Stock markets started the week brightly enough, with a two-day rally as good as any since the start of the pandemic. But it was not to last, as OPEC dealt a blow to investors outside the oil sector, and to consumers battling inflation, by opting to cut oil production by two million barrels a day. This was enough to trigger a rally of nearly 10% in the price of oil. The decision came despite frantic lobbying by US officials and a visit by President Biden to Saudi Arabia in July. Some commentators viewed this as a weaponisation of oil prices amidst an energy power struggle between America and Saudi Arabia, and the US government described Saudi Arabia as having chosen to align itself with Russian interests.

The week saw a steady drumbeat of bad news. Sentiment in the technology sector was depressed by a flurry of profit warnings in the semiconductor industry, with the major players reporting steep revenue declines. In five separate speeches, governors at the US Federal Reserve expressed their total commitment to fighting inflation rather than to supporting economic growth. As the speeches came just ahead of the US inflation figures to be reported this week, markets are understandably going to be nervous. Another cryptocurrency hack resulted in the release of $568 million worth of stolen tokens onto the world’s biggest cryptocurrency exchange, forcing the exchange to suspend transactions.

Markets went fully into reverse gear when the US employment data for September showed that job growth continues to be relatively healthy, with the employment rate falling to 3.5%. This makes it even more likely that the Fed will raise rates by 0.75% at its meeting next month, and by a further 0.5% in December. The Fed wants to see a material softening in the labour market and an unemployment rate at 50-year lows does not fit the bill. The S&P 500, the world’s biggest stock index by value, fell by over 3% following the news, completely wiping out its gains from earlier in the week.

The week ended on another sour note, as the American government imposed its strictest regulations yet on the sales of computer chips to China. The new regulations have upped the ante in the economic cold-war between the US and China: they extend well beyond semiconductors and threaten all industries that rely on sophisticated computing power. Chinese commentators were, predictably, outraged. The weekend brought further bad news from China, where service sector activity fell to its lowest level since May and endured the sharpest decline since the start of the Omicron outbreak. It’s thought that the authorities have been tightening Covid restrictions to stamp it out ahead of the Party Congress, which is due to start in a week’s time. Also at the weekend, medical data showed that Covid infections are flaring after the week-long National Day holiday. A lot of hope has been placed by investors on a loosening of China’s strict anti-Covid policy after the Party Congress.

Long gone are the days when central banks used their firepower to support capital markets, except in the UK where market chaos is a genuine threat. The Bank of England extended its emergency actions to stabilise government bond prices using the kinds of measures that were last seen at the height of the pandemic. Gilt markets remained unconvinced, however, with yields retesting their highs for the year. 

Investors are nervously awaiting the start of so-called “earnings season” when the majority of mainly large, global or American companies report their results for the previous calendar quarter. Rarely has such focus been on the risk of poor results, with concerns abounding over the impact of inflation on demand for products and services, labour costs, the accumulation of inventory stockpiles and the strength of the US dollar.

Levi Strauss & Co was the latest victim of a build-up of excess inventory in the retail sector, as companies initially built up their stock to avoid disruptions to supply-chains but were then hit by a reduction in demand. The company reported inventories that were up by 43% over a year ago and reduced its expectations for full-year revenues by about 5%. Nevertheless, management claimed that higher prices were being successfully passed onto customers. Levi Strauss shares fell by 12% on the news.

Even without the American clampdown on sales of computer chips to China last week, bad news from the semiconductor industry contributed to the decline in stock markets. American chip maker Advanced Micro Devices reported revenues for the previous quarter $1 billion below its own estimate, and the head of Samsung’s chip business was reported as having cut the division’s revenue forecast by a third. Samsung Electronics, which is the world’s biggest manufacturer of memory chips, reported its first decline in operating profit since the pandemic, missing analysts’ expectations by 11%. Intel Corp shares fell 6% after the company reported a significant decline in revenues for the previous quarter and slashed its revenue guidance by $11 billion.

Tobacco and vaping group Imperial Brands reiterated its guidance for full-year revenue and profit and announced its first share buyback programme in two years. The share price is now back to its pre-pandemic level. 

• US employment data for September surprised to the upside, with 263,000 jobs created versus market expectations of 250,000. Markets reacted badly to what was, statistically speaking, a small difference. The trend in job growth has clearly slowed during the year but remains very rapid by historic standards, presumably due to a catch-up in post-Covid recruitment.
• The US unemployment rate fell to 3.5% from 3.7%, below expectations for it to remain at 3.7%. However, the movements in the size of the workforce and the number employed have been substantially affected by the pandemic, and monthly data have become statistically much less significant. 

• UK GDP is expected to have flatlined between July and August. Business surveys suggest that output probably fell, but output in the construction sector is likely to have recovered after being hit by very hot weather in July, while some sectors may have benefited from easing labour and input shortages.
• The publication of the minutes to the Federal Reserve’s September meeting are unlikely to offer much support for investors hoping for a slowdown in the pace of rate rises.
• A further drop in fuel prices is likely to have constrained US inflation in September, which is expected to drop to 8.1% from 8.3% last month. Core inflation, which excludes food and fuel prices, and is a better gauge of longer-term inflation, is expected to have risen from 6.3% to 6.5%.