US clocks have now undergone their daylight savings so the usual 5-hour difference with the UK is restored.
Global markets had plenty to absorb last week with US interest rate decision and employment data whilst the Bank of England also announced their rate decision.
Review of last week’s key action
FTSE +287 +4.07% DOW -458 -1.4% S&P -130 -3.35% NASDQ -627 -5.65% DAX +216 +1.63% NIKKEI +94 +0.3% Hang Seng +1,298 +8.73%
The Federal Reserve and Jay Powell disappointed global markets with a surprisingly hawkish slant on interest rates which suggests interest rates will rise higher than previously expected. The FOMC, the rate setting committee, raised rates by 0.75%, the fourth such consecutive rise.
Forward interest rate contracts now imply interest rates may not peak until Q3 or Q4 next year at around 5% – 5.25%.
Major US indices all reacted poorly to the central bank’s update with the NASDAQ closing down 5.65% on the week, its worst weekly performance since January albeit after two weeks of sharp gains.
US equities were weak, but the higher interest rate outlook tends to hurt the technology sector which invest heavily for future growth and returns and which costs considerably more to finance than it did at the start of the year. The broad-based S&P500 also lost ground, falling 3.35% on the week.
In a week of hawkish comments by the Fed and Jay Powell, it was the dovish comments from two other members last Friday that helped equities recover from an even bigger fall. Susan Collins and Thomas Barkin, chairs of the Boston and Richmond Federal Reserve districts, called for a slowdown in the pace of rate rises which contradicts the FOMC just two days previously.
In contrast to US equities, European equities had a better week with the UK FTSE100 having a particularly strong showing. This followed news that the Bank of England raised rates by 0.75% to 3%, the largest increase in over 30 years. However, the reason for the rally in UK markets was due to the guidance given by the bank, which said that the bank will not have to raise rates as much as the market had expected. Investors now expect interest rates to peak at 4.6% in September next year, lower than the rate of 4.75% before the announcement.
Chinese equities continue to surge following rumours that Beijing had set up a committee to explore ways of unlocking the economy – in effect ditching the Zero Covid policy championed by Xi Jingping.
EURUSD unchanged GBPUSD -2.40 -2% USDJPY +0.79 +0.53%
A roller coaster week for the US Dollar as a more hawkish Fed initially helped the US Dollar recover lost ground from the previous week but that was all wiped out on Friday when the trend reversed to leave the US Dollar unchanged on the week.
In a week with two key data releases, it was more notable on a day, last Friday, when robust employment data was released – something that would be unlikely to encourage the Fed to slow up in its fight against inflation.
The fall in the US Dollar was prompted when two members of the Federal Reserve last Friday said that the central bank should start to slow down the pace of interest rates. This had the greