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Market Updates

Market Update Monday 28th November 2022

Markets rally on rising hopes of a moderation in the interest rate cycle

Markets made further ground this week as the minutes of the last US Federal Reserve meeting were released, showing a “substantial majority” of officials supporting a moderation in the pace of interest rate increases. Investors looking for evidence to support this view were rewarded with a further contraction in the US manufacturing purchasing managers indices, which provide a window on the operating environment companies find themselves within, including new orders, hiring, and investment intentions. Whilst lower energy prices within the Eurozone have eased concerns over gas rationing this winter, providing a boost to European equities. However, hopes of further easing over China’s zero Covid policy were dashed, with a sharp escalation in the number of recorded infections.

As of 12pm on Friday, London time, US equities, having been closed for Thanksgiving on Thursday, were up 1.6%, with US technology stocks having risen 1.3%. European equities were 1.8% higher, and the UK market rose 1.2%. Japanese and Australian equities followed suit, rising 2.6% and 1.5% respectively. Whilst emerging markets only increased by 0.3%, held back by Hong Kong stocks which dropped 2.3% on rising Covid cases.

Yield curve inversion deepens as recession fears grow, despite hopes of a moderation in rate rises

As expectations hardened to an impending recession, longer-dated haven government bonds rallied, with yields, which move inversely to price, falling. 10-year US Treasury yields are now yielding 3.72%, with German Bund yields standing at 1.95% and UK gilts 3.11%. Whilst shorter-term debt trades at higher yields, this inverted relationship signals recession. 2-year US Treasuries, German Bunds, and UK Gilts currently yield 4.49%, 2.18% and 3.28% respectively. This picture was reinforced by comments made by Isabel Schnabel, a European Central Bank executive board member who signalled her desire for Eurozone rates to rise by 0.75% for a third time in a row to combat inflation. This was despite prices of goods leaving factories falling for the month of October in Germany, the first decrease in two years, following a decline in wholesale energy costs.

Oil price falls on rumours of a supply increase being considered by OPEC

The oil price weakened further, with Brent crude dropping by 1.5%, now priced at $86.3 a barrel, following rumours that OPEC (Organisation of Petroleum Exporting Countries) were considering an output increase to counteract the loss of Russian crude supplies. However, this was subsequently denied, with OPEC reiterating their plans to stick with the current production cuts.

Market Update Monday 21st November 2022

Major indices give back previous weeks gains

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Most major equity indices gave back some of the previous week’s strong gains and closed slightly lower. Growth stocks lagged value-oriented shares, which were supported by gains in the consumer staples sector. The energy sector underperformed, however, as European oil and natural gas inventories reached near-peak levels. Dispelled reports of a Russian missile strike on Polish territory sparked a brief sell-off on Tuesday.

U.S. stock indexes rallied on Tuesday after a report showed the prices that suppliers charge goods producers rose at a slower pace in October than economists had forecast. The government’s Producer Price Index was the second recent piece of positive news on inflation, coming after the previous week’s better-than-expected report on the Consumer Price Index.

Counteracting this news and on the heels of a flat result the previous month, U.S. retail sales picked up in October, rising a seasonally adjusted 1.3% from September. That’s the strongest monthly retail gain since February 2022, despite negative factors such as inflation and rising interest rates.

UK stocks rise despite tax increase announcement

US equities fell 0.6% over the week, with US technology stocks falling by -1.5%. European equities outperformed their US equivalents posting a gain of 0.7% whilst UK stocks rose by 0.92%. UK finance minister Jeremy Hunt unveiled tax increases, spending cuts, and new fiscal rules in his Autumn Statement, with an eye toward repairing the public finances and restoring Britain’s credibility in international markets. Chinese markets showed further optimism after positive talks between US and Chinese leaders along with hopes of a post Covid recovery, with a weekly return of 4.2%, with the broader EM market +0.8% for the week.

US Yield Curve inverts further

The U.S. Treasury yield curve inverted further during the week, driving the inversion in the two-year/10-year curve segment—historically, a typical but not conclusive indicator of a coming recession—to its deepest level in over 40 years. Short-term U.S. Treasuries repriced to higher yields, particularly after suggestions that the Fed’s terminal policy rate should reach a minimum level of 5% and may need to go as high as 7% to achieve the central bank’s inflation objectives. The US 10-year treasury yield ended the week at 3.83% whilst the 2 year equivalent closed at 4.5%

Oil falls as inventories reach peak levels

Oil fell 9.8% for the week as European inventories reached peak levels and investors fear a supply glut in the face of a slower period of economic growth. WTI crude oil ending the week at $80.24 per barrel.

