Week ending 22nd November 2024.

This week, global markets have been navigating heightened geopolitical turbulence with escalating tensions in the Russia-Ukraine war. Early in the week, reports emerged that Ukraine has been authorised to deploy US and UK missiles in its defence efforts. In a televised response, Russian President Vladimir Putin accused the UK and US of direct involvement in the conflict, citing their provision of advanced weaponry, satellite support, and operational aid to Ukraine. Adding to the gravity, Putin announced a review of Russia’s nuclear doctrine on Tuesday, lowering the threshold for potential nuclear strikes. Despite the seriousness of the situation, market reactions have been surprisingly subdued. On Thursday, the S&P 500 climbed more than 0.5%, bringing it close to adding to the over 50 record highs it has set this year.

While traders remain mindful of the risks posed by escalating geopolitical conflict, the muted market response highlights a broader focus on economic growth and monetary policy. Investors are concentrating on earnings growth driven by artificial intelligence, the potential for corporate tax cuts under Trump’s second presidential term, and the path of interest rates set by major central banks. However, with the stakes rising on the global stage, investors are likely to remain vigilant as the situation develops.

Japan’s Consumer Price Index (CPI) rose 0.4% month-on-month in October, with both goods and services posting equal gains. On an annual basis, inflation slowed slightly to 2.3% in October, down from 2.4% in the same period last year, largely due to government subsidies that eased the burden of rising energy costs. Despite the slight deceleration, the data underscores persistent inflationary pressures in Japan, marking the 31st consecutive month that inflation has stayed above the Bank of Japan’s (BOJ) 2% target. BOJ Governor Kazuo Ueda has indicated that the central bank will convene in December for a dynamic, data-driven discussion on monetary policy. Should prices and economic growth align with policymakers’ expectations, markets are anticipating a potential 25 basis point rate hikes.

Eurozone and UK Purchasing Managers’ Index (PMI) data released Friday highlighted economic challenges in November. In the Eurozone, the composite PMI unexpectedly dropped to 48.1, down from October’s 50, signalling a contraction in manufacturing and business services activity. Economists suggest that uncertainty over a potential Trump presidency, with proposed tariffs of up to 20% on European imports, may be weighing on business sentiment and prompting caution among firms. Meanwhile, the UK composite PMI also slid in November, marking its lowest level in over a year. The data indicates a slowdown in growth across manufacturing and services, with survey respondents citing diminished confidence partly tied to the payroll tax increases announced in the Autumn Budget.

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Retail sales in the UK dipped by 0.7% in October, which reversed the previous month’s growth. Economists attribute the decline to consumer caution ahead of the Autumn Budget and unusually warm weather, which may have delayed seasonal purchases. While the October data reflects a more reserved mood among shoppers, the broader picture reveals a 0.8% rise in sales volumes over the August-to-October period compared to the previous quarter. Looking ahead, retailers are also optimistic that Black Friday promotions – following the conclusion of the Budget uncertainty – will spark a rebound in sales. A strong performance could help lift investor confidence, which has been mitigated of late by higher-than-expected inflation figures and tepid GDP growth.

The UK’s FTSE 100 had a strong week, achieving its largest weekly gain in over six months. This performance was driven by a weaker pound, which helped boost UK-listed international firms that generate a significant portion of their revenue overseas.

Next week brings a range of key economic updates, including the US Fed meeting minutes, US PCE, and durable goods data. In Japan, we’ll see unemployment figures, industrial production, and retail sales. Additionally, eurozone inflation data will be released.

Nicola Tune, Portfolio Specialist