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Markets last week 26/09/2022

United Kingdom

The Sterling tumbled against the dollar to below $1.08, over the weekend hitting the lowest point since 1985. On Friday, the new UK finance minister Kwasi Kwarteng announced a GBP 45bn debt-financed tax-cutting package much to everyone’s surprise. This is a huge gamble as he is betting that this will kickstart the economy by facilitating growth and reducing any effects of an impending recession. This prompted a massive day of trading as many are sceptical of this approach.  

This spending spree has come at an odd time as the chancellor wishes to borrow huge sums of money at high-interest rates compared to two years ago, with an ambitious expansionary fiscal policy. What is even stranger is he wishes to execute this plan while the Bank of England is in the middle of contractionary monetary policy execution by raising rates.  The National Institute of Economic and Social Research said that BoE would have to raise rates to 5% and keep them there until at least 2024.  

Kwasi Kwarteng unveiled a tax-cutting budget that also included supply-side reforms and a GBP 60 billion energy support package for households and businesses aimed at achieving 2.5% annual growth. The package includes reductions in the top and basic rates of income tax and the cancellation of increases in national insurance contributions and corporation tax. The below table shows how the new tax cuts will affect the different income families in the UK  

Tax savings from the mini budget measures

PwC has published a report which seems to suggest that UK GDP growth to averages between 3.1% and 3.6%, followed by two years of slow, or even negative GDP growth. They also state headline inflation could reach 17% next year although with the new energy price cap that number has been revised to 10% to 13%. It’s clear that the chancellor has his eyes set on future growth-related problems but that could be at the cost of making current inflationary issues worse.  

United States

Stocks recorded a second week of pronounced losses after Federal Reserve policymakers revealed that they expected official short-term interest rates to continue going sharply higher over the next several months. The Dow Jones Industrial Average and S&P 400 Midcap Index fell to new intraday lows in late 2020, while the small-cap Russell 2000 Index and Nasdaq Composite managed to stay slightly above their bottoms in mid-June 2022.  

The technology-heavy Nasdaq Composite Index fared worst for the second consecutive week and briefly fell to a level more than one-third below its January record high. Stocks fell sharply on Wednesday after policymakers announced a 75-basis-point (0.75 percentage point) hike in the federal funds rate, bringing it to a target range of 3.00% to 3.25%, its highest since March 2008. 

A survey undertaken by Fed policymakers indicates that individual expectations for future rate increases showed that many expect rates to reach 4.50% by the end of the year and stay near there for much of 2023. While the full impact of the Fed rate increases has yet to be felt it will make it hard for businesses to make plans or have any chances of bolstering sentiment. 

Federal Reserve Chair Jerome Powell’s post-meeting press conference initially seemed to reassure investors, sending stocks back higher. In as much as a continuous raise in interest rates has caused uncertainty about whether there will be a recession and how much effect it will have on the economy. This saw stock retreating to lower levels upon their closing hours on Friday as the Fed Chair seemed to acknowledge how most market participants had anchored their long-term prospects on where inflation should be. 

The selling accelerated Friday, seemingly fed by troubling developments in Europe and despite some modestly encouraging economic data. S&P Global reported measures of current manufacturing and services activity that both surprised on the upside. Manufacturing activity continued to expand and even accelerated a bit while services sector activity continued to contract but at a much more modest pace. 

Short-term yields briefly jumped in response to the Fed’s latest projections, but the week’s sharpest yield increases occurred on Thursday amid elevated futures market activity. These moves pushed the benchmark 10-year U.S. Treasury note yield briefly to 3.77% its highest mark since November 2008.  

Tax-exempt municipal bonds slumped, as the continued climb in Treasury rates and persistent outflows from Municipal bond portfolios industrywide weighed heavily on the market. Very light issuance levels may have mitigated this week’s selling pressures. investment-grade corporate bonds held up relatively well ahead of the Fed meeting as higher-than-average trading volumes and muted primary issuance formed a supportive technical backdrop. 

 However, after the meeting, the asset class weakened alongside moves lower in the equity market and rising U.S. Treasury yields. There was also an uptick in new issuance post-Fed, although the level of new deals fell short of weekly expectations. 

The EU

European shares fell sharply for a second week, as central banks raised interest rates sharply, intensifying fears of a prolonged economic slowdown. The pan-European STOXX Europe 600 Index ended the week down 4.37%, dropping to the lowest levels in more than a year. Major indexes also tumbled as France’s CAC 40 lost 4.84%, Germany’s DAX slid 3.59%, and Italy’s FTSE MIB 4.72% 

Yields on German 10-year government bonds rose to fresh decade highs as central bank rate hikes boosted market expectations for monetary policy tightening at the European Central Bank. That was echoed across European markets with Italian, Spanish, and French yields also rising across the board. UK gilt yields jumped sharply on the prospect of escalating public debt and a sharp increase in interest rates after the government slashed taxes by the most since 1972 to support the economy. The UK pound fell to USD 1.09 a 37-year low. 

