Contact us
Client and adviser portal
Log in

Between CPI-Scylla and Collapsing-Charybdis

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • Equities rallied hard this week, with US equities gaining c. 6% in sterling terms
  • Bonds also recovered, with gilts up c. 1.5%

A bad week for

  • Emerging market equities were left behind, falling -0.4%
  • The US dollar weakened -0.5% on a trade weighted basis

US monetary policy

The US Federal Reserve’s chair testified before the US Senate last week, answering questions on monetary policy and the economy. Fed Chair Jerome Powell acknowledged that higher interest rates posed a threat to the US economy, but emphasised the need to ‘restore price stability’ in order to avoid high inflation becoming entrenched. Powell also reiterated that members of the Fed’s policy making committee still anticipate further interest rate rises being necessary, given the high rate of inflation. The prospect of a sustained tightening cycle has weighed on asset markets in recent weeks, as higher future interest rates put downward pressure on the current value of bonds and equities. At the June Federal Open Market Committee (FOMC) meeting, Powell confirmed that committee members would need to see compelling evidence of inflationary pressures abating and declining prints before easing up the pace of tightening. The committee’s forecasts saw hiking frontloaded in 2022, with modest rate hikes in 2023 and rate cuts in 2024. Growth is expected to slow in the third quarter of 2022, as negative real incomes begin to depress spending. Inflation is also expected to fall as year-on-year comparisons normalise post-pandemic, but energy prices provide a source of persistent uncertainty.

G7 Summit

This year’s G7 summit was dominated by the Russian invasion of Ukraine and possible responses. A cap on Russian energy prices was proposed, in order to limit the degree to which Russia’s state-owned energy companies are benefitting from higher energy prices. The idea has the support of the Premiers of France and Italy, as well as the US Treasury Secretary Janet Yellen. A price cap could be enforced via the insurance market, with the majority of oil tanker coverage arranged via the International Group of Protection and Indemnity Clubs, which is subject to European laws.

UK inflation

UK inflation edged higher to 9.1% in May, from 9.0% in April. This was close to the Bank of England’s own forecast of 9.2%. Core inflation, which excludes volatile energy and food prices, fell to 5.9% from 6.2%. Inflation is likely to remain high for the remainder of 2022, with the October Ofgem price cap rise expected to push inflation up in the final quarter. Falling real income growth is likely to weigh on consumption spending, and spending growth can only be sustained if households use credit and savings. While households have high excess savings and can extend more credit in aggregate, savings and credit are not distributed evenly. Nonetheless, targeted government grants should support spending for lower income households.

French politics

The party of France’s president lost control of the French National Assembly in last week’s legislative elections. President Macron was successfully re-elected in April’s presidential election, but his centre-right party lost assembly seats to a left-wing alliance and the far right, losing his absolute majority by 44 seats. Macron must now govern in coalition with other parties and discussions are ongoing. The broad-left coalition NUPES won 131 seats, and could hold 150 with the support of allied parties. However, this coalition is made up of several parties each with its own priorities, making a schism possible. On the right, National Rally gained 89 seats, while the Republicans have signalled they intend to remain in opposition.

Geopolitics

Relations between Russia and Europe faced renewed pressure last week over access to the Russian exclave of Kaliningrad. The region sits between Poland and Lithuania, both NATO member countries, and remains Russian territory. Russian access to Kaliningrad has always been fraught, but Lithuania’s application of EU sanctions on Russian goods bound for Kaliningrad has heightened tensions once more. For now, Lithuania’s government has passed a law banning Russian natural gas imports, with an exception for transit into Kaliningrad. The dispute coincides with a barrage of cyberattacks on Lithuanian government institutions and Russia’s government has threatened retaliation for the block on imports.

 

Important information
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.

!

Before you invest, make sure you feel comfortable with the level of risk you take. Investments aim to grow your money, but they might lose it too.