Market Update Monday 14th November 2022

US equities record their strongest day in over two years as inflation softens

A softening in the latest inflation data out of the US sent markets sharply up this week, with US equities recording their strongest day in over two years on Thursday. US inflation for the year to October came in at 7.7%, sharply down on the previous reading of 8.2% in September. Even once food and energy are excluded, the inflation numbers eased, coming in at 6.3%, down from 6.6%. Market expectations for the next US rate hike have come down to a 0.5% increase, with the peak in rates now priced in at 4.9%.

Global equity markets rally on the back of softer US inflation data

As of 12pm on Friday, London time, US equities rose 4.9% over the week, with US technology stocks rising by 6.1%. However, for overseas investors, equity gains in US stocks were dampened by a sharp sell-off in the dollar, which fell by 3.2% versus the Euro and Sterling. European equities increased by 3.8%, helped by better-than-expected German industrial production data released on Monday, which rose by 0.6% for the month of September, against a decline of 0.8% in the previous month. UK stocks rose by 1.3%, held back by news that UK GDP fell by 0.6% in September, a larger fall than forecast. However, within the more beaten-up area of UK small and mid-cap stocks, equities rose a whopping 8.2% over the week, responding to the easing in US inflation. The Japanese market increased by 3.3% and Australian stocks rose by 3.9%. Emerging markets rose by 5.2%, boosted by news that China shortened Covid-19 quarantine requirements for close contacts and international travellers.

Bond markets join in the rally

US Treasuries rallied on the release of the inflation data with yields, which move inversely to price, falling to 3.8% on the 10-year. German bunds and UK gilts followed suit, now yielding 2.11% and 3.36% respectively.

Gold also rises as US interest rate expectations rollover

Gold jumped by 5.0%, supported by lower expectations of future US interest rate rises, now trading at $1,761 an ounce. Although crude oil ended the week lower, with Brent crude falling by 2.1% to $96.5 a barrel, this masked a strong rally at the end of the week, having fallen under $92 on Thursday. European natural gas resumed its very helpful downward spiral this week, falling by almost 11% to €101.5 a megawatt hour, due to unseasonally warm weather.

Republican ‘red wave’ fails to materialise in the US mid-term elections

In the US mid-term elections, the ‘red wave’ in favour of the Republican party failed to materialise. At the moment the Republicans look to have taken the lower house of Representatives, whilst the upper house of the Senate remains too close to call. Historically, markets have responded well to a divided Congress as it limits the amount of disruptive new regulations or tax increases that can be passed.

Market Update Monday 7th November 2022

US Federal Reserve signals shallower, but higher interest rates

The US Federal Reserve (Fed) raised rates by 0.75% for the fourth time in a row, whilst signalling that the magnitude of future rate hikes may moderate, acknowledging the delayed impact of monetary policy on economic activity and inflation. For a brief moment US equities rallied, before Jerome Powell, the Fed chair, poured cold water on the idea that peak rates were near, as he said he expected rates to peak at a higher level than previously thought. US equities, still trading at a sizeable premium versus other internationally traded equity markets, fell sharply, with technology stocks once again bearing the brunt of the pain. Despite the dollar strengthening once again, excluding the US, most other equity markets made gains. Chinese equities were particularly strong, on unsubstantiated rumours that a “reopening committee” had been established to assess different reopening plans for next year.

US equities tumble whilst gains made elsewhere

As of 12pm on Friday, London time, US equities were down 4.6% over the week, whilst the US technology sector had fallen 6.8%. European stocks, however, rose 1.2%, with UK equities rising by 3.5%. This followed the Bank of England’s governor, Andrew Bailey, heavily guiding markets down on future rate rises, having put rates up by 0.75% this week, taking the base rate to 3.0%. Japanese stocks were up by 0.9%, whilst the Australian market increased by 1.6%. Emerging markets climbed up by 1.8%, with Latin American markets increasing by 4.5%, and onshore and offshore Chinese equities rising by 5.3% and 8.7% respectively.

