Markets ended last week on the back foot as investors became concerned about the extent of AI capex and high U.S. equity valuations before making up all that lost ground on progress of an end to the U.S. Government shutdown.
Markets ended last week on the back foot as investors became concerned about the extent of AI capex and high U.S. equity valuations before making up all that lost ground on progress of an end to the U.S. Government shutdown.
The U.S. Government Shutdown Drama
The most significant development was the ongoing U.S. government shutdown, now the longest in American history, which severely disrupted the flow of critical economic data including non-farm payrolls and CPI figures. This data blackout left the Federal Reserve and markets operating in what Chicago Fed's Austan Goolsbee aptly described as a "fog." By mid-week, optimism emerged that the shutdown would end before November 16th, with betting markets shifting dramatically from 56% expecting a prolonged shutdown to 89% anticipating resolution. The Senate ultimately passed legislation to end the shutdown, with the House expected to follow, keeping government operations funded through January.
Equity Market Volatility
U.S. equities experienced significant swings throughout the week. The tech-heavy NASDAQ fell 3% over the week followed by a strong bounce-back rally as shutdown resolution hopes emerged. The S&P 500 showed similar volatility, ending the week down after initially strong performances. European markets followed suit, with the DAX showing particular strength in the last few days. Notably, Nvidia shares fell 3.1% on news of Softbank selling a $5.8 billion stake to fund OpenAI investments, dragging down the broader tech sector.
Bond Markets and Central Bank Expectations
The lack of official labor market data created uncertainty about the Fed's December meeting, with rate cut probabilities fluctuating between 60-70%. In the UK, gilt yields fell 7 basis points after disappointing employment data showed unemployment rising to 5%, increasing December rate cut expectations to over 80%.
Currency and Commodity Movements
The Australian dollar emerged as a notable outperformer, rising to 65.3 US cents following hawkish comments from RBA Deputy Governor Andrew Hauser, who suggested Australia might be "boxed in" by capacity constraints. The New Zealand dollar underperformed, reaching a 12-year low against its Australian counterpart. Gold demonstrated its safe-haven appeal, climbing 2.4% to firmly exceed $4,000 per ounce despite the risk-on equity rallies. Oil markets weakened, with Brent falling 2.2% over the week to $63.60 on oversupply concerns.
Global Economic Indicators
China delivered disappointing news with exports unexpectedly falling 1.1% year-on-year in October, reversing September's 8.3% growth and raising concerns about global demand. The Michigan consumer sentiment survey plummeted from 58.6 to 52.2, approaching record lows and reflecting broad-based pessimism across demographics. In contrast, Australian business conditions improved, with the NAB Business Survey showing rising activity and capacity utilisation, while consumer confidence surprisingly jumped 12.8% month-on-month.
Looking Ahead
Markets will be digesting a torrent of economic data as the U.S. Government (hopefully) opens up but the quality and timeliness of U.S. economic data remain questionable even after the shutdown ends. Meanwhile, global growth concerns persist, with deflationary pressures in China and weakening labour markets in major economies juxtaposed with capacity constraints in areas of the economy, especially related to the U.S. tech infrastructure roll out.
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The past week delivered a tale of two markets. On one side, a reassuring U.S. inflation print and a surprisingly strong labour market report suggested the American economy remains on solid footing.
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