Close Brothers Asset Management Logo

Important compliance information for institutional investors and FCA authorised intermediaries

For use by institutional investors, FCA authorised intermediaries and connected persons only – it must not to be relied upon by retail clients. If you are a retail client please return to the main part of the website.

Please read this page before proceeding, as it explains certain restrictions imposed by law on the distribution of this information and the countries in which our funds are authorised for sale. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction.

This part of the Close Brothers website is for information purposes only. It is not intended to be relied upon to make any investment decision. Although the information herein has been obtained from sources believed to be reliable, neither Close Brothers Asset Management or any of its employees guarantee its accuracy, completeness or fairness. The most recent data has been used where possible. Except in so far as liability under any statute cannot be excluded, no member of Close Brothers Asset Management accepts liability (whether arising in contract, tort or negligence) for any error or omission in this document. 

The information contained on these pages is believed to be correct but cannot be guaranteed where data is sourced from third parties. Opinions constitute our judgment as at the date shown and are subject to change without notice. The information on this website is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. This does not constitute an offer or solicitation to sell shares in any of the funds referred to on this site, by anyone in any jurisdiction in which such offer, solicitation or distribution would be unlawful or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. 

Applications to invest in any fund referred to on this site, must only be made on the basis of the offer document relating to the specific investment (e.g. prospectus, simplified prospectus or other applicable terms and conditions). 

As a result of money laundering regulations, additional documentation for identification purposes may be required when you make any investment. Details are contained in the relevant Prospectus or other constitutional document. 

If you are unsure about the meaning of any information provided please consult your Close Brothers contact, financial or other professional adviser. 

The information contained on this site is subject to copyright with all rights reserved. It must not be reproduced, copied or redistributed in whole or in part. 

We may source data from reputable third party data providers, however, we accept no responsibility or liability for the accuracy of such data. 

We accept no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. 

You acknowledge and agree that it is your responsibility to keep secure and confidential any passwords that we issue to you and your authorised employees and not to let such password(s) become public knowledge. If any password(s) become known by someone other than you and your authorised employees, you must change those particular password(s) immediately using the function available for this purpose on the Website. 

On accessing the Close Brothers Asset Management website, you are aware of the following investment risks applicable to all Close Funds: 

PAST PERFORMANCE RISK-Past performance, though extensively used in analyzing investments, is not a reliable indicator of future returns. 

RISK OF PERMANENT CAPITAL LOSS-The risk that investments may fall in value permanently with little or no expectation of recovery, including the possibility of total loss of the amount invested. Typically, this applies to individual securities. 

RISK OF REDUCED INCOME-The risk that income derived from investments falls significantly and no longer fulfils its objective in a portfolio with a corresponding fall in the capital value if realised. 

VOLATILITY RISK-The risk of a decline in the value of a group of investments due to market fluctuations. Typically investors measure this risk over short timescales. 

INFLATION RISK-The risk that the growth of investments does not keep pace with inflation over the longer term, i.e. a reduction in the real purchasing power of one's capital. 

LIQUIDITY RISK-The risk that an investor cannot gain immediate access to capital. 

TAX RISK-The risk that the tax regime generally affecting returns, a particular asset or a specific tax efficient scheme may change or be removed with consequent impact on investment returns and strategies. 

CURRENCY RISK-The risk that movement in rates of foreign exchange may cause the value of investments and/or income derived from them to fluctuate independently of the value of the underlying asset and may amplify losses or impact gains when translated into the investor’s base currency. 

BENCHMARK RISK-The risk that investments do not beat a specific benchmark over the longer term, e.g. the failure to match the returns of a given equity index, bond index, or a blend of these. 

This site is operated by Close Asset Management Limited (Company No. 1644127) which is registered in England and Wales, is authorised and regulated by the Financial Conduct Authority and is a subsidiary of Close Brothers Group plc. Close Asset Management Limited is a member of the Close Asset Management group and uses the trading name Close Brothers Asset Management. Registered office at 10 Crown Place, London EC2A 4FT. VAT Registration No 245 5013 86.