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Tensions escalate yet stocks brush it off, for now...
After months of increasingly public pleas from Ukraine, the US government finally gave Volodymyr Zelensky the green light to strike territory inside the Russian Federation with American-provided ATACMS missiles.
The UK followed America’s lead and granted permission to use another long-range missile, the Storm Shadow, to hit Russia. Ukraine’s army has received two powerful boosts to its ailing war effort in a single week.
The Kremlin’s response to news of these decisions has been one of unbridled fury. Dmitry Peskov, the Kremlin spokesman, declared that the US was adding “fuel to the fire and to further provoke the level of tension”. Peskov reminded reporters of comments made by Vladimir Putin in September, when the Russian president declared that allowing the use of ATACMS to strike Russia would mean “Nato countries are directly involved in [the] military conflict” with Moscow.
Maria Butina, convicted as a foreign agent in the US before taking up a second career in politics in Russia, said that Biden was “seriously risking the start of World War III”. War with Ukraine, war with Nato, or even a world war: ever thicker layers of hyperbole promise imminent catastrophe.
On 19 November, two days after Biden granted permission to use ATACMS, Ukraine hit a facility in Russia’s Bryansk region. “American rockets attack Russia!” screamed Moscow’s media outlets, depicting a conflict not between Moscow and Kyiv but between Moscow and Washington. For decades, Putin’s regime has told its people that America, or the synonymous terms Nato and the “collective West”, is waging a war against Russia and Russians, determined to eradicate them using any means necessary. Now it would seem that physical attacks are being added to the cultural and spiritual offensives that the regime purports Washington is already levelling at Russians.
The regime has ramped up this narrative even further by announcing that Vladimir Putin signed a new nuclear doctrine on the same day that Ukraine struck Bryansk. The new doctrine, which has been months in the making, substantially lowers the threshold for Moscow’s use of nuclear strikes. According to this revised policy, any attack and even “aggression” by a non-nuclear power supported by a nuclear-armed state meets the threshold for action. Dmitry Medvedev, currently deputy chairman of the country’s security council, took to X to declare that as temperatures rise, “Russia could retaliate with WMD against Kiev [sic] and key Nato facilities, wherever they’re located. That means World War III.” In this version of reality, Joe Biden may have sparked a mass global conflict.
The worry is understandable. Not since American, British and French arms and armies were deployed against the Bolshevik government in the Russian Civil War a century ago, and 30 years before Moscow went nuclear, have Western nations come so close to physical contact on Russian territory.
The hope is that these heightened threats are all to strengthen the bargaining position of the Russians when peace is eventually declared, but pretending to know what is in the mind of Vladamir Putin is a dangerous game to play.
Somehow, stocks do not seemed phased by all of this, but things could change very quickly.
UK
Despite dismal eurozone and UK preliminary purchasing manager indices pointing to a contraction and UK retail sales falling more than expected, European stock indices ended the day in positive territory with the FTSE 100 being the outperformer.
Retail sales fell sharply in October, reflecting lingering economic uncertainty. Data from the Office for National Statistics revealed a 0.7% decline in sales volumes, surpassing economists’ expectations of a 0.3% drop.
Non-food sales were particularly weak, falling 1.4%, with clothing store sales tumbling 3.1%.
The ONS attributed the decline to subdued consumer confidence and Budget-related uncertainties, further weighing on discretionary spending.
UK business activity contracted in November for the first time in over a year. The S&P Global flash UK composite output index dropped to 49.9 from 51.8 in October, signalling a move into contraction territory.
Manufacturing fell to a nine-month low of 48.6, while the services sector stagnated at 50.0, its lowest reading in 13 months.
“The first survey on the health of the economy after the Budget makes for gloomy reading,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.
“Businesses have reported falling output for the first time in just over a year while employment has now been cut for two consecutive months.
Inflation in the UK accelerated more than expected in October mainly on the back of higher household energy bills. The year-over-year change in consumer prices increased from 1.7% in September to 2.3%—the highest since April and above economists’ forecasts of 2.2%. The core measure, which excludes volatile food and energy costs, ticked up to 3.3%. Inflation in the services sector also strengthened slightly to 5%, in line with Bank of England (BoE) predictions.
The data reinforced expectations that the BoE is likely to keep policy steady for the rest of the year. Markets also scaled back their expectations from three rate cuts to two in 2025. Separately, BoE policymakers were split over the persistence of inflation and the path for interest rates at a meeting of a parliamentary committee held before the release of the inflation data. Governor Andrew Bailey said there were “risks on both sides” of the inflation outlook.
Europe
The pan-European STOXX Europe 600 Index ended 1.06% higher on hopes that the European Central Bank (ECB) could lower borrowing costs in December after purchasing managers’ surveys signaled a deterioration in the economic outlook. Major stock indexes mostly fell. Italy’s FTSE MIB dropped 2.04%, while France’s CAC 40 Index lost 0.20%. Germany’s DAX tacked on 0.58%,
Business activity in the euro area contracted unexpectedly in November, underlining the uncertain economic outlook, according to purchasing managers’ surveys conducted by S&P Global.
