Equity markets rise despite central banks doubling on pledges to get inflation under control
The week will be most notably marked by the death of Queen Elizabeth II, Britain’s much loved and longest sitting monarch, who dutifully served her country to the end.
Global equities rose following the dollar weakening, prompted by the European Central Bank (ECB) raising rates by 0.75%, signalling that central banks globally are getting tough on inflation. This was despite the US Federal Reserve (Fed) once again reinforcing its commitment to getting inflation under control. Whilst European natural gas prices spiked by over 30% on Monday, as Gazprom, the Russian state-controlled gas company, cut off the gas supply to Europe.
As of 12pm on Friday, London time, US equities rose 2.1% over the week, whilst European and UK equities were up 1.1% and 1.3% respectively. Japanese stocks increased by 1.8%, the Australian market was up 1.0%, whilst the emerging markets fell by 1.5% with a large variation between different countries, with, for example, Brazil down by 0.9% and China up by 2.4%.
With central banks increasingly signalling their intent to get tough on inflation, bond markets sold off. As of Friday, 10-year US Treasury yields, which move inversely to price, had risen to 3.26%, German Bunds 1.71% and UK Gilts 3.07%.
US dollar weakens as the Fed is no longer the only major central bank raising rates aggressively
Despite the market pricing in over a 75% probability of a third 0.75% rate hike in the US in September, the US dollar weakened as, following the rate increase by the ECB, the Fed is no longer the only major central bank in town raising rates aggressively. The dollar index, which measures the value of the dollar versus a basket of internationally traded currencies, fell by 0.75%, whilst the Euro rallied by 1.1%, now trading at $1.01 and Sterling also strengthened, rising 0.7%, to close to $1.16. However, against the Euro, Sterling weakened, now priced at €1.15.
Energy prices fall as recession risks increase
It was a mixed picture for commodities, with metal prices strengthening, whilst energy sold off. Gold rose 0.9%, benefitting from the weakness in the US dollar, whilst copper prices rose 3.0%, now priced at $7,919 a tonne and Iron ore increased by over 8%. However, crude oil sold off, falling by 2.3%, with Brent crude trading at $90.9 a barrel, whilst at its lowest point it was priced at just over $87. European natural gas, despite having touched €283 per megawatt hour (MWh) on Monday, finished the week down by 1.0%, at €207 MWh.
US economic data releases continue to point towards more aggressive tightening
The latest Institute of Supply Management Services Sector index for the US was released this week, providing a snapshot of how companies perceive their operating environment. Unexpectedly it showed an improvement, despite rising prices and a tight labour market, coming in at 56.9 for August, with any number above 50 representing expansion. This followed a robust jobs report from last week, leading markets to price in a peak in interest rates of just under 4% in March. However, to muddy the picture, a competing survey, the S&P Purchasing Managers Survey of the service sector, came in at 43.7, a figure that indicates contraction.
UK energy cap plan prompts Bank of England chief economist to warn of further rate increases
As was widely expected, Liz Truss won the race to become leader of the Conservative party and Prime Minister. Although heavily overshadowed by the death of the Queen, on Thursday she announced a package estimated to cost £150 billion through additional borrowing to cap the average household energy bill at £2,500 until 2024. For companies, the cap will last six months before being reviewed. However, to emphasise that there are few easy decisions in politics, Huw Pill, the Bank of England’s (BoE) chief economist, told MPs at the House of Commons Treasury Select Committee that any such plans would likely force the BoE to raise interest rates even higher, despite the action having the effect of lowering the inflation rate in the immediate term. The impact on Sterling will be keenly watched in the coming months, as the Truss government is looking to ease fiscal policy through tax cuts, whilst increasing government borrowing at a time when the cost of debt is rising.