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Markets and macro insights with Bernard Swords, Chief Investment Officer
How have equities been faring?
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This month to date, the momentum continues in equity markets. In euro terms, world equities are up 3.4%, although a weak euro is a big boost here. In local currency terms, world equities are up just over 1.5%. IT and Financials are the strongest sectors.
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Good earnings from the Taiwan Semiconductor Manufacturing Company (TSMC) boosted the AI theme. But a poor outlook from ASML, a semiconductor equipment maker, shows that AI’s ‘rising tide’ is not lifting all boats. The AI-related demand is only impacting companies involved in high-end semiconductor production.
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Strong results from the US Banks pushed the Financials higher. Consumer discretionary is at the bottom of the sector performance table. It is being pulled down by the luxury sector and a disappointing outlook from luxury giant LVMH. Materials are the second weakest sector as enthusiasm for a Chinese fiscal package wanes. But progress is being made in world equities.
What happened at the European Central Bank (ECB) Governing Council meeting last week?
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As expected, the ECB cut rates 25 bps to 3.25%. While the ECB Council said that the âdisinflationary process is well on track,’ it was still a modest cut. The Council explained its reluctance to cut rates further, saying, “Domestic inflation is high,” and “Wages are rising fast.” Analysts expect another cut before the end of the year, but President Lagarde stressed that the ECB makes rate decisions on a meeting-by-meeting basis. The data will have to improve to justify a further cut in December. The interest rate cutting cycle is now well entrenched in the euro area.
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Industrial production in the euro area rebounded in August, up 1.8% month-on-month. Some of this was a bounce back from a weak July figure, but quarter-to-date, industrial production is up 1.2% from Q2. A continuation in this trend would be a welcome sign that the euro area is not sliding towards recession. However, the growth rate is very anaemic.
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In the US, we see increasing data indicating a strong consumer. Core retail sales rose 0.7% month-on-month and is growing this quarter at an annualised rate of 6%, the fastest we have seen since the start of 2023. This strength was due to the fact that demand for goods and services surpassed expectations. Growth rate is higher than expected, and the run rate this year is now in line with last year, i.e., no slowdown this year. If these trends continue, then there will be further upgrades to growth forecasts for 2024 and 2025.
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It’s not all rosy in the US economy: the industrial sector continues to struggle. Industrial production was down 0.3% month-on-month in September, and there were downward revisions to prior months. A big drop in aerospace and transport equipment distorted the figures because industries are unpredictable and not aligned with the cycle. However, the only category to show any growth in production was in selected high-tech industries (computers, communications equipment, and semiconductors). Output was down in all other sectors.
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Chinese data painted a better picture. GDP for the first nine months of the year was slightly behind forecast (4.8% vs. 4.9%), but it improved towards the end of the period. During September, both industrial production and retail sales were stronger than forecast. This is the first time retail sales have beaten forecasts month-on-month this year. With more monetary easing measures announced, we may be passing the weakest point for the Chinese economy.
The week ahead: what to watch out for
One data release of note is the monthly US Consumer Sentiment Index from the University of Michigan, but it has given a poor indication of US consumption in the past. It’s unclear how much attention will be paid to it. Other than that, the main talking points will be corporate results.