US bond market points further towards recession

The yield on rate-sensitive two-year US Treasury bonds, which move inversely to price, rose to its highest level since 2007, now trading at 4.75%. This is sharply higher than the 10-year bond which is trading at 4.16%, leaving the yield curve inverted, signalling an impending recession. The yield on 10-year German Bunds rose slightly over the week, now trading at 2.29%, whilst UK gilt yields rose to 3.56%.

European natural gas prices turn higher once again

Gold traded up to $1,653 an ounce, an increase of 0.5% over the week. Whilst Brent crude oil rose by 2.2%, now trading at $97.9 a barrel, and US WTI (West Texas Intermediate) increased by 4.2%, priced at $91.6. European natural gas, having fallen sharply over the last few months, rose by 10% over the week, taking the price to €121 Megawatt Hour. This price is likely to be very volatile in the coming months, exacerbated by the limited gas storage capacity in Europe and the prevailing weather impacting winter demand.

Sterling takes the pain as the Bank of England forecasts a year-long recession

The governor of the Bank of England forecast a year-long recession in the UK this week, as consumers battle a cost-of-living crisis against the backdrop of sharply higher energy prices as a direct result of the Russia-Ukraine war. What was perhaps striking, was how well the stock market performed against this rhetoric, a result of just how cheap UK equities have become, and expectations that the recession will be shallow. However, the pain was taken in the currency, as sterling fell against both the dollar and the euro, now trading at $1.12 and €1.14 respectively.

Fed looks for evidence to justify a hiking slowdown

The latest jobs report from the US Bureau of Labor Statistics is due out today, with forecasts of 200,000 new jobs having been created in October, down from 263,000 in September and 315,000 in August. Whilst unemployment is forecast to rise to 3.6% and wages to have risen by 0.3%, the same level as they rose in September. The Fed will be looking for some moderation in employment data before slowing down the tightening cycle, otherwise, the risk for markets has to be for further 0.75% rate hikes.

Market Update Monday 31st October 2022

Technology names disappoint in earnings season.

This week’s headlines were dominated by the continuation of earnings season in the US as investors digested disappointing reports from large-cap technology names. Nearly $1 trillion was wiped off the value of the largest technology companies who all cited a slowing global economy and increasing cost pressures. Google parent Alphabet fell 9.1% on Wednesday after the company announced worse-than-expected growth in its core advertising business and Facebook owner Meta dropped 5.6% on the same day as it reported a decline in third-quarter revenue. Amazon on Thursday reported a weak revenue forecast for the rest of the year, whilst Microsoft was also punished by the market as the company provided downbeat forecasts despite resilient revenue growth on the back of growing cloud services demand.

Although the US technology sector finished lower for the week at -0.62% as of 12pm London time, the broader US index still posted a positive gain of 1.45%. It was also a mixed picture for the rest of the equity markets. Europe and the UK posted stronger gains with their main indices up 3.06% and 1.52% respectively. However, in Asia, Chinese stocks sold off in the wake of President Xi Jinping securing a third term as party leader. Investors fear continuing strict policy that could hamper the growth of tech giants with very few people who can challenge Xi’s policies. The Hong Kong index finished 8.32% lower whilst the Shanghai Composite fell 4.05%.

The European Central Bank raises interest rates as expected

With much of the year also focused on monetary policy and inflation, the European Central Bank (ECB) raised rates by 0.75%, pushing its deposit rate to 1.5%, the highest level since 2009, in a bid to tackle inflation. Inflation for the eurozone hit 9.9% in September. Meanwhile, a flash reading of the composite purchasing managers’ index, a gauge of manufacturing and services activity, showed a decline to 47.1 from 48.1 for September. Readings below 50 indicate a decline in activity, and this was the biggest contraction for almost two years, raising fears that the Eurozone is likely entering a recession.

UK bond market rallies as Rishi Sunak is confirmed as UK Prime Minister

Gilt yields (which move inversely to their bond price) continued to fall as Rishi Sunak was confirmed as the UK’s prime minister on Tuesday. Gilt yields returned to levels last seen before September’s ill-received “mini” Budget announced by former Prime Minister Liz Truss. Investors were reassured by what they perceive as a more fiscally prudent Prime Minister, who also retained chancellor Jeremy Hunt who has already scrapped the majority of Truss’s earlier proposed tax cuts. As of 12pm London time, the 30-year Gilt yield fell to 3.51%, whilst the 10-year gilt yield fell 65 basis points to 3.46%. Elsewhere major government bonds also rallied, with the 10-year German bund trading lower at 2.1% whilst the US 10-year Treasury yield fell 20 basis points to 4.01%.

