Politics
On November 5th, Americans will decide who will next occupy the White House and, in doing so, will play an important role in shaping geopolitics and the global economy for the next four years. With tax cuts and deregulation likely under a second Trump presidency, businesses will have some aspects to cheer. Yet, with greater tariffs also promised, international trade will face disruption, and inflationary pressures could return. Trump vs. Harris is, therefore, likely to be the defining moment of this year.
Meanwhile, in the UK, the first Labour budget in 14 years will be delivered on October 30th. Rachel Reeves hopes to deliver a plan for growth, yet with an unforgiving fiscal environment and given her previous pledge not to raise taxes on ‘working people,’ she faces limited options. A focus on wealth taxes for individuals and a greater burden on business seems the likeliest path, while tweaking the definition of public debt could also afford her more wiggle room for spending. A narrow path she must, therefore, tread, and markets will be watching closely and quick to judge her decisions.
2024 has been a year of change, and as the above suggests, that is set to continue as the year nears its end. Yet, with these two events so large on the horizon, investors in Western markets are waiting for clarity on the political direction of both the US and the UK. Will the US take a turn to an ostensibly pro-business, yet highly protectionist nature, or will it return to an internationalist agenda where global trade is seen as win-win rather than zero-sum? In the UK, will the Chancellor be able to fill the ‘fiscal black hole’ Labour has loudly highlighted while still leaving space for the economy to grow, or will a tax-heavy agenda put off corporate investments and suppress consumer confidence? Only time will tell on these items, and therefore, perhaps unsurprisingly, markets have been rather directionless over recent weeks.
Central Banks
While investors have been able to sit tight while awaiting these developments, central bankers have had no such luxury. With inflation falling back into line with target levels, the opportunity has been created for reductions in interest rates, while concerns over slowing labour markets have arguably created the need. Because of this, we have seen the first rate cuts in the US, the UK, and the Eurozone. Further reductions are likely, but at what pace and to what level are uncertain.
Markets are currently expecting interest rates to fall to around 3.5% in the UK and US a year from now, but these figures are highly uncertain. The current estimations are based on the assumption of continued moderate economic growth, a slight softening of the labour markets, and a sustainable victory over inflation. Yet, should central banks misjudge the situation, the true path of interest rates could diverge significantly from here. For investors, reactions will likely be positive if there are signs of a slight slowing of the economy as this would allow gradual further rate cuts (the favoured soft-landing scenario). Yet, if data comes out which suggests a harder landing, with widespread job losses, then markets could quickly lose confidence as large rate cuts would be needed. A prime example of this being the heightened volatility we saw in August following a disappointing US jobs report.
China
In the West, politics, labour markets, and economic growth will all be crucial factors in deciding the path of investment markets. In the East, meanwhile, the focus has been on policy announcements in China.
China has been a drag on the global economy over the past two years, with its economy hobbled by a collapsing property sector and the low levels of consumer confidence this created. In the last days of September, there was a major development in this story with Beijing announcing a large stimulus package leading to a rapid rally in Chinese equities, which in turn drove high performance amongst the Asia Pacific and Emerging Market investment regions. Full details on the scale of the intervention have not yet been provided, and in this absence, markets have given back some of their gains. Yet, this does appear to mark a major turning point in the actions of China’s policymakers, suggesting a more supportive environment ahead.