Markets Rise on Optimism Over Inflation and Trade
Stock markets in London, New York and Tokyo climbed to record highs, propelled by more encouraging inflation reports and progress in US-China trade talks ahead of the Trump-Xi summit in South Korea on Thursday. The FTSE 100, S&P 500 and Nikkei indices rose 2.8%, 2.1% and 2.7% respectively on the week.
US Treasury Secretary Scott Bessent told reporters late on Sunday that a “very positive” framework has been agreed in advance of the first summit between Trump and Xi since 2019. Following talks on the sidelines of the ASEAN meeting in Kuala Lumper, trade negotiators reached several agreements, including a deferral on China’s rare earth minerals controls, a deal on TikTok’s US operations, fentanyl, trade in agricultural products and shipping fees.
Before arriving in South Korea, President Trump met with Sanae Takaichi, Japan’s new appointed first female prime minister. The US president hailed the “great friendship” between the two countries, and the two leaders discussed a closer defence alliance and Japan’s $550 billion of investments into the US, a condition to reduce tariffs on Japanese exports from 25% to 15%. Takaichi also presented Trump with a golf bag and putter that belonged to her mentor, the late prime minister Shinzo Abe.
Whilst trade barriers were coming down in Asia, Canada was hit with an additional 10% levy on its exports to the US in retaliation for the province of Ontario running a TV ad campaign which featured clips of Ronald Reagan’s 1987 radio address warning of the long-term economic perils of tariffs.
Better-than-expected inflation reports from both sides of the Atlantic also provided some tailwinds for markets. In the UK it was revealed that headline annual consumer price inflation held steady at 3.8% in September for a third successive month, as higher transport petrol prices and airfares were offset by lower food bills and live music prices. Although inflation remains well above the Bank of England’s 2% target, the probability of an interest rate cut in December increased to 65% according to money markets.
In the US, inflation rose less than forecast to 3.0%, paving the way for the Federal Reserve to cut interest rates again this evening, despite concerns that tariffs will feed through to higher prices further down the road.
I was a busy week for third quarter corporate earnings reports with mixed fortunes. Shares in NatWest jumped 5% to a 15-year high on Friday after reporting its highest quarterly profits since 2008. The Edinburgh based lender’s operating profit rose to £2.2 billion, 30% higher than the same period last year, underpinned by mortgage and corporate lending. Its net interest margin, the difference between what it pays for deposits and charges for loans, increased to 2.37%.
Tesla shares initially fell after it revealed that its profits fell by more than 37% year-on-year to $1.4 billion despite higher sales. The company attributed the declines to increased costs from tariffs, the loss of revenue from carbon credits and higher research and development expenditure in areas such as AI and robotics. It has also lost market share to lower cost Chinese competitors, including BYD and Geely.
The earnings report comes ahead of Tesla’s annual meeting on 6th November at which shareholders will vote on a proposed $1 trillion share package for Elon Musk. The board is seeking to away Musk up to 12% of the company’s shares over the next decade if he can hit a series of targets, such as increasing Tesla’s market valuation to $8.5 trillion, from $1.5 trillion today, and reaching ambitious milestones in autonomous driving and robotics. Tesla’s Chair Robyn Denholm warned shareholders on Monday than Musk could leave the company if the proposal is not approved.
In commodity markets, Brent Crude rose more than 7% to $65 a barrel after the US hit Russia’s energy sector with more sanctions after efforts to negotiate a peace deal in Ukraine with Vladimir Putin stalled. It targeted Rosneft and Lukoil, which account for more than half of Russia’s daily exports of 4.5 million barrels, mostly to China and India. In contrast, prices of precious metals, such as gold and silver, retreated from all-time highs as progress in US-China trade talks reduced safe-haven demand.
A blockbuster week lies ahead for corporate earnings, headlined by tech giants Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook) and Microsoft. Investors will be looking for reassurances that the huge investments into AI infrastructure will pay off. The five companies combined account for a quarter of the valuation of the S&P 500 index.
(Cover Image Source: Kate Krivanec)