm elections, which could drive further volatility in US bond markets.

Across the pond, UK gilt yields fell modestly following last Wednesday’s Budget, with the 10-year yield declining by more than 5 basis points to around 5.29%, c.16 basis points below its October peak. Despite the fall, yields remain elevated, amid subdued investor confidence and persistent inflation, with the 10-year yield almost 1% higher than at the same point last year.

What’s on the horizon

The US midterm elections on Tuesday will be the main focus this week, as investors assess the implications for the balance of power in Washington. Geopolitical events in the Middle East and the Russia-Ukraine conflict will also remain high on the agenda.

On the macroeconomic front, a range of October Purchasing Managers’ Index (PMI) figures will be released, giving strong indications of whether the respective economies are expanding or contracting; PMI figures are due for the UK, US, Japan and China. The Bank of England’s interest rate decision is set to be announced on Thursday, whilst employment data will be in focus in the US, with September job openings, non-farm payrolls, and the unemployment rate all being released. In the eurozone, October’s Consumer Price Index – another gauge of inflation – will be a key data point coming out on Wednesday.

Further major tech earnings will also be announced, with Apple, Palantir and AMD set to report. AMD’s results will give a strong read-through into the strength of AI hardware, while Palantir and Apple will highlight the state of AI software and consumer technology demand, respectively.

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.