Nearly all the price action in markets last week came in a burst of euphoric demand following the publication of relatively benign American inflation data. US inflation fell from 8.2% in September to 7.7% in October, with the details revealing that inflationary pressures were easing across the board: the pace of inflation decelerated in the property and service sectors between September and October, and there were outright declines in the cost of used cars, rent, clothing and household furnishings. One data-point does not constitute definitive evidence and, more broadly, current economic data confirms that a slowdown is underway but, nevertheless, this was enough to send markets into an epic rally. Expectations for interest rate rises in the US dropped like a stone, along with the safe-haven US dollar. US government bonds surged across the board, and five-year bonds enjoyed their biggest one-day gain in a decade. The S&P 500 stock market index had one of its best days since the start of the pandemic, rising by 5.5%. The technology-heavy Nasdaq index, which had been beaten down by the fear of rate rises, rocketed by over 7%. European stock markets surged in sympathy: the Euro Stoxx 50 index had gained over 3% by the end of the day and the UK-orientated FTSE 250 gained nearly 4%.

While this is undoubtedly good news, many forecasters had been expecting inflation to begin to decline from its extreme levels. The surprise was that it hadn’t done so sooner, given that so many of its components were caused by the impact of pandemic-related lockdowns on consumption and supply chains. Federal Reserve Chairman Powell is looking for decisive evidence that inflation is coming down before he will consider looser monetary policy, and that includes seeing “a series of down monthly readings”. At least he has now witnessed the first of that series. If this is indeed the pivot towards slower rate rises that investors have been looking for, attention may now turn towards government spending and the fiscal adjustments needed to rein in government deficits. The British government’s recent experience was echoed last week in Brazil, when the new president’s attempt to bust through budget restrictions sent Brazilian asset prices into a tailspin.

Markets had struggled going into Thursday’s inflation report, thanks to another high-profile catastrophe in the world of crypto-currencies. The demise of the FTX exchange, together with its associated companies, eradicated a quarter of the value of crypto-currencies in just two days. More importantly, it raises the prospect of foul play, and guarantees the involvement of the regulators. The emperor is rapidly shedding his new clothes.

As the week drew to a close, markets were boosted by all things Chinese. Having already ignited a rally in Chinese assets with a slight relaxation of the zero-Covid policy, the Chinese authorities announced plans to alleviate the crisis in the property sector. The measures are extensive, including financial support for property developers and smaller down payments for buyers. Asset prices leapt again, and the Chinese yuan enjoyed its biggest one-day gain against the US dollar in seventeen years. This was followed up by a relatively civil meeting between Presidents Biden and Xi Jinping, plus a liquidity-boost by the People’s Bank of China. The Hang Seng China Enterprises Index, which tracks the stock prices of Chinese companies listed in Hong Kong, has now risen 25% from its trough in October. Moreover, any improvement in US-China relations is likely to boost investor sentiment globally. 

Semiconductor manufacturers have endured a torrid few months, with the pandemic-inspired boom turning to bust, followed by the industry getting caught up in the trade war between the US and China. A bullish report by Dutch chip manufacturer ASML Holding, however, underlines just how strong the outlook for the industry remains. The company forecast that its annual revenues could reach EUR40 billion a year by 2025, compared with the average expectation amongst analysts of EUR32 billion. Simultaneously, the company announced a EUR12 billion stock buyback programme. The shares surged 12% on the news. The chip sector was boosted again when it was revealed that Warren Buffett’s Berkshire Hathaway had invested $5 billion in Taiwan Semiconductor Manufacturing Co., prompting that company’s shares to rise by 8%.

News that China will reduce the amount of time that travellers and some citizens must spend in Covid-quarantine sent commodity prices up across the board. Iron ore has soared by 17% since the relaxation of strict anti-Covid measures got going in earnest a couple of weeks ago. Copper prices jumped over 12% in the last week alone, and even precious metals got in on the act with gold and silver prices rising 5%.

The luxury goods sector followed suit, jumping on the news that China would be relaxing penalties on airlines bringing Covid cases in from overseas. French and Italian luxury goods stocks rose by 4-6% across the board, including Richemont, LVMH and Hermes International. Britain’s Burberry rose by nearly 3%. This had already been one of the better performing sectors this year.

Disney stock suffered its worst one-day decline in 20 years after the company reported quarterly profits that missed expectations by a country mile. Higher programming expenses to support the Disney+ streaming service were a significant factor. Management announced a severe company-wide cost-cutting programme and a freeze on recruitment.