European natural gas prices briefly drop below €100

The benchmark Dutch 1-month gas futures price dropped as low as €93.35/MWh on Monday, before finishing the week at €112 as of 12pm London time thanks to oversupply of natural gas and milder weather in Europe more recently. This marks an approximate 70% fall from its record price in August. Short-term Dutch gas spot prices for delivery within an hour, which reflect real-time European market conditions, also briefly dipped below €0 on Monday because of oversupply. With Russia cutting off their pipeline, Europe is attempting to secure as much fuel ahead of winter. However, storage facilities are close to full and tankers carrying liquefied natural gas are lining up at ports unable to unload their cargoes, sending prices lower.

Market Update Monday 24th October 2022

Mixed third quarter company results lead to a choppy week in markets

It has been a choppy week for equity markets as third-quarter company results have taken centre stage, as investors look for evidence of inflationary pressures, rising borrowing costs, and challenging economic conditions. US global investment banks, although reporting weaker earnings, nonetheless beat forecasts, as earnings from consumer lending helped to temper falling investment bank revenues. Along with news that the UK’s new Chancellor of the Exchequer, Jeremy Hunt, had thrown out almost all of the mini-budget tax cuts, these brought a fillip to the beginning of the week. However, later, results from the likes of Procter & Gamble and Nestlé pointed towards falling earnings, as consumers traded down to minimise the impact of inflation.

Low US initial jobless claims reinforce expectations of further rate hikes

The bearish end to the week was reinforced by the latest US initial unemployment claims figures, which unexpectedly fell from 226,000 in the previous week, to 214,000, quickly erasing any thoughts of a Federal Reserve (Fed) pause in the rate hiking cycle.

Resignation of the UK’s Prime Minister, Liz Truss, goes by largely unnoticed by markets

The resignation of the UK’s Prime Minister Liz Truss after just 44 days in the job went by almost unnoticed by markets. However, by Friday, as talk of a Boris Johnson comeback materialised, Sterling fell, and UK gilts sold off as the effects of uncertainty came to bear once more. As of 12pm on Friday, London time, US equities rose 2.3% over the week, with the US technology sector climbing 2.8%. European equities were flat, whilst the UK market crept up by 0.1%. Japanese stocks fell by 0.9%, with the Japanese Yen weakening to ¥150.96 versus the dollar, the lowest point in over 32 years. Australian equities fell by 1.2%, whilst domestic Chinese ‘A’ shares lost 1.1%, and Hong Kong stocks dropped by 2.3%. However, Latin American stocks rose by 5.1%, dragging up the Emerging Markets to finish 0.2% higher.

UK borrowing costs fall after the abandonment of the mini-budget

10-year US Treasury yields, which move inversely to price, rose to 4.31% and German bunds yields traded up to 2.50%. However, following the abandonment of the mini-budget, UK gilt yields fell as low as 3.78% on Thursday as Liz Truss resigned, however, by Friday they were creeping up once more, now trading at 4.08%. Sterling, having rallied back up to $1.14 and €1.16 on Monday, is now trading back down at just under $1.11 and €1.14.

European natural gas prices continue to slide

Gold fell 1.6% on expectations of continued tightening from the Fed, currently trading at $1,623 an ounce. Whilst Brent crude was steady over the week, rising 0.8% to $92.4 a barrel. European natural gas prices continued to fall, falling by 19% over the week, now trading at €114.5 megawatt hour, or a 63% fall since its peak at the end of August. However, it remains more than five times as expensive versus the beginning of 2021.

Market Update Monday 17th October 2022

Markets rally towards the end of the week despite US inflation exceeding expectations

Losses in markets from the beginning of the week were partially reversed as a powerful rally in equity markets gained ground on Thursday, despite the latest US inflation data coming in stronger than forecast. Whilst the rally in markets was not intuitive, commentators put it down to a combination of markets being oversold and weakening lead indicators, such as a fall in US rental costs. UK gilts and the British pound also rallied, as expectations rose that the UK government was going to row back further from the tax-cutting pledges made in the mini-budget, as the chancellor, Kwasi Kwarteng was expected to be sacked on Friday.

