The Cambridge Weekly – 5th October

Technology and artificial intelligence were focal points for markets last week, with the US hosting several leading tech companies at the White House. The self-regulatory approach taken by these businesses was praised by the US administration, who also reinforced their stance on a lighter, rather than stricter, oversight of the sector. This comes against a backdrop of sustained debate regarding the risks of accelerated AI development. Notably, Anthropic, the creators of Claude, warned of "existential risks to humanity" in its initial public offering (IPO) prospectus. Meanwhile OpenAI, the developer of ChatGPT, also cancelled the planned release of its next model following the identification of safety concerns from internal testing.

In energy markets, US and Iranian officials spoke separately last Monday, in renewed efforts to end the conflict that has now elapsed 7 months. The price of Brent crude fell to $96 last Wednesday, from around $108 per barrel at the start of the week, as reports from several financial institutions suggested oil flows out of the Persian Gulf had almost returned to pre-war levels. Oil edged back up towards the $100 level by Friday however, with markets maintaining an air of scepticism surrounding diplomatic developments.

US Equity Market:

AI-related companies remained central to US market activity last week as Nvidia, the world's largest company, announced an additional $150bn of share buybacks last Monday - eclipsing the $110bn record set by Apple in 2024. This brings the total buyback amount authorised by Nvidia's board of directors before January 2028, to $235bn. Repurchases are commonly interpreted by the market as a signal that the company's management views its shares as undervalued. The company's stock price jumped around 2% initially on the news.

Elsewhere, the White House held talks midweek surrounding potential US diesel export restrictions. Supporters of the policy believe limiting exports would increase the supply domestically, thus easing cost of living pressures facing American consumers. Energy companies, on the other hand, continue to warn that such a ban may cause refineries to reduce their overall production, offsetting any potential benefits to petrol and aviation fuel prices. This comes at a time when inflation is at the forefront of consumers' minds, with the US midterm November elections just around the corner.

The broader performance of US equities was mixed, though climbing Treasury yields weighed on market sentiment. As such, the S&P 500 index closed the period to Friday down 0.25%.

UK Equity Market:

UK news last week revolved around the Labour Party Conference, and the Prime Minister's amendment to the state pension triple lock to help fund social care reform. As a reminder, the triple lock guarantees annual increases in the state pension in line with the greatest of annual earnings growth, CPI or 2.5%. The proposal was welcomed by bond markets, with gilt yields falling initially, despite some commentators suggesting that the proposal alone would be insufficient to meet the scale of social care funding requirements. Investors will also be monitoring how markets react to other measures discussed at the conference, including proposals aimed at expanding social care provision, improving UK-EU relations and repealing restrictions on public ownership of water companies. Alongside this, Chancellor Healey reiterated Labour's commitment to fiscal discipline, paving the way for possible future tax rises.

The upcoming budget on 28th October comes against a backdrop of increased living costs for UK households. Latest forecasts from Cornwall Insight suggest that the energy price cap could rise to almost £2,000 a year from January, up from £1,723 and the largest increase in four years, to counter rising energy prices across the globe. Despite these inflationary pressures, UK GDP growth was revised higher to 0.5% from initial estimates of 0.4% for the second quarter, with stronger-than-expected economic growth supported by rising business investment, including increased spending on AI.

In response to the weekly news, the FTSE 100 index fell by 2.13% last week, while sterling trades at around $1.32 against the US dollar.

Inflation, Interest Rates and Bond Markets:

Gilt yields fell modestly on the discussions of reforming the state pension triple lock, as investors reassessed the implications for the UK's long-term fiscal outlook. The 10-year gilt fell marginally to 5.35% last Wednesday, down from 5.42% the previous day, though this relief was temporary as yields shot back up to 5.51% on Thursday. 30-year yields followed the same pattern, rising above 6%, a result of the inflationary pressures spurred on by tensions in the Middle East.

Due to potential restrictions on fuel exports from the US and ongoing supply disruptions linked to developments in the Middle East and Russia, the RAC motoring group forecast that UK diesel prices could exceed £2 per litre for the first time in history. Higher fuel prices would add further inflationary pressure to the UK economy, increasing the likelihood that interest rates will remain elevated for longer.

Across the pond, US Treasury yields remained elevated. 10-year Treasury yields are currently trading around 5.27% at time of writing, amid a deepening bond sell-off and wavering hopes of an Iran-US agreement. The US is currently experiencing the combined headwinds of more Treasuries being sold on the market, lowering their market price and increasing their yield past the threshold where some funds are obligated to sell them, leading to a further sell-off.

What's on the horizon

Investor attention will remain on government bond markets, where further yield increases could also weigh on performance across asset classes, and raise the cost of borrowing throughout the wider economy. Developments in the Middle East and the impact on oil prices will also be monitored.

The minutes from the Federal Reserve's September meeting will be released on Wednesday, providing further insight into the unanimous decision to raise interest rates by 25 basis points. Markets will be focused on the level of concern policymakers exhibit regarding inflation and the extent of discussion towards further rate rises, which in turn will further affect the direction of Treasury yields.

Lastly, the International Monetary Fund will release analytical chapters from its October World Economic Outlook this week, ahead of the full report later in the month. The publication is expected to assess the effects of recent cost of living pressures, and present the outlook for global economic growth.

This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.

Past performance is not a guide to future performance.

The value of your investments can go down as well as up and you may get back less than you originally invested.

Source of financial market data: MorningstarDirect.