The Week Ahead

As we start a new month, equity market futures are a sea of green, and risk sentiment  is high. This suggests that the seven-month long rally in global stock markets could continue. The latest drivers include an easing of US/China trade tensions, and some strong tech earnings.

Commodities are also in focus; the oil price is higher after Opec + decided to pause oil production hikes from next month. The gold price is also rising this morning, and is above $4000 per ounce, after falling below this level last week.

Stocks outperform gold

The past month gave us some important information about financial markets. The Nasdaq outperformed the gold price during October, the tech stock index rose by 4.15% in October, compared to a 3.7% rise in the price of gold. The Nasdaq index was the top performer in the US and Europe, although the Japanese Nikkei benefited from Japan’s new prime minister and rose by nearly 15% last month. This suggests that although US tech is grabbing most of the headlines, investors are still diversifying their portfolios and are not solely focused on US stocks.

Tech continues to power US stocks

October also gave us valuable information about the tech sector, which has been driving the rally in US stocks since April. The Philadelphia semiconductor index rose by nearly 10% on the month, outperforming the broader index, and was the top performing US sector. Earnings reports for Q3 were a mixed bag for big tech, there were upbeat earnings data from Amazon, Apple and Google, while Microsoft and Meta’s results were less well received.

Investors get fussy about AI investment

AI spending was the key focus of this earnings season. Would the $600bn that the AI hyperscalers have pledged to spend on AI investment pay off? The answer is yes. Both Meta and Amazon reported record quarterly revenues, however, record levels of capex are eroding free cash flow for Meta, Google and Microsoft. Meta’s 12% price decline last week is a sign that investors are taking a more nuanced approach to the hyperscalers, and are scrutinizing spending plans more closely than they have in recent memory.

Nvidia’s market capitalization reached a record $5 trillion last week. If the hyperscalers are spending money, then they will be buying Nvidia’s chips, which almost guarantees strong revenues at the GPU maker for the foreseeable. This is what investors love to see and Nvidia is now worth more than the UK economy.

Divergence in the Magnificent 7

Microsoft and Apple also both reached the $4 trillion mark for market capitalization. As you can see in the chart below, there has been a clear divergence in the performance of the Magnificent 7 in recent weeks. Nvidia, Google and Tesla are leading the pack of mega cap tech stocks, while Microsoft, Meta, Apple and Amazon are lagging their peers. However, after a strong earnings season for Amazon and Apple, we could see these two start to play catch up as we progress through November.

Chart 1: The Magnificent 7 largest tech stocks

Source: XTB and Bloomberg

Overall, tech and AI remain a huge theme for investors as we move into the final months of the year, and the equal-weighted S&P 500 index, which strips out the effect of big tech, is struggling to keep up, showing the outsize impact of the tech sector.

UK bonds defy budget gloom

This month also saw a stunning performance for UK bonds, which were the top global performers behind Argentina, in October. The 10-year yield has dropped some 28 basis points in the last 4 weeks. While the economy and UK taxpayers hold their breath about what the Budget holds on November 26^th, the bond market seems fairly relaxed. The only market noise that the bond market seems to be buying right now, is hopes that the UK’s chancellor will rebuild fiscal headroom by more than £10bn. If she does this, then this is the type of policy that will entice bond investors who  may deem UK debt less risky after this Budget.

Dollar makes a comeback

The US dollar was the best performer in the G10 FX space for a second month, and it rose by nearly 5% vs. the yen last month. The pound also struggled vs. the USD as it lost yield support. At least the pound is weakening at the same time as bonds are rallying, as this is the sign of a normal FX/ Bond relationship. The UK may well be heading for fiscal disaster, but for now the bond market does not think this is a serious threat.

The strengthening in the dollar is coming from a low base, and while we do not think that the dollar will bounce back to 2024 levels anytime soon, it does suggest two things. Firstly, that concerns about dollar debasement may have run their course and 2, this could limit further upside for the gold price.

This week there are multiple key events, although earnings season will slow down slightly in the US after the excitement of last week’s big tech reports. We take a look at the two main events to watch.

1, The Bank of England central bank meeting

The BOE will release their last quarterly monetary policy report of 2025 this week. The market does not expect any change to interest rates and the focus instead will be on the Bank’s updated forecasts for CPI and the GDP. The UK interest rate swaps market is pricing in less than a 30% chance of a cut at this meeting, instead the market expects the BOE to hold off cutting rates until February. The pound was the weakest performer in the G10 FX space last week, so confirmation that the BOE won’t cut rates could see a small bounce in the pound later this week. 

While a rate cut is unlikely there has been a spate of weak economic data that means a surprise cut cannot be ruled out. Inflation remains at 3.8%, still unacceptably high for the BOE, in our view. However, crucially, the BOE expected inflation to peak in September at 4%. It will be interesting to see if the BOE downgrades its CPI forecast due to this, since inflation never reached its peak of 4%. Will the Bank instead say that price growth will moderate from here and reach the target 2% rate before 2027? If yes, then this could give the green light for a rate cut in February. If the BOE does err on the dovish side without cutting rates this week, then the downside for the pound could be limited, due to recent weakness in sterling and the sharp decline in UK Gilt yields.

2, US data: to be, or not to be

With no end to the US government shutdown, it is unlikely that Non-Farm payrolls will be released this week. This means that we could forego the latest US labour market report that should be released this Friday, for a second month. This hasn’t stopped the Fed from cutting rates or the stock market surging to fresh record highs, however, if the shutdown lasts beyond the end of this week, then it will be the longest ever. This is significant, since at some point a lack of economic data may start to limit Fed policy. Already, FOMC members have come out and sounded hawkish. This weighed on the overall market mood at the end of last week.

Without the labour market report, the focus could shift to three other events. 1, the ISM reports for October, 2, a series of Fed speakers to try and gauge how far away another rate cut is, and 3, the New York mayoral elections that take place on Tuesday. A win for Social Democrat, Zohran Mamdani, is now expected. While we doubt that this will have a big market impact, his progressive policies could hit the corporate world, especially banks who are based in NYC. Thus, if Mamdani does win by a large margin on Tuesday, it would give him a mandate to enact his radical left-wing agenda, which could hurt the share price of New York registered corporates, who could face higher taxes and costs under Mamdani.