Emerging markets tumble as China tightens COVID restrictions

As of 12pm on Friday, London time, US equities rose 0.8% for the week, whilst the US technology sector was flat. European equities rose 0.7%, whilst UK equities fell 0.9%, with the Bank of England expected to have to hike rates more aggressively to counteract the government’s growth plans, in order to get inflation under control. Japanese stocks lost 0.45%, whilst Australian equities fell 0.1%. Emerging markets were hit particularly badly, falling 4.8%, with the Hong Kong Hang Seng falling 6.5% as China tightened Covid curbs, warning against any relaxation in its fight against the coronavirus.

UK Government bonds rally as expectations grow for the mini budget to be scrapped

Government bonds sold off at the beginning of the week, as UK pension funds managed by liability-driven investment managers continued their forced selling of assets to meet margin calls from banks. On Tuesday, the Bank of England extended its emergency bond-buying programme to include index-linked bonds, helping to dampen the extreme levels of volatility experienced in recent days. By the end of the week, on expectations of a U-turn by the UK government, bond prices rallied, with the yield on 10-year Gilts, which moves inversely to price, falling from a peak of 4.61%, down to 3.95%. 10-year US Treasuries yields, which also bounced around during the week, finished the week at similar levels to where they started, trading at 3.89%. It was a similar story for German bunds, with yields back at 2.19% by Friday.

Despite gains this week, Sterling still down by over 16% versus the dollar year to date Sterling recovered some of its losses against the dollar, trading at $1.125, and against the Euro, at €1.155. However, this still leaves sterling down by over 16% against the dollar year to date, and just over 3% against the Euro.

Gold falls as US inflation remains stubbornly high

The US inflation data took the shine off gold this week, as expectations remain high for a further 0.75% US interest rate hike in November. Gold fell by 2.9%, now trading at $1,660 an ounce. Crude oil also fell, giving back some of its gains last week, following the announcement of supply cuts by Opec+ (Organisation for Petroleum Exporting Countries + Russia), with Brent crude dropping by 4.4%, now priced at $93.6 a barrel. European natural gas also weakened further, dropping another 7% this week, now priced at €145.3 a megawatt hour.

Market Update Monday 10th October 2022

Markets rally as the UK government commits to a partial climb down on its unfunded tax cuts

Markets rallied strongly at the beginning of the week as the UK government backtracked on its plan to cut the 45% tax band for higher earnings, whilst softer economic data out of the US gave hope of a pivot in the interest rate cycle. However, the rally paused mid-way through the week, whilst investors wait for the latest US jobs data report, the non-farm payrolls, due out today at 1.30pm London time. Expectations are for 250,000 new jobs to have been created in September, down from 315,000 in August.

As of 12pm on Friday, London time, US equities had rallied by 4.4% over the week, with the technology sector rising 4.7%. European equities increased by 2.3%, with UK equities advancing 1.7%, both held back by a greater probability of a recession and heightened concerns over the willingness of Russia’s President Putin to use nuclear weapons on the battlefield in Ukraine. Japanese stocks rose by 3.9%, whilst the Australian market was up 4.5%. Emerging markets increased by 4.0%, with Latin American stocks rising by a massive 8.9%.

Government bond rally fizzles as quickly as it arrived

Government bonds staged a strong relief rally at the beginning of the week after the Conservative party’s partial climb down on its unfunded tax cutting agenda. This was closely followed by the latest new jobs opening data out of the US, which reported 10.1 million job openings in August, lower than the 11.2 million reported in July and beneath forecasts of 10.8 million. This led to a rally in government bonds, with yields, that move inversely to price, falling from 3.80% on the 10-year US Treasury to 3.56%. However, the buoyant mood was short lived as investors questioned the idea of an imminent pause in the US hiking cycle. This was reinforced by an interview on Thursday with the Chicago Fed’s President, Charles Evans, saying rates will probably rise to 4.5% or 4.75% next Spring before pausing. By the end of the week 10-year US Treasury yields ended up higher than at the start of the week, at 3.84%. It was a similar story for German bunds and UK gilts, with the mid-week rally vanishing. German bunds are currently yielding 2.16% and UK gilts 4.20%.

