Highlights
Major U.S. equity benchmarks retreated in the week following a period of heightened volatility as investors assessed the implications of Tuesday’s midterm elections, in which Democrats secured control of both chambers of Congress. At the same time, stronger-than-expected employment figures and other economic releases suggested that the U.S. economy continued to demonstrate resilience. U.S. stocks experienced considerable turbulence following Election Day. An initial rally on Wednesday was followed by a widespread sell-off on Thursday, before markets recovered some ground on Friday. For the week, the S&P 500 declined 2.68% and the Nasdaq shed 4.91%. The stronger-than-anticipated performance by Democrats initially encouraged investors, who saw the change in political control as potentially creating opportunities for reduced geopolitical tensions, particularly in relation to Iran. However, sentiment deteriorated sharply on Thursday as investors reconsidered what the election results could mean for corporate profitability and the regulatory environment. Concerns that a Democratic-controlled Congress could impose greater oversight on the artificial intelligence (AI) industry coincided with relatively disappointing outlooks from major semiconductor companies, triggering substantial selling across technology shares. However, on a positive note, traditionally defensive industries, particularly consumer staples and health care, held up comparatively well. Separately, Friday’s employment report from the Bureau of Labor Statistics showed that the U.S. economy added 165,000 jobs in October, comfortably above market expectations. Meanwhile, the unemployment rate edged lower to 4.1% from 4.2%, while the labour force participation rate increased slightly to 61.9% from 61.8%. Across the Atlantic, markets proved far more resilient as the pan-European Euro STOXX 600 Index advanced 0.75% over the week. Market sentiment was influenced largely by volatility in AI and technology shares, alongside a shift in some investment flows away from U.S. equities and toward European markets. European shares generally avoided the more severe losses experienced in the U.S., partly because European equity markets have comparatively lower exposure to AI and semiconductor companies. Similarly, European banks were among the beneficiaries of this shift, while defence stocks experienced declines. Annual headline inflation across the eurozone increased to 4.0% in October from 3.8% in September. This represented the fastest rate of price growth since September 2023 and was twice the European Central Bank’s 2% inflation target. The sharp increase in energy prices presented a challenge for policymakers, particularly as other indicators suggested that economic activity was beginning to lose momentum. In the U.K., the Bank of England raised its benchmark interest rate by 25 basis points to 4.0% on Thursday, marking its first increase since 2023. The central bank expects inflation to rise from its current level of 3.5% to approximately 5% in the second quarter of 2027, largely reflecting the impact of the energy price shock. Finally, in Asia, Japanese equity markets experienced substantial pullbacks during the week. The Nikkei 225 Index retreated 9.25%, while the broader TOPIX Index shed 6.48%. Conversely, Chinese equity markets recovered during the week, clawing back some of the decline recorded in October. The CSI 300 Index advanced 1.73%, while the Shanghai Composite Index rose 1.39%. Hong Kong equities performed more strongly, with the Hang Seng Index gaining 5.10%.
Data Highlights
USD Unemployment Rate (Oct) fell -10bps, from 4.2% to 4.1%, consensus expected it to remain the same at 4.2%. USD Non- Farm Payrolls Private (Oct) rose 81K, from 78K to 159K, consensus expected the figure to decrease -14K, from 78K to 64K. CAD Unemployment Rate (Oct) rose +20bps, from 6.5% to 6.7%, against expectations for it to remain the same at 6.5%. GBP BoE Interest Rate rose +25bps, from 3.75% to 4%, in line with expectations. CHF Inflation Rate YoY (Oct) rose +50bps, from 1% to 1.5%, consensus only expected a +30bps increase, from 1% to 1.3%. CHF Unemployment Rate (Oct) stayed the same at 3%; consensus wrongly expected an increase from 3% to 3.1%. EUR Inflation Rate YoY (Oct) rose in line with expectations, +20bps from 3.8% to 4%. EUR Retail Sales YoY (Sep) fell -90bps from 1.3% to 0.4%, consensus only expected a decrease to 0.6%. NZD Unemployment Rate (Q3) rose +10bps, from 5.6% to 5.7%, consensus wrongly expected it to fall -10bps, from 5.65 to 5.5%.
Week Ahead
CNY Inflation Rate YoY (Oct), EUR Balance of Trade (Sep) – Monday | GBP BRC Retail Sales Monitor YoY (Oct), USD Inflation Rate YoY (Oct), USD Core Inflation Rate YoY (Oct) – Tuesday | GBP GDP Growth Rate YoY (Q3), GBP Goods Trade Balance (Sep), USD Existing Home Sales (Oct) – Thursday | EUR Employment Change YoY (Q3) – Friday
