Markets remained cautious this week as all eyes were on the US mid-term elections as Americans headed to the polls yesterday. Historically markets have performed best with a Democrat in the White House and Republicans holding either both or one chamber of Congress. Studies have shown that the S&P 500 saw average annual returns of 16.2% when Republicans controlled both chambers of Congress, compared to gains of just 13.6% with a split Congress, and 10.1% with a Congress controlled by Democrats.
As polling cards continue to be counted this morning, it appears as though the Republicans are on track for a majority in the House of Representatives, which should make it harder for President Joe Biden to pass legislation, which is good for corporates. As of this morning, control of the US Senate is still very much up for grabs.
The UK’s biggest mortgage lender Halifax reported that UK house prices fell at the fastest monthly rate in October since February 2021, reflecting the fallout from the September “mini-budget”.
On Tuesday shares of British house-building companies fell. Persimmon plc fell as much as 8% upon market opening, as the company announced it expects to sell fewer new homes in 2023 than it has this year. They also reported a rise in cancellation rates from 21% to 28% in the past six weeks. Dean Finch, the company’s chief executive, said: “Rising interest rates and broader economic uncertainty are clearly impacting mortgage lending and customer behaviour”.
However, the company is still on track to complete between 14,000 and 15,000 homes this year and announced it was going to implement a new capital allocation policy, to retain capital to invest for its long-term future rather than focusing on short-term high dividends.
Chinese PPI (Producer Purchasing Index), a key gauge for inflation fell by 1.3% in October, the first decline since December 2020. CPI data revealed that Chinese inflation slowed in October; prices rose by 2.1% down from 2.8% in September and were below market expectations of 2.4%. The drop in inflation was attributed to a slowdown in costs of food inflation that eased by 7% month on month, inflation continues to elude China.
On Monday China’s National Health Commission was quick to quash reopening rumours that had caused market sentiment to soar at the end of last week. Officials warned that the current situation could become “more severe and complex” as the country enters the winter flu season. That being said, whilst we don’t expect China will shift from its zero-Covid policy overnight we continue to see signs that the Chinese economy is limbering up in preparation for reopening with Covid restrictions becoming less stringent than several months ago. Quarantine areas continue to shrink, and market optimism is growing with investors looking at sectors that would benefit from reopening, such as tourism, hotels and catering. The Hang Seng index ended up 2.7% on Monday to extend last week’s rally which was the biggest since 2015.
Eurozone retail sales rose in line with expectations for September despite high inflation. The volume of retail sales increased by 0.4%, a strong upward revision from August. The increase was mainly due to a rise in online purchases which rose by 2.6% per month.
Still to come this week we have UK Q3 GDP, UK Industrial goods, Japanese PPI and US CPI.
Kate Mimnagh, Portfolio Economist