- Weekly market update
- 5 minute read
A good week for
- The US dollar continued to appreciate, gaining +0.7% on a trade weighted basis
A bad week for
- US dollar strength continued to undermine the oil price, which fell around -8% in US dollar terms
- Gilts and UK corporates led bonds markets lower, falling around -3%
- Equities suffered broadly in sterling terms, with Japan (-2.7%) and the UK (-1.86%) suffering most
Last week was a challenging week for UK assets, with sterling, the UK large-cap equity index and UK bonds all underperforming broader peer groups. Sterling has depreciated by almost 15% versus the US dollar year-to-date and approached $1.15, the lowest level in almost forty years. While the dollar is relatively strong, sterling has also depreciated c. -6% on a trade weighted basis year to date. UK assets are likely to have weakened for a range of reasons. While high inflation means the Bank of England is expected to tighten monetary policy further, similar is expected in the US where the economy is stronger. Downgrades to UK economic forecasts may also be contributing to currency weakness, and the large-cap UK equity index is more likely suffering from weaker economic expectations on a global level given its greater exposure to the global economy. With the Conservative Party leadership race over and a new PM installed in Number 10, we expect a number of fresh economic policies designed to boost growth in the near-term, as the country suffers a squeeze in real income growth. An energy price freeze and business grants are reportedly under consideration.
In the wake of Fed chair Powell’s hawkish Jackson Hole speech, analysts awaited August’s employment report with trepidation, with a strong print likely to intensify Fed inflation concerns. However, the report was mixed. A sharp increase in participation translated to a rise in employment of 442,000, as well as a rise in unemployment of 344,000, raising unemployment to 3.7%. However, further increases in participation will be harder won, as it is now close to pre-pandemic levels.
More coronavirus lockdowns and electricity shortages contributed to renewed weakness in Chinese business surveys. Both the Caixin and official manufacturing Purchasing Managers’ Indices slipped below the “50” level, signalling contraction. Chengdu, a city of 21m residents, is the latest to enforce a lock-down, while tech-hub Shenzhen is facing a tightening of health restrictions. The high economic cost of social restrictions has caused dramatic downgrades to China’s GDP estimates this year, though it is hoped that measures will ease before 2023, when pent up demand could boost a rebound. However, it will not be until activity fully normalises that analysts get a sense of whether policymakers have done enough for China’s ailing real estate sector to recover.
The flow of Russian gas into Europe was once again disrupted last week, with the Nord Stream 1 pipeline closure extended indefinitely. This saw a spike in energy prices. However, European countries are in fact making good progress in building up winter reserves. Storage levels rose from 80.3% to 81.6% during to first four days of the closure. If EU countries are able to implement a 15% consumption reduction, the winter is mild and Russia does not turn off other gas flows, Europe is expected to pass through the winter without rationing. This week EU countries will meet to discuss a restructuring of energy markets, with a view to decouple electricity prices from gas prices.
Eurozone CPI surged to a fresh record high, rising to 9.1% from 8.9% in July. As in prior months, sky-high energy prices have played a significant role. However, the core basket, which excludes volatile components such as food and energy, also accelerated to 5% from 4.5% in July. The rate of inflation differs across EU member states, depending on how governments have chosen to tackle high energy costs, but the European Central Bank (ECB) will be wary of signs of high domestically-generated inflation. However, uncertainty as to the energy outlook this winter could prevent the ECB from more dramatic action.
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