Crude oil rises as Opec+ agrees to cut production by 2 million barrels a day

Gold rose over the week by 2.7%, now trading at $1,717 an ounce, as markets anticipate a pause in the rate hiking cycle, whilst also offering haven status should the Ukraine Russian war escalate further. Crude oil rose sharply as Opec+ (Organisation for Petroleum Exporting Countries plus Russia) agreed a cut by 2 million barrels a day in response to the recent slide in oil prices. Although in truth, it’s not clear what impact this will have in the medium term as the Opec+ countries are already producing less oil than their quotas allow. Brent crude rose by 8.6%, now trading at $95.5 a barrel, whilst US WTI (West Texas Intermediate) jumped 12.6%, currently priced at $89.5.

Issues under discussion

Investors are trying to second-guess a pivot

The sharp move upwards in markets this week underlines how much investors are trying to second guess a pivot in the Fed’s monetary policy stance. Investors are aware, historically speaking, how quickly markets have rallied at this inflection point. However, we need to be mindful that inflation remains at very elevated levels versus recent history, and that even if the US employment picture is weakening, the forecasts still remain at very robust levels.

Market Update Monday 3rd October 2022

UK government bond turmoil ripples around the world before the Bank of England intervenes

Government bonds sold off sharply this week, led by UK gilts, following the UK Chancellor of the Exchequer’s mini budget last Friday when he announced up to £45 billion worth of unfunded tax cuts.  On Monday, the pound fell to a record low versus the dollar of $1.035, followed by sharp upward moves in gilt yields, which move inversely to price, as the 10-year yield hit 4.59%, with 30-year yields touching a 20-year high in excess of 5%.  This forced up government debt yields around the world, as 10-year US Treasury yields went above 4%.  The selloff in UK gilts was eventually put down to forced selling by pension fund liability driven investment strategies, or LDI, having to meet derivative margin calls as gilts sold off sharply.  It was not until the Bank of England intervened, promising to buy up to £65 billion of gilts, that some sort of normal order resumed, with government bonds staging a rally as yields came back down.  The sharp increase in debt costs only served to increase recession worries, dragging equity markets down in tandem.

Domestic orientated UK equities feel the pain

As of 12pm on Friday, London time, US equities fell 1.4% over the week, whilst European stocks dropped 1.2%. The UK market fell 2.5%, although by far the most pain was felt in mid cap stocks which lost 5.7% of their value. Japanese stocks fell 4.2%, whilst Australian equities dropped by 1.5%. The emerging markets sold off by 3.6%.

10-year UK gilt yields settle back down, having hit 4.59% midweek

Bond markets had settled down by the end of the week, following the Bank of England’s intervention, with 10-year US Treasuries currently yielding 3.71%, German bunds 2.09% and UK gilts 4.05%. The Bank of England, which was about to start selling down its gilt holdings as part of its efforts to get inflation under control, has committed to buying £5 billion of gilts a day up to the 14th October, thereby providing liquidity to LDI pension fund schemes.

Sterling rallies from its record low of $1.035

The pound has also rallied from its record low versus the dollar, now trading just under $1.11 and just over €1.13. Where UK asset prices go from here in the immediate term will be largely dictated by government policy. So far, the Prime Minister, Liz Truss, and her chancellor, have committed to ploughing on with their fiscal easing whilst introducing supply side economic reforms to boost growth. However, they have also agreed to work with the Office for Budget Responsibility to try to persuade financial markets and the public that their plans stack up. The biggest push back so far, has been the idea that the government is trying to boost growth, whilst the Bank of England is trying to reign in demand to squash inflation, somewhat diametrically opposed policies.

European natural gas prices fall, despite sabotage on the Nord Stream pipelines

Amidst the turmoil, gold rallied by the end of the week, rising 1.2%, now trading at $1,675 an ounce. Similarly, so did crude oil, up by 2.8% for the week, priced at $88.6 a barrel. Whilst European natural gas, having spiked by close to 18% on news that the Nord Stream 1 and 2 gas pipelines had been ruptured after a series of explosions, finished the week down by over 6%, trading at $169 a megawatt hour. Although no one has taken responsibility for the damage, all fingers are pointing at Russia whilst experts have said only a state actor could have carried out such large explosions.

Market Update Monday 26th September 2022

Rising rates and the Russia Ukraine conflict continue to take their toll on markets

Bond and equity markets both sold off this week as a number of global central banks raised rates in their continued efforts to combat inflation, with the US Federal Reserve raising rates by 0.75% for the third time in a row, taking the upper bound to 3.25%. The negative sentiment was compounded by Russian President, Vladmir Putin, escalating the Ukrainian war by seeking to annex invaded areas of Ukraine by holding referendums. This was backed up with plans to compulsory draft 300,000 Russian reserve soldiers and make further veiled threats of the use of tactical nuclear weapons.