The HCOB Flash Eurozone Composite PMI Output Index unexpectedly fell to 48.1, a 10-month low, from 50 in October, as the manufacturing sector sank deeper into recession and the services sector started to struggle after two months of marginal growth. (PMI readings below 50 indicate a fall in output.) The PMIs for the bloc’s largest economiesm France and Germany, also shrank. UK business activity also moved into contractionary territory, ending a 12-month period of sustained expansion.
Weak PMI data appeared to bolster expectations that the ECB could ease monetary policy further in December. However, a pickup in negotiated wage growth, a measure watched by the ECB for signals of underlying inflationary pressures—may reinforce the case for continued caution on policy. Negotiated wages grew 5.4% in the three months through September, up from an annual increase of 3.5% in the previous quarter.
US
Major stock indices in the US finished the week higher, recovering some of the previous week’s losses despite some continuing uncertainty around the incoming Trump administration’s policies and escalating geopolitical tensions stemming from the conflict between Russia and Ukraine. Gains for the week were also relatively broad-based, with smaller-cap indexes outperforming large-caps and an equal-weighted version of the S&P 500 Index outpacing its more familiar capitalization-weighted counterpart. Similarly, the price of Bitcoin continued its postelection rally and notched its third consecutive week with a gain exceeding 10%.
With a relatively light economic calendar for the week, much of the focus was on NVIDIA’s third-quarter earnings release on Wednesday. Shares of the chip giant ended the week little changed as investors appeared to be generally satisfied with the results, although the company’s guidance for the fourth quarter was lighter than some analysts expected. Relatedly, the utilities sector outperformed as commentary on NVIDIA’s earnings call seemed to drive optimism around rising artificial intelligence-driven demand for clean energy. Communication services stocks lagged, driven in part by a drop in shares of Google parent Alphabet following reports of the Justice Department filing a proposal to break up the internet search giant.
Asia
Japan’s stock markets lost ground over the week, with the Nikkei 225 Index falling 0.93% and the broader TOPIX Index down 0.56%. Heightened geopolitical tensions dented risk appetite and prompted demand for assets perceived as safer, including the Japanese yen, although the currency traded mostly within the JPY 154 range against the U.S. dollar.
With the timing of the Bank of Japan’s next interest rate hike (likely in December or January) still finely balanced, the yield on the 10-year Japanese government bond approached 1.1%, nearing a 13-year high. Consumer inflation held above the BoJ’s 2% target in October, although the headline consumer price index fell to 2.3% year on year, this was in line with expectations given the return of electricity and gas subsidies. The reading was broadly seen as supporting the more hawkish stance that the BoJ has adopted this year. BoJ Governor Kazuo Ueda said earlier in the week that the central bank expects wage-driven inflationary pressure to heighten, as the economy continues to improve and companies continue hiking pay. He reiterated that the bank will keep raising rates if the economy and prices move as expected.
Japan’s government on Friday approved an economic package to ease the pain of inflation on households and businesses and to revitalize struggling regional economies. Combined with expected spending from the private sector, the package is estimated to add JPY 39 trillion (around £15.5 bn) to the economy. Measures include subsidies to curb rising energy costs and cash handouts to low-income households, as well as an increase in the tax-free salary threshold to boost disposable incomes.
The Week Ahead
News from across the Atlantic will dominate macroeconomic headlines next week as traders look for clarity around the Federal Reserve’s next move on interest rates.
Wednesday is set to bring both a second estimate for third-quarter gross domestic product and a producer price index reading from the US.
October is expected to have seen a 0.2% uptick in producer prices, mirroring September’s increase, according to Trading Economics figures.
Coinciding GDP data will be in focus for any changes from the first estimate of a 2.8% expansion over the third quarter in the meantime.
“The US economy has managed to remain resilient throughout this year,” CMC Markets analyst Michael Hewson said.
However, there is “concern that headline inflation may be starting to bottom out,” he added, leaving the figures “likely to add colour to the picture as to whether we get a December rate cut from the Fed”.
Federal Open Market Committee minutes are also due on Tuesday from the US, alongside house price and home sales data.
In the UK, attention will be on Friday’s house price reading from Nationwide and Bank of England consumer credit figures, when Eurozone inflation data is also due.
B&Q owner Kingfisher, easyJet, Compass and Pennon are among the names set to update over the coming week.
Kingfisher will kick off proceedings on Monday, with Citi analysts expecting a cautious tone to be taken on its outlook ahead.
A busier Tuesday then brings Compass' update, while Halfords and Topps Tiles are also in line to report.
EasyJet features on Wednesday with Johan Lundgren's final update as chief executive, alongside Pets at home.
Pennon's update on Thursday is then set to bring further clarity on how water firms are faring before new pricing rules are introduced next year.
On our platform:
As always the trackers are tracking and therefore this week was a slightly positive one for those types of strategies.
However, more interesting this week was how our strategies adapted to the tension escalating in Ukraine and Russia. Our 'long or flats' and our 'active strategies' both entered the week with decent sized BUY biases, but as the tensions increased, bit by bit this was tapered back.
Although markets haven't reacted badly at the moment, it wouldn't take much to reverse sentiment, so caution is definitely the buzzword right now.
As always, things can change quickly, but we believe going into the weekend it's the prudent approach.
Have a great weekend and good luck in the markets next week. For more insight head to www.tppglobal.io
