The Week Ahead

It’s been a wild ride for financial markets in recent days. Stocks sold off sharply last week and bitcoin slumped by 7%. However, a sense of calm has descended on markets as we start a new week.

Thursday’s initial rally and then reversal,  was the biggest intra-day range for US stock prices since the tariff-induced sell off in April. The question now is, will this Thanksgiving-shortened week give some respite to investors? Or are the good times for stocks behind us?

US and European stocks set to rise, as Bitcoin claws back losses

The initial signs are good. US and European stock market futures are pointing higher this morning, and Asian stocks are higher after last week’s bloodbath. Gold prices have retreated, but remain above $4,000 per ounce, bitcoin clawed back some losses in weekend trading and rose back above $87,000, although it is giving back some of those gains today. As long as the original crypto coin stays above $85,000 then broader risk sentiment could improve.

European stocks hit harder than US

Interestingly, US stock indices outperformed the Eurostoxx index last week, the S&P 500 fell 1.95% compared with a more than 3% decline in the Eurostoxx index. One factor driving the selloff in stocks was concerns about the US economic outlook. If the US sneezes, the rest of the world catches a cold, which is why we saw deeper losses for Asian and some European indices, compared to the US.

Fundamentals don’t support the sell off

As we have mentioned, the sell-off in stocks was driven by fear rather than actual fundamentals. Nvidia delivered stunning results, yet its stock price fell 2% last week. Since the chip maker makes up 7% of the entire S&P 500, when it stumbles, the index will plunge with it. There were signs that the US labour market may not be as weak as some feared heading into the US government shutdown, after the September payrolls report was stronger than expected. Earnings season has also been strong, with the S&P 500 reporting its highest revenue growth in 3 years, the blended earnings growth rate is 8.4%. Added to this, all 11 sectors of the S&P 500 are reporting positive earnings growth.

Fed’s Williams rate cut talk is the real deal

However, this good news is being dismissed by investors who are concerned about bubbles and what the Fed will do next. Although AI and tech valuations were the main driver of markets last week, it is notable that sentiment started to recover on Friday after the Fed’s John Williams said that he would support a rate cut next month. He is second in command to Jerome Powell, so Williams’ words carry weight with investors since his comments are usually made with the tacit agreement of the Chair. Considering there is no framework to assess the current state of the US economy, these comments will likely have a big impact on the market. The Fed Fund Futures market rapidly repriced December rate cut expectations following the comments from Williams. There is now a 65% chance of a cut priced in from the Fed next month, up from 40% on Thursday. If a last gasp rate cut is coming from  the Fed, then a prolonged recovery rally for stocks cannot be ruled out.

Bitcoin dictates market mode

The jolt of volatility that hit US and global markets last week emanated from the sell off in crypto. Bitcoin fell below $85,000 last week, before recovering over the weekend. Bitcoin is lower by 30% since October, and along with other coins, the crypto space has lost some $1 trillion in value in recent weeks. There is concern that the decline in crypto is triggering the sell-off in other asset classes like stocks. Indeed, the correlations between bitcoin and the Nasdaq surged to 56% this month, it’s 63% between bitcoin and the S&P 500, and with gold, the correlation is a whopping 76%.

There is no logical reason why people would need to panic sell other assets because their bitcoin positions are underwater. This could be the case for some hedge funds; however, we think this is only an issue at the margin. Instead, the price of bitcoin holds a mirror up to the market mood. Bitcoin is not actually useful, it is not an effective inflation hedge, and it doesn’t have many practical uses, however, it is a pure risk asset, one that plunges sharply when the mood music changes. Thus, the selloff in bitcoin in October could be an expression that investors are not 100% confident in the AI theme, and they are concerned that the ‘third industrial revolution’ may not be as transformative as some expect, regardless of what Jensen Huang has to say about demand for Nvidia’s chips. This is why Bitcoin’s positive correlations with other assets surged this month.

Eli Lily joins the $1 trillion club

It is easy to categorize last week as a wash out, but it wasn’t all doom and gloom. For example, Eli Lily, the drug maker and producer of weight loss drug Mounjaro, joined the $1 trillion club, the first drugmaker to do so. The stock surged by 5% last week and was one of the top performers in the S&P 500 along with Merck and Alphabet.