As of 12pm on Friday, London time, US equities had fallen 3.0% over the week, with the market having given up 85% of its rally over the summer, taking the market to within just over two percent of its low for the year, down 21.2% year to date. Although sterling-based investors have been cushioned from this fall by a magnitude of 18% as sterling has weakened against the dollar. US technology stocks fell by 3.3% over the week, taking their loss to 29% year to date, just above their low point in June. European markets fell by 4.4%, rocked by an increasingly hawkish European Central Bank, and the escalation in the Ukraine war by Russia. UK equities dropped 3.4% as the Bank of England raised rates by 0.5% to 2.25%, whilst announcing that the UK was probably in a recession. Japanese stocks were a comparative bright spot, falling 1.2% as the Bank of Japan maintained its dovish stance, keeping rates on hold at -0.1%, whilst continuing to target a zero percent yield for ten-year Japanese government bonds. Australian stocks fell 2.4%, whilst the emerging markets lost 2.3%.

Government bonds continue to weaken in the face of rising rates

US government bonds sold off, with the 10-year Treasury now yielding 3.76%, a level not seen since 2010. However, it was UK government bonds that took the limelight this week for all the wrong reasons. The combination of a comparatively small rate hike by the Bank of England, and a string of tax cuts announced by the new chancellor of the exchequer, Kwasi Kwarteng, raised concerns about rising UK government borrowing in a rate rising environment. 10-year gilt yields, which move inversely to price, jumped by 0.66% over the week, taking the yield to 3.8%, whilst two-year gilt yields are now trading at 3.96%. German government bond yields rose by 0.28%, taking the yield on 10-year bunds to 2.04%. The Swiss National Bank raised rates by 0.75%, thereby taking interest rates to 0.5% and ending negative interest rates for the first time since 2015. The Bank of Japan now remains the only global central bank still pursuing negative interest rates.

Sterling falls to a 37-year low versus the US dollar

The dollar maintained its upward path, with the dollar index (the dollar versus a basked of internationally traded currencies) rising by 2.3%. Whilst Sterling fell to a thirty-seven year low versus the dollar, trading at just under $1.11, it also fell versus the Euro, trading at €1.13. The Euro also weakened versus the dollar, falling beneath parity to trade at $0.98. However, despite the Bank of Japan being the only major central bank not to be following a tightening path, the Yen strengthened this week, as the Japanese central bank intervened in currency markets to prop up their currency.

Commodities continue to fall on recession concerns

Gold sold off over the week, falling 1.8% to $1,654 an ounce following the latest US interest rate rise. Industrial commodities also sold off as recessionary fears grew in the face of rising rates. Copper fell 1.7%, currently trading at $7,739 a tonne, whilst crude oil sold off, with Brent crude falling by 4.1%, now priced at $87.6 a barrel. European natural gas also fell a further 4.8%, now trading at €178 megawatt hour, although that remains an increase of 172% since the start of the year, and over an eightfold increase since the start of 2020.

Issues under discussion

Trying to put the inflationary genie back into the bottle

To date, 2022 has been one of the worst years on record for fixed income as central banks have played catch up as they try to put the inflationary genie back into the bottle. Many would argue that they were caught napping in the second half of 2021, as loose monetary and fiscal policy from the covid pandemic led to unprecedented levels of demand, colliding with supply chains suffering from the aftereffects of the pandemic. Although there may be some truth in this, they could not have known that Russia was about to invade Ukraine, and the impact this was to have on energy prices.

US rates have moved up swiftly since, with the 10-year yield on US Treasuries now in positive territory having adjusted for future expectations of inflation. Whilst the risk is that central banks increase rates higher than what the market is currently pricing in, the opportunity is that economies start to slow as the higher costs of servicing debt has the desired effect. The cost of a new mortgage has now doubled in the US, this is increasingly likely to be a headwind for the housing market, a key harbinger for the US economy. Therefore, the yield on offer in fixed income markets looks increasingly compelling, both in government bonds, and within areas of the corporate credit market where investors are being sufficiently compensated for the likelihood of rising defaults.

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