Following another week of political unrest, a new Prime Minister (yet again) and Xi Jinping's re-election we take a look at markets and shed light on these events that continue to dominate the news.
UK political turbulence continues as economic picture worsens
Following the resignation of Prime Minister Liz Truss, the Conservative Party conducted another leadership contest, with former Chancellor of the Exchequer Rishi Sunak being appointed. Whilst Liz Truss was only in office for a record total of 49 days, the period was marred by extreme market volatility in response to her ‘mini budget’ in which a series of unfunded tax cuts was announced. Most of these measures have since been reversed, but not before she lost the confidence of the markets and her party, leading to the UK seeking its third prime minister this year.
The incoming PM will face a daunting in-tray, with inflation hitting 10.1% in August, interest rate rises placing more pressure on households, a recession forecast and industrial action expected to continue across public services. The Medium-Term Fiscal Plan, scheduled on the 31 October, is not expected to be delayed and will contain long-awaited official forecasts for growth and debt from the Office for Budget Responsibility, which are expected to show a shortfall of around £70bn in the UK government’s finances.
The appointments of a new prime minister and a new chancellor of the exchequer have stabilised the gilt and sterling markets for the time being. In addition, the Bank of England is expected to continue to address inflation with a rate rise of at least 0.75% at its next meeting in November, but further anti-inflation measures in the form of quantitative tightening may have to be put on hold while markets remain nervous.
China’s party congress cements Xi’s power for historic 3rd term
The Chinese Communist Party (CCP) held its quinquennial National Congress, at which Xi Jinping was re-elected for a historic third term as general secretary. Whilst this was widely expected, the heavily choreographed event did deliver some surprises, including the former President Hu Jintao being escorted out of the meeting by Xi’s personal bodyguard. The event, which was broadcast live to the public, has led to speculation that Xi is consolidating his power by replacing those with diverging political views, such as the focus on the free market associated with Hu Jintao.
The National Congress has historically not focused on policy agendas, but this time saw an increase in references to security and safety, as opposed to growth and reform. Xi reiterated his commitment to the Dynamic Zero-Covid policy, common prosperity, achieving independence in strategic industries such as semiconductors, and his plans for reunification with Taiwan. The overarching implication is that China’s policy mix will focus inwards, pursuing security and economic equality rather than growth. Markets reacted badly, with foreigners selling a record number of mainland shares when markets reopened on Monday.
Market review
It was a largely positive week across equity markets, with the MSCI ACWI index up over 3%. In the US, the S&P 500 index ended the week up over 5%. The exception was China, where the MSCI China index finished the week down almost 3% in response to the National Congress of the Chinese Communist Party.
UK bond markets stabilised, with the UK gilt index up 5% over the week. UK inflation-linked bonds rose by almost 20%.
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