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.