As we close the chapter on October’s busy financial scene, the spotlight has swung onto Labour’s first budget in 14 years and the US election. With inflation, corporate results, and interest rates occupying a central role in markets worldwide, there’s much to unpack about the economic ripples reaching us here in the UK, across Europe, and beyond. Let’s take a closer look at what’s been driving markets this month in our November Market Commentary.

UK

At the heart of October’s financial developments was the UK’s new budget. Rachel Reeves, the Chancellor, announced an ambitious £40 billion in new tax revenue, with the spotlight on businesses. The big headline? Employers’ National Insurance contributions are up from 13.8% to 15%, a change aimed at bolstering Treasury coffers to the tune of £25 billion. It’s a gamble, though. Many experts worry that this could mean fewer pay raises, slower hiring, and perhaps even redundancies – scenarios that might shrink the economy rather than grow it.

On the pensions front, Reeves announced that by 2027, any unused pension fund or death benefits will face inheritance tax. This shift, she argues, will feed into much-needed infrastructure investments designed to boost long-term UK growth. Projects have been earmarked, but how soon they’ll deliver tangible returns remains to be seen. While Reeves points to a horizon well beyond the next election, the Office for Budget Responsibility (OBR) offered a more cautious view, projecting modest growth in the near term but less impact in the latter years of this government’s term. Whether the electorate will wait to see if these investments pay off is another question entirely.

Europe

The European Central Bank (ECB) continued with its steady rate-cutting strategy, reducing rates by another 0.25% to 3.25% in October. This third cut for 2023 is part of a plan to keep inflation in check, with ECB President Christine Lagarde adopting a more cautious “dovish” tone as economic momentum shows signs of slowing.

Weakness is especially apparent in the manufacturing sector, with Germany – the economic engine of the Eurozone – grappling with declines in industrial and car manufacturing. The service sector remains a brighter spot, but the region’s overall growth lags behind the US, with European sovereign bonds dipping 0.1% last month due to the ongoing challenges in fixed-income markets.

United States

Financial markets are in a buoyant mood following President-elect Donald Trump’s victory. The Dow Jones, S&P 500, and Nasdaq have all hit record highs, with investors clearly optimistic about Trump’s proposed policies, including anticipated tax cuts and deregulation. This market rally reflects confidence in Trump’s business-friendly stance, which many see as favourable for stocks, bonds, and the dollar in the near term.

Tesla has been a standout, with its market value soaring beyond $1 trillion. Elon Musk’s recent public support for Trump has spurred a sharp rise in Tesla’s stock price, and some analysts are projecting a valuation of up to $2 trillion. This is creating waves across the tech and green energy sectors, as investors respond to Trump’s promise of favourable conditions for US businesses.

Gold ETFs have also joined the rally, as investors look to diversify their portfolios. The increased demand for gold reflects both enthusiasm for growth under Trump and caution about potential inflationary pressures.

On the economic front, the Federal Reserve has responded to concerns about inflation, cutting interest rates for the second time in four years. This 0.25% rate cut is aimed at supporting economic momentum, but it highlights a growing balancing act: Trump’s pro-business policies could drive growth but also stoke inflation fears in the medium to long term.

The US economy itself remains resilient, posting a solid 2.8% annualised growth rate in the third quarter. Banks have enjoyed a robust earnings season, benefiting from relaxed regulations and optimism about future investment, while tech stocks have shown mixed performance, especially with the fluctuating semiconductor demand. Although big tech may not be the only growth engine, there’s plenty of opportunity across sectors, especially in energy, manufacturing, and infrastructure, which are set to benefit from Trump’s policies.

Far East

Over in Asia, China has been rolling out measures to support its property sector and spur consumption, hoping to balance the ongoing real estate pressures. New policies, including allowing local governments to use special bonds to buy land from struggling developers, aim to keep the housing sector afloat. It’s a cautious but potentially stabilising move for China’s economy.

In Japan, October was a positive month for stocks, despite concerns that a stronger yen might impact exporters. Political uncertainties following recent election results appear to have had minimal impact. Inflation came in at 1.8% year-on-year, supported by healthy wage growth. The Bank of Japan kept interest rates steady, giving businesses and consumers alike some much-needed stability.

Emerging Markets

Emerging markets have had a challenging month, largely because of the stronger US dollar, which makes dollar-denominated debt more expensive to service. While goods inflation is under control, high inflation in services remains a concern. The manufacturing sector improved a little, but remains weak for the year ahead, and oil prices have been all over the place.

A potential Trump victory could complicate matters further if a trade war with China reignites. China may seek alternative markets for its exports, looking to emerging economies, though this would likely require some adjustments to exchange rates. Indian stocks, after a strong year, corrected in October following weaker-than-expected corporate results.

Final Thoughts

With a busy political calendar and plenty of macroeconomic shifts, markets have had a volatile but fascinating October. The key takeaway? Economic fundamentals continue to reassert themselves as we move past headline-grabbing events. Interest rate normalisation remains the order of the day, and a US recession looks avoidable, with a soft landing anticipated for 2025.

And in case you were wondering, Mount Everest grows about four millimetres every year. This happens because of tectonic plate movements, with the Indian and Eurasian plates pushing against each other and nudging the mountain a bit higher. A gentle reminder that slow and steady changes – whether in mountains or markets – can lead to significant impacts over time.