Past the peak?

A good week for

• Government bonds rallied last week, reversing some of prior weeks’ losses.
• The dollar gained c. 1% on a trade weighted basis.
  
  
  

A bad week for

• Non-UK equities struggled in sterling terms, with emerging markets suffering most.
• Dollar strength undermined gold and oil prices in US dollar terms.
  
  
  

US inflation

US inflation slowed to 8.3% in April, meaning that March’s 8.5% print could have been the peak in the US Consumer Prices’ Index (CPI). A strong acceleration in CPI twelve months ago will make year-on-year comparisons more demanding herein, weighing on 12 month inflation prints. However, while airfares did provide a boost to April inflation, the broad-based strength in core services prices validates
The US Federal Reserve’s (Fed) belief that monetary policy needs to be tightened further, with a triple-sized 0.75% rate rise under consideration for forthcoming Federal Open Market Committee meetings.

UK economy

UK GDP grew by less than expected in the first quarter of 2022, mostly due to weak activity in March. Month-on-month, GDP fell by -0.1% in March, leaving Q1 growth at +0.8% quarter-on-quarter. Weakness was centred on the consumer sector, notably car sales and broader retail sales. Business investment was also weak, falling -0.5%, though business surveys suggest this should improve, and that supply chain difficulties may explain the delay in businesses making the most of investment tax incentives. In contrast, government spending should decline further, as coronavirus health measures and associated spending come to an end. While UK GDP was ahead of developed market peers in the first quarter, this may in part be due to the impact of the Ofgem price cap, which shielded consumers from the full extent of energy price increases until April. However, the price cap also amplifies the size of the increase in inflation in April, with a further increase expected in October. High energy prices are expected to keep inflation high for much of 2022, weighing on real income growth and potentially causing consumption spending to slow further in coming months.

European energy

European gas prices surged last week as Russia begins to eye energy supplies as a tool in its war in Ukraine. On Thursday Russia imposed sanctions against European subsidiaries of the state energy firm Gazprom, limiting gas supply. This follows Ukraine’s halting of a gas pipeline, citing interference by Russian occupying forces. Moscow has already cut off supply to Bulgaria and Poland, and is believed to have threatened Finland with the same treatment on Friday. This was likely provoked by Finland’s move, along with Sweden, to join NATO. European countries have set out plans to shift away from Russian energy, targeting a reduction of two thirds by the end of the year. However, if Russia begins to cut energy supply sooner, Europe is likely to face energy shortages and a hit to the economy.

Brexit

UK-EU relations face a fresh challenge with Northern Ireland’s recent elections triggering fresh scrutiny over the Northern Ireland Protocol, which imposes a trade boarder between Northern Ireland and Great Britain. With Unionists firmly against any barriers to UK-NI trade, Westminster is considering unilaterally revoking the treaty, which is part of the UK’s Trade and Cooperation Agreement with the EU. The UK has yet to fully implement some of the broader trade checks it has agreed to, citing likely disruption, but further disruption and tariffs would be likely if the EU-UK deal disintegrated.

Cryptocurrencies

A rout in some coins caused weakness across cryptocurrencies last week. Some stablecoins, which are coins that peg their market value to an external reference, are backed by hard currency reserves. However, TerraUSD, an algorithmic stable coin, is backed by tokens of another cryptocurrency, LUNA. Until recently, the bulk of TerraUSD was held in Anchor Protocol, a blockchain savings platform, which pays 20% interest on TerraUSD deposits. In March Anchor announced plans to move to a variable deposit rate, causing large withdrawals of TerraUSD, and a surge in the number of LUNA coins. The price stabilisation mechanism caused the value of LUNA coins to fall. This broke the balance that had provided stability to TerraUSD, and both coins fell sharply. This also undermined the broader cryptocurrency market, with other coins falling. The event led regulators to reiterate the need for appropriate regulation as these assets become more enmeshed in the financial system.

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.