The US and China agreed a one-year trade deal in South Korea last week. The US President met with the Chinese President in Gyeongju last Wednesday where they discussed a number of matters including tariffs and semiconductors. The US expects the deal to go on for ‘long beyond a year’. China agreed to a year-long suspension of the rare earth mineral export controls that rattled markets when they were announced a couple of weeks ago. In return the US said they would pause the extension of their technology-related export controls to Chinese companies that were brought in at the end of September.
South Korea has agreed to invest $350bn in the US economy in exchange for lower tariffs on car exports to the country. The agreement reached last Wednesday will lower tariffs on South Korean auto imports from 25% to 15%, aligning the auto tariff rate with those of Japan and the EU. Last year, automobiles made up roughly one-third of South Korea’s total exports to the United States.
US Equity Market:
Nvidia has become the world’s first $5tn company. To put this into perspective, the French and UK stock markets have market caps of just over $3.2tn and $4tn respectively. The tech giant reached this historic milestone last Wednesday after announcing large AI chip bookings as well as the prospect of gaining less restricted access to the Chinese market.
Microsoft, Alphabet and Meta reported results last Wednesday, and the reaction has been a mixed bag. Alphabet, Google’s parent company, reported quarterly revenue of over $100bn for the first time, driven by strong earnings from advertising and cloud computing. Shares rose 5% in after-hours trading, extending its year-to-date rally to 44%. Meta, on the other hand, raised its capital expenditure guidance for this year and announced plans to spend significantly more than expected for 2026. Its shares fell more than 10% last Thursday, wiping out around $200bn of market cap. Microsoft’s results for its Azure cloud computing business fell short of investors’ expectations; the shares dropped 3.6% after the release.
Apple reported its own results last Thursday and predicted that the upcoming Christmas period would bring its best-ever sales figures, largely driven by the new iPhone 17. Shares were up 2.3% in after-hours trading. Amazon’s quarterly results were perhaps the most impressive of all of the so called ‘magnificent 7’. Its shares shot up 12% last Friday morning after its AWS cloud computing business posted its strongest growth figures since 2022.
UK Equity Market:
The FTSE 100 attained new record highs last week. The UK market has rallied on the back of strong earnings figures from some key index constituents such as GSK and Next. The positive mood from broad US stock market performance and optimism about the US-China trade deal extended into European markets in the middle of last week, before the deal was officially announced.
Inflation, Interest Rates and Bond Markets:
The Federal Reserve opted to cut interest rates by 25bps in the Federal Open Market Committee meeting last Wednesday. The move, which was largely anticipated by investors was accompanied by an announcement that the Fed would end its quantitative tightening[1] programme. The Fed is ending its quantitative tightening programme to prevent short-term interest rates, such as theSecured Overnight Financing Rate (SOFR), from drifting above the Federal Funds Rate. A dispersion between the two rates can indicate strains within the lending system, which can destabilise financial markets.
In a speech after the rate decision last Wednesday, Fed chair Jay Powell warned that a further reduction of the policy rate in December’s meeting is “not a foregone conclusion”. Powell reiterated the tough situation that the Fed is facing due to the ongoing federal government shutdown in the US. “What do you do if you’re driving in the fog? You slow down,” Powell said, highlighting the Fed’s preference for a cautious approach when operating with limited official data. The probability of another 25bps cut in December fell from around 90% to 70% after Powell’s comments; US stocks initially fell but later recovered the losses to end last Wednesday’s trading session broadly flat.
What’s on the horizon
The Bank of England’s Monetary Policy Committee (MPC) is due to meet on Thursday to make a decision on interest rates. With the September inflation print coming in at 3.8%, almost double the BoE’s 2% target, it is largely expected that the MPC will maintain the current rate of 4% until at least the next meeting in mid-December. While a cut in December is possible, most analysts are expecting the rate to stay at 4% until early 2026.
The unemployment rate in the UK was 4.8% in August, the highest figure in more than four years. While the BoE acknowledges the need to stimulate growth within the economy, it remains cautious about cutting rates prematurely, which would run the risk of fuelling further inflation. This is a very similar situation to that which the Federal Reserve has been facing in the US throughout the year.
The US government shutdown has entered its fifth week, making it the longest full government shutdown in US history. Key US data releases such as the Nonfarm Payrolls data, which is due to be released on Friday, are at risk of being delayed. While September’s inflation data was released as scheduled recently, the absence of broader labour market indicators complicates the Federal Reserve’s decision making process, as alluded to by Jay Powell in his address last week.
[1] Quantitative tightening (QT) is a process that removes liquidity – meaning the amount of cash circulating in the economy. It began in 2022 to reverse some of the effects of a quantitative easing (QE), which is essentially the complete opposite. QE was introduced after the global financial crisis in 2008 to flood the financial system with cash and boost the economy.