Market Pulse
Friday, November 1, 2024
Welcome to this week's Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our three stories this week:
1. Setting the Pace: The ECB Debates Rates
2. Room for Growth: The UK Government Budget
3. Earnings Roundup: Big Tech
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
After a string of weak readings sparked concerns about growth headwinds, the Euro area’s most recent inflation report came in precisely at the 2% target. For the time being, policymakers appear to be succeeding in balancing growth with cost-of-living pressures. The best way to maintain that success, however, is a matter of debate.
Earlier this month, the ECB cut rates for the third time this year, bringing their benchmark rate to 3.25%. Although policymakers are largely unified in their view that interest rates will continue falling, the pace of those cuts remains uncertain. At a meeting in Washington last week, central bank leaders offered a diverse assessment of the scale of risks facing Europe.
Some, including the German and Austrian central bank presidents, cautioned against cutting rates too quickly, owing to inflation’s recent uptrend. Others, including Portuguese policymakers, argued that restricting the ECB’s moves to quarter-point cuts would limit the continent’s economic potential. For her part, ECB president Christine Lagarde did not commit to a pace of easing, instead emphasising a data-driven approach.
The ECB’s next rate decision comes in December. Following October’s inflation reading, the market-implied probability of a 25-basis-point cut jumped about 20 points to 80%, with a 50 basis point cut seen as increasingly unlikely. Price pressures on certain underlying sectors remain stubborn, however, with services inflation remaining elevated at 3.9%.
While we are sympathetic to arguments that Europe faces growth risks, we are not convinced that the ECB needs to pursue an aggressive policy path. At 6.3%, unemployment in the Euro area remains historically low, hardly a signal that drastic action is needed. In addition, policymakers need to consider the negative market signal that may be attached to a larger-than-expected cut.
Finally, we note that while Europe does face growth challenges, many of these challenges are not monetary in nature. As the recent Draghi report makes clear, much of the burden for unlocking Europe’s potential falls on governments and regulators. In terms of fostering growth, monetary policy is not the only game in town.
The expectations placed on Chancellor Rachel Reeve’s recently announced government budget were substantial, with the Labour government identifying it as a key tool in their growth initiative. While the figures associated with the budget were enormous, however, the outcomes may be underwhelming.
The focal point of the budget was a sizable increase in government spending, amounting to a £70 billion jump by the end of the decade. Unlike previous UK budgets, this increase isn’t being funded with mere wishful thinking. In fact, the budget featured substantial tax increases amounting to approximately £40 billion in fresh revenue.
The remaining gap is being filled with increased borrowing activity. Gilt issuance is expected to average £28 billion over the next five years, with the government spending about four times that amount on interest in each of those years. While plans for increased borrowing have sparked a moderate rebuke in the bond markets, the scale is far from the chaos that resulted from Liz Truss’ infamous ‘mini-budget’.
Ultimately, however, these spending increases may not be sufficient to bring the country out of its economic malaise. The Office for Budget Responsibility, the UK’s fiscal watchdog, noted that it expects the budget to make little difference to GDP over five years. In part, this is due to inflationary pressures from public spending necessitating more restrictive monetary policy.
While no one measure will completely solve the UK’s growth equation, we are encouraged that this budget shows a government oriented in the right direction. Notably missing from the budget, however, was any willingness to address the UK’s disparate tax system, in which ultra-wealthy individuals can leverage generous tax allowances unavailable to working people.
Despite this gap, our team at Sidekick continues to explore ways in which we can offer users effective tax optimisation strategies, in line with our mission of democratising the financial advantages of the ultra-wealthy. In fact, with the UK’s tax burden as a percent of GDP set to rise to its highest level on record, we see this component of our mission as more pressing than ever.
This week has been a busy earnings period for Big Tech, featuring results from some of Flagship’s key holdings. While results were generally strong, Big Tech appears to be struggling to keep up with outsized investor expectations, especially as gains from AI take longer to materialise than many expected.
Alphabet, which released results on Tuesday, was one of Big Tech’s strongest performers. Google’s parent company posted net income growth of 33% to $26.3 billion, far exceeding analyst expectations of $22.8 billion. Much of this gain stems from Google’s cloud business, where operating profit rose sevenfold since last year.
Microsoft’s cloud computing unit Azure also helped deliver strong performance. Thanks to a 34% revenue gain at Azure, overall net income gains came in slightly above analyst expectations. Similarly, Meta managed to edge out expectations with $40.6 billion in sales, a 19% increase from a year earlier. Still, owing to mixed guidance and high capital expenditures, both companies fell in trading on Thursday, leading the Nasdaq lower.
After the market closed on Thursday, both Amazon and Apple released impressive results. Amazon’s net income exceeded analyst expectations by about 25%, once again on strong cloud performance. Apple, meanwhile, also edged out profit expectations despite a sizable one-time hit owing to their tax dispute in Ireland.
The most important takeaway from this tech earnings season is that investors will have to be patient for broad-based gains resulting from AI. Cloud divisions continue to reap the immediate rewards of increased demand for computing power from generative AI tools. The rewards stemming from the adoption of underlying tools themselves, however, will take time.
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
