The prime minister resigns, long live the prime minister

Liz Truss resigns becoming the shortest serving prime minister in UK history
Mega-cap revaluation in US

Financial market price changes were positive but volatile during October except emerging markets which were negative. The main factors which effected positive results in developed markets were hopes that we already reached the inflation peak, and the US Federal Reserve Bank will become less hawkish. The US S&P 500 index (S&P 500 Total Return EUR Index), which represents major 500 US companies increased by 7% during the month. Developed markets (MSCI World Total Return EUR Index) increased by 6.24%. Emerging markets (MSCI Emerging Markets Daily Net Total Return EUR Index) generated 3.96% negative return.

The Bank of England keeps pace with other main central banks by increasing interest rates. Together with restrictive monetary policy, which is mainly directed to fight against inflation, UK central bank had to take an emergency action to prevent financial markets from turning into an economic crash. Central Bank initiated strictly time limited gilt purchasing program which could bring stability to UK’s credit market. Bank of England emphasized that this emergency market intervention is temporary and it is in not a form of quantitative-easing bond buying, which is a monetary policy tool. The turmoil in credit market is not the only black cloud in the UK sky, later in the month UK prime minister Liz Truss made the statement that she resigns. She became the shortest serving UK prime minister in history by staying in the cabinet only for 45 days. These political disturbances negatively effected credit markets and GBP exchange rate. After few days of debates Rishi Sunak was announced to become Britain’s next prime minister. This message was welcomed by the market and GBP restored some value against USD.

GBP/USD Currency exchange rate

Source: Bloomberg L.P

On the other side of the Atlantic Ocean in the United States of America, the announcement of companies quarterly results gained momentum. Markets faced price revaluation after the announcement of results of mega-cap companies like Microsoft, Meta and Amazon which immediately lost between 10% to 25% of company’s value. The misses of results and drastic revaluation of these companies, negatively affected major market indices, because these mega-cap companies are the biggest constituents of the major market indices.

November month will be quite interesting too, because market participants were waiting next FED meeting and monetary decision. European Central Bank during the meeting at the end of October increased three major interest rates: the interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility by 0.75% to 2.00%, 2.25% and 1.50% respectively and indicating further rate hikes if needed.

“House view” update

Luminor Investment management team decided to maintain lowered risk allocation budget and higher exposure to defensive sectors (utilities, energy, and consumer staples). High uncertainty about possible consequences of the war in Ukraine, tightening monetary policy, high volatility in the markets and slowed economic growth still warrant such decision.

Luminor House view

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