Nervousness on US Government Reopening

It was a week of some European indices hitting new highs. However, as the longest US government shutdown in history ended, there was a distinct feeling of fragility about the state of financial markets.

The health of the key US economy will become clearer as the government hums back into activity in the next few weeks. Reports on inflation, employment and general economic direction will provide investors with a degree of certainty, something that has been missing for nearly two months.

Ten days ago, a US December rate cut was an odds-on certainty, but today according to money markets there is only a 40% chance of a one quarter point cut. A perception exists that the economy is sound whilst employment is not as weak as suggested by independent surveys.

Throw in hawkish Federal Reserve comments on inflation staying above 2% target levels until 2027 along with expensive company valuations and there is good reason to reign back optimism.

In corporate news, Alphabet, the parent company of YouTube and Google was again prominent. This time, it was the announcement that Warren Buffett’s Berkshire Hathaway had built a stake in the company worth $4.9B during the third quarter of this year.

It is particularly unusual action given that Berkshire tend to buy Banks, Insurance, Consumer and Energy companies, avoiding large technology names. This is a big vote of confidence in Alphabet and its huge investment in Artificial Intelligence and data centres. Already the stock is up 16% in the last month and by over fifty per cent since the start of the year.

President Trump is gaining credibility on his wish to impose tighter price regimes in US drug prices. Agreement between the administration and Eli Lilley for sweeping price cuts in their best-in-class obesity and diabetes drugs is positive. However, Eli Lilley have not got it all their own way as competitor, Novo Nordisk have decided to reduce prices further for their own weight loss drug to an even lower monthly level.

Turning to fuel prices, local car drivers may wonder if they will receive a benefit of soggy oil prices, but it may be next year before pump prices meaningfully fall. Oil ended the week unchanged, torn between several factors. There is increasing risk aversion amid fear of oversupply in oil markets and intensifying geopolitical tensions following new Ukrainian attacks targeting a major Russian export hub.

Fundamentally, the International Energy Agency (IEA) has updated its forecasts and still expects the global oil market to be well supplied for the next few years, The IEA expects only modest demand growth, suggesting a significant surplus and lower prices in 2026. The Organisation of Petroleum Exporting Countries share this view, as the cartel gradually increase their own production quotas.

Closer to home, everyone will be waiting for the delayed Autumn Statement on 26 November from UK Chancellor, Rachel Reeves. She may have given herself more time to work out the sums, but nothing seems clear. The strange press conference two weeks ago direct from Downing Street, laying the groundwork for tax rises and breaking the governments election manifesto, seems to have backfired badly.

Government lobbyists now tell us that there will be no changes to basic tax rates! Little wonder then, that the latest Purchasing Managers data highlighted the steepest decline in construction activity for five years. Elevated political and economic uncertainty in the run up to the Autumn Statement has quite reasonably discouraged spending and normal levels of activity.

We can only hope that the domestic economic picture improves next year. Supporting this thesis is the UK FTSE100 index reaching a record high last week. The market is always a good barometer to tell us what the economy will be like in nine to twelve months’ time!

This week’s important corporate result is tonight at 9pm our time. The world’s largest company, Nvidia announce their latest quarterly numbers. Unless they beat the market forecast handsomely, it could signal the start of significant profit taking and a continuation of this short-term market pullback.

(Cover Image Source: Harold Mendoza)