As we start a new week, let's take a look at the significant events in the global economy over the past week with our weekly financial update, presented by Bas Kooijman, the CEO and Asset Manager of DHF Capital SA.
U.S. stocks saw a strong rally last week as investors responded positively to the Republican win across both Congress and the White House. This “red sweep” fueled optimism for policies expected to support corporate growth through potential tax cuts, reduced regulations, and other economic stimulants. The small-cap Russell 2000 Index led the gains, surging 8.57% for the week, though it remains 2.41% shy of its November 2021 record. The S&P 500 Index, posting a 4.66% increase, enjoyed its strongest week in a year. This enthusiasm suggests that investors are factoring in an improved earnings outlook and fiscal policy changes that could stimulate economic expansion.
T. Rowe Price’s Chief U.S. Economist, Blerina Uruçi, provided further insight into the potential economic impacts of a Trump administration in a recent webinar. She pointed out that proposed immigration restrictions and increased tariffs could add inflationary pressures, though the specifics of such policies remain uncertain. Uruçi also noted that a stronger dollar might help to absorb some inflationary impact, especially if paired with tax reductions and regulatory easing expected under the new administration, which could be a net positive for economic growth in the near term.
The Federal Reserve also took decisive action last week, announcing a 25-basis-point rate cut—its first since mid-September. The cut aims to maintain economic stability amid political changes, though Fed Chair Jerome Powell reassured markets that the Fed’s decisions will remain independent. Powell reiterated the Fed’s commitment to base policy changes strictly on economic data, refusing to speculate on the implications of anticipated fiscal policies. The U.S. bond market saw mixed movements in response to these events. Treasury yields generally ended the week lower, with the rate cut influencing intermediate- and long-term yields.
European stock markets were less upbeat last week, with the pan-European STOXX Europe 600 Index ending 0.84% lower. Investor sentiment was dampened by concerns surrounding potential shifts in U.S. trade policy that could weigh on European economic growth. Major indexes across the region, including Italy’s FTSE MIB (-2.48%), France’s CAC 40 (-0.95%), and Germany’s DAX (-0.21%), showed declines as caution around potential U.S. tariffs and trade policy changes set in. European central banks also took significant policy actions in response to slowing growth and inflation. The Bank of England (BoE) cut its key rate by 0.25 percentage points, bringing it down to 4.75%. BoE Governor Andrew Bailey indicated that if economic data continues to weaken, further cuts could be expected. Sweden’s Riksbank took similar action, reducing its key rate to 2.75% in response to a sluggish economy and slowing inflation, signaling potential further cuts if the outlook remains unchanged.
In the Eurozone, the revised Purchasing Managers’ Index (PMI) for October offered mixed news, increasing slightly to a reading of 50 from an initial estimate of 49.7. This revision now suggests that economic activity remained flat rather than contracting, with the services sector showing modest growth and manufacturing contracting more slowly than expected. However, the backdrop remains uncertain as business confidence across the Eurozone dropped to its lowest level of the year.
Asian markets experienced mixed yet generally positive trends, with Japan and China taking center stage. Japan’s Nikkei 225 and TOPIX indexes gained 3.8% and 3.7%, respectively, as investor sentiment was buoyed by the Fed’s rate cut and hopes for U.S.-Japan trade stability. Despite some uncertainty due to the stronger yen, Japan’s Chief Currency Official, Atsushi Mimura, signaled that the government is ready to address market volatility. Analysts anticipate that the Bank of Japan (BoJ) may consider a rate hike as early as January 2025, following indications that economic activity may warrant further tightening.
Economic data from Japan painted a cautious picture, with real wages falling 0.1% year-over-year in September, following a decline of 0.8% in August, suggesting limited spending power for consumers. Despite a 2.8% nominal wage increase, it was unable to outpace inflation at 2.9%, and household spending fell by 1.1% compared to expectations of a 2.1% drop. These indicators reflect continued challenges in boosting domestic demand, even as global developments support Japanese exports.
In China, stock markets surged after the announcement of fresh stimulus measures aimed at managing local government debt. The Shanghai Composite Index rose 5.51%, while the CSI 300 gained 5.5%, reflecting optimism that these efforts will mitigate financial risks. China’s top legislative body, the standing committee of the National People’s Congress, introduced a RMB 10 trillion refinancing program for local debt and raised the debt ceiling to RMB 35.52 trillion. Finance Minister Lan Fo’an also pledged more robust fiscal support for growth in 2025, aiming to sustain the economy amid global uncertainties.
Overall, global markets are adjusting to significant political changes and economic data releases, with investors closely monitoring the potential impacts of policy shifts in the U.S.