Sweden’s central bank started a wave of large interest rate hikes in Europe and warned that policy may need to be tightened further to bring inflation under control, a view shared by other central banks. The Riksbank increased its benchmark interest rate by one percentage point to 1.75%, which was higher than expected. Switzerland’s central bank raised borrowing costs by 0.75 percentage points, bringing its benchmark rate to 0.5% and putting the country back in the black for the first time since 2015. 

 In Norway, policymakers hiked rates by 50 basis points for the third time in a row to 2.25%. The Bank of England (BoE) lifted its key rate to 2.25% as well, hiking by 0.5 percentage points for the second month running. Markets had been pricing in the probability of a three-quarter-point increase in line with the U.S. Federal Reserve. 

Eurozone business activity contracted for a third consecutive month in September as the economic downturn deepened, according to purchasing managers’ surveys. Preliminary data showed the S&P Global Eurozone purchasing managers index composite Index fell to 48.2 in September—the lowest level since June 2020 from 48.9 in August. 

China

China’s stock markets fell as investors worried about global growth slowing. According to Reuters, the broad, capitalization-weighted Shanghai Composite Index fell 1.2%, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1.9%. 

On Friday, the yuan currency fell to a nearly 28-month low, trading at 7.1066 per US dollar, down from 7.0185 the previous week. The People’s Bank of China (PBOC), which sets a reference rate for the onshore yuan versus the US dollar each trading day, set the so-called fixing at its lowest level since early August 2020, according to reports. The onshore yuan can trade up to 2% on either side of the fixing. However, the central bank has set the fixing higher than market expectations in every single session for nearly a month, indicating China’s efforts to slow the rate of depreciation. 

The Fed’s aggressive tightening has boosted the dollar at the expense of the yuan and other emerging markets currencies this year. China’s surprise decision to lower key interest rates in August has also fuelled the yuan’s slide. 

A growing number of economists are lowering their growth forecasts for China, where the economy is being hampered by a property market downturn and ongoing coronavirus outbreaks. The Asian Development Bank was the most recent to lower its growth forecast for China to 3.3% this year from 4.0% previously. It also predicted that for the first time in more than three decades, China’s economic growth would lag that of developing Asia. This year, Beijing’s official growth target is around 5.5%, which many economists believe is unattainable. 

In terms of monetary policy, the PBOC held its benchmark lending rates steady at its monthly meeting. After unexpectedly cutting both rates in August, the central bank left the one-year and five-year loan prime rates unchanged. The 10-year Chinese government bond yield increased from 2.692% the previous week to 2.713% as US Treasury yields reached 11-year highs. The yield differential between the benchmark 10-year US Treasury bond and its Chinese counterpart has reached its highest level since 2007. 

Japan

Japan’s stock markets closed at their lowest levels in more than two months in a holiday-shortened week. The Nikkei 225 Index fell 2.6% dipping at one point below the 27,000 mark for the first time since July 19. The Nikkei tracked losses on Wall Street as a large interest rate hike by the Fed further widened the U.S.-Japan rate differential. The government intervened in the foreign exchange market to support the yen after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy. 

For the first time since 1998, Japan intervened in the currency market to support the yen after it fell below JPY 145 to the US dollar. Following the event, Finance Minister Shunichi Suzuki stated, exchange rates should be determined by market movements and not entirely through speculation, he also mentioned that the government will closely monitor the situation and take appropriate action in the event of excessive rate swings. 

Japan’s core consumer price inflation, which excludes volatile food prices, rose to 2.8% year on year in August, the fastest rate since October 2014, according to the Ministry of Internal Affairs and Communications. The reading exceeded expectations for a 2.7% increase and was up from 2.4% in July. The increase was driven by higher utility bills and food and grocery prices, as well as the fading effect of mobile phone tariff cuts. 

Indices for the week 

 

In Local Currency 

In Sterling Pound 

Index   

Last week   

YTD   

Last week   

YTD   

UK   

 

 

 

 

FTSE 100 Index   

-3.02% 

-2.06% 

-3.02% 

-2.06% 

US   

 

 

 

 

S&P 500 Index   

-4.63% 

-21.61% 

-1.49% 

-2.61% 

Europe   

 

 

 

 

Euro Stoxx 50 Index   

-4.25% 

-19.73% 

-2.85% 

-14.89% 

Asia   

 

 

 

 

Nikkei 225 Index   

-1.50% 

-5.69% 

0.59% 

-8.40% 

Hang Seng Index   

-4.35% 

-20.84% 

0.30% 

-2.33% 

MSCI Emerging Markets Index   

-3.20% 

-18.20% 

0.65% 

6.13% 

` 

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