Mercury Weekly (11/10/24)

Middle East Tensions: How Has the Market Reacted?

Global markets have shown resilience in the face of escalating tensions in the Middle East following Iran’s missile strikes on Israel. Despite fears of a broader conflict, the market response has been relatively subdued. European and Asian stocks experienced slight declines, while Brent crude oil rose modestly to around $75 per barrel. Gold saw little movement, and the US dollar gained just 1% against other major currencies.

Investors appear cautious but not panicked. Analysts noted that while Iran's involvement is alarming, the market's reaction mirrors previous geopolitical flare-ups. Much of the market’s stability is attributed to US monetary policy. Recent interest rate cuts by the Federal Reserve, alongside strong economic data, have bolstered risk assets, providing a cushion against geopolitical shocks.

Additionally, Chinese economic stimulus measures are contributing to a positive market mood. The dollar’s traditionally strong response to crises has been less pronounced this time, as central bank agreements and high US interest rates have reduced the need for a rush to safety.

Though investors remain on edge, the current response highlights how the financial markets, buoyed by global monetary policies, are evolving in their reaction to geopolitical uncertainties. However, should tensions in the region escalate, this delicate balance could be tested.

Soft Landing Looks Positive After US Jobs Report

In September, the US economy added 254,000 jobs, far exceeding expectations and signalling continued strength in the labour market. This growth, primarily driven by the leisure and hospitality sector, marked a significant leap from economists' predictions of 140,000 new jobs. The unemployment rate also fell to 4.1%, down from the three-year high of 4.3% seen in July.

The jobs report has increased confidence that the Federal Reserve can achieve a "soft landing" for the economy, balancing high inflation without triggering a recession. Following this news, traders adjusted their expectations for interest rate cuts, now betting that the Fed will implement a smaller quarter-point cut in November.

Average hourly earnings also saw a 0.4% rise for the month, contributing to a 4% annual increase. Treasury yields jumped and the US dollar strengthened as markets responded positively to the report. This continued labour market resilience points to a strong economic outlook heading into the final quarter of the year. Kamala Harris is likely to benefit from this economic backdrop, giving her campaign a boost as the election approaches.

UK Seeks Renewed Ties with EU

Prime Minister Keir Starmer's first visit to Brussels marks a significant step towards transforming UK-EU relations post-Brexit. Meeting with European Commission President Ursula von der Leyen, Starmer aims to set the stage for upcoming negotiations on security and veterinary agreements, part of a broader effort to mend ties after years of strained negotiations.

The Labour government's approach includes strategic bilateral talks and key meetings across Europe, reflecting a proactive stance on rebuilding cooperation. Both sides display a readiness for a reset, yet differing priorities hint at complex talks ahead. The UK focuses on defence collaboration and trade simplification, while the EU pushes for mobility and energy partnerships.

As formal negotiations are expected to begin in the coming months, the dialogue between the UK and EU is poised to define the trajectory of their future relationship.

House Prices Pick Up the Pace

UK house sales saw their fastest rise in three years this September, spurred by falling mortgage rates and renewed buyer demand. According to property platform Zoopla, the number of agreed sales rose 25% compared to the same period last year, the sharpest increase since the post-lockdown rebound of 2021. Buyers' inquiries also surged by 26%, signalling a renewed confidence in the housing market after a prolonged period of uncertainty.

This surge in activity comes as average mortgage rates dropped to their lowest in over a year, with the two-year fixed rate falling to 4.7% in August. Analysts suggest that further declines in mortgage rates could fuel additional price growth, contributing to the ongoing recovery in the property market.

The increase in home sales and inquiries highlights renewed optimism among buyers and homeowners. However, rising supply, particularly in rural and coastal areas, driven by potential tax reforms targeting second homes, could shift the dynamics of the market. While this uptick in activity is a positive sign for the UK economy, increased supply could temper house price growth in specific regions, potentially offering new opportunities for first-time buyers.

France Delays Budget Deficit Target Amid Economic Strain

In a significant policy shift, French Prime Minister Michel Barnier has postponed the target for aligning France's budget deficit within the European Union's limits. Originally set for 2027, the new deadline extends to 2029, as Barnier confronts the realities of France's financial health in his inaugural policy address to lawmakers. Amid growing investor concerns and what has been described as a “colossal” national debt, the adjustment reflects deep fiscal challenges.

Barnier's strategy to curb the deficit, which is projected to exceed 6% this year, includes a mix of spending cuts and targeted tax hikes on the wealthy and profitable corporations. This approach aims to balance fiscal responsibility with economic competitiveness, avoiding broad tax increases that could stifle economic growth.

The political background adds complexity, with Barnier'scentrist coalition lacking a strong majority and facing potential opposition challenges. However, some reprieve comes as Marine Le Pen's National Rally opts against immediate no-confidence motions, providing Barnier a narrow window to implement his fiscal reforms. This cautious endorsement underscores a critical period for Barnier'sadministration as it strives to stabilise France's finances without deepening social divides.

Chinese Stocks Rally Amid Economic Stimulus

The Hang Seng China Enterprises Index recently celebrated a 13th consecutive day of gains, surging 7.1% as property and brokerage sectors led the charge, buoyed by government stimulus measures. These initiatives, including interest rate cuts and liquidity enhancements, have rejuvenated investor confidence, reversing a three-year decline in Chinese equities.

Despite the rally's robustness, with analysts suggesting it could last up to six months, the surge is grounded in attractive stock valuations and recent regulatory relaxations that have spurred investments from heavyweights like BlackRock. This renewed interest coincides with visible signs of economic recovery, such as record holiday travel, signalling a potential upturn in consumer spending.

Yet, challenges like economic imbalances persist, prompting caution among investors. Nonetheless, the strong market performance has positively affected the regional currency, highlighting a growing optimism in China's economic prospects and its stock market's potential for further gains.