Ukraine peace talks could boost market mood

News that the US and Russia had put together a peace plan for Ukraine dominated the headlines at the weekend, especially when Ukraine and its European allies did not appear to warm to the deal. On Sunday, the US said that this week’s deadline to accept the deal is not a hard deadline, and there could be some leeway on the terms. This suggests that Donald Trump’s peace plan still stands a chance, especially if he is willing to make concessions to the Ukrainians. The oil price is stable on this news, and signs that negotiations are ongoing could help to boost risk sentiment at the start of a new week.

BHP’s second failed approach for Anglo American does not suggest fears about global economic outlook

There was also M&A news over the weekend. BHP made another offer for FTSE 100 miner Anglo American. The UK company is already in a $50bn merger with Teck Resources, which was designed, in part, to rebuff takeover attempts. BHP has now said that it has walked away from the deal, however, if there was deep concern about the global economy, or the potential for a deep stock market crash, then it would be unlikely to see any takeover attempts, rebuffed or not, in the resources sector.

As we embark on a new trading week, there are some undercurrents of optimism. We will be watching to see if these are translated into a stronger stock market recovery ahead of the US’s Thanksgiving holiday, with volumes potentially falling from Wednesday onwards.

Below we look at three events that could move markets this week.

1, How strong is the US consumer?

We will get some key information about the main pillar of the US economy this week: the US consumer. We will get the delayed release of the September retail sales report on Tuesday, which could show that sales rose by 0.4%. Core sales, excluding autos and gas, are expected to have risen by 0.3%. While headline sales were likely boosted by a rush of consumers buying electric vehicles ahead of the end of US Federal subsidies, core sales may have slowed as the back-to-school sales boost in August faded. Even if sales were slower in September vs. August, the overall picture of the consumer is one of strength, with consumer spending expected to rise 3% in Q3, up from 2.5% in Q2.

Black Friday is the start of the famed US holiday shopping season. Although YoY sales could have dipped slightly compared to 2024, this is expected to be the first time that US consumers splurge more than $1 trillion this holiday season, which could be enough to cheer stocks, especially the consumer discretionary sector, which has been bruised and battered in recent weeks.

2, UK: D-day for the Budget

After a long lead up to this Budget, the weekend papers suggest that Reeves will boost public sector spending by £15bn, while hiking taxes on workers, pensioners and homeowners to pay for extra welfare and benefits spending. As we have mentioned in our Budget preview, this Budget may not boost the Prime Minister or the Chancellor’s ratings in the polls, and the biggest effect could be to trigger more political volatility.

As we lead up to Wednesday’s 12pm budget, the pound is stabilizing and is trading within its recent range, although it has dipped below the $1.31 mark in early trading on Monday. Concerns about how the government will balance the books could force up bond yields, and weigh on the pound as we lead up to this Budget. If this does happen, then it could suggest that markets are not convinced by Labour’s economic strategy and its ability to generate economic growth.

After a dismal few months of teasing out the details of the Budget only to reverse course when put under pressure by Labour backbenchers, literally anything could happen on Wednesday. Should the markets lose faith in the Chancellor, expect a rocky period for UK assets, especially bonds and the pound.

3, European CPI

The provisional reading of National CPI in Spain, France and Germany will be released this week. France is expected to register no inflation for this month, and its annual rate is expected to remain below 1%. Germany is expected to register negative inflation growth for this month, as a mix of uninspiring economic growth and weaker energy prices feed through to the German consumer. Spain tends to be a lead indicator for the currency bloc. CPI is expected to fall 0.2% MoM, and the annual rate is expected to moderate to 3% from 3.2%. This is well above the ECB’s tolerance level, which may limit the prospect of future rate rises.

Thus, we do not expect this week’s provisional CPI data for November to shift the dial for the ECB. The interest rate futures market is not pricing in a rate cut for the currency bloc for the next year, and we expect that it is still too early to talk about further rate cuts.