Written by Millan Chauhan
The Bank of England’s Monetary Policy Committee voted narrowly to maintain interest rates at 4%, with five members favouring a hold and four advocating for a cut. Governor Andrew Bailey signalled a commitment to lowering interest rates gradually, noting that inflation appears to have peaked. This has increased expectations for a potential rate reduction at the Committee’s final meeting of the year in December.
Last week, US equity markets experienced declines, with the S&P 500 decreasing by 1.7%, largely due to weakness in technology stocks. The Nasdaq-100, which is heavily weighted toward technology firms, fell by 3.2%. The sell-off was driven by worries about high valuations in these technology companies and a decline in consumer confidence during October. Investment into Artificial Intelligence (AI) has remained strong with major technology companies, including Alphabet, Amazon, Meta, and Google, collectively reporting $112 billion in capital expenditures for the third quarter. These investments are primarily directed toward Graphics Processing Unit (GPU) acquisitions and infrastructure enhancements, which are intended to drive AI integration and improve productivity and efficiency. This sustained commitment has played a significant role in driving up the valuations and prices of these technology companies. This capital expenditure has also positively impacted infrastructure assets, especially electric utilities, which play a crucial role in meeting the rising energy requirements associated with AI hardware.
Historically, infrastructure assets have provided strong diversification benefits compared to global equities, often acting defensively during stock market downturns, while also offering effective inflation protection and an attractive dividend yield. For instance, last week the Nasdaq-100 dropped by 3.2%, but infrastructure assets, as measured by the S&P Global Infrastructure GBP Hedged Index, rose by 0.9%. This clearly demonstrates how portfolio diversification plays a crucial role in achieving positive outcomes.
The United States federal government has now been shut down for 38 days, constituting the longest closure in history. This situation has limited access to official government data and increased reliance on alternative reports from the private sector. For instance, last Wednesday’s ADP employment report indicated that private employers added 42,000 jobs over the past month, representing an improvement after two consecutive months of job losses. However, a separate report released last Thursday by Challenger, Gray & Christmas stated that US employers have announced nearly 1.1 million job cuts year-to-date through October, a 65% increase compared to the same period last year and a 44% rise over the total number of cuts in 2024. In October alone, 153,074 job cuts were reported, marking the highest figure for that month since 2003. These developments present considerable challenges for the Federal Reserve as it assesses the state of the labour market and the broader economy in advance of their final meeting of the year in December. In light of the conflicting economic indicators, markets are assessing whether the Federal Reserve will implement a rate cut next month or maintain current rates amid the continued uncertainty.
Although global markets experienced a downturn last week, we would like to emphasise the advantages of remaining invested, as attempting to time the markets is often extremely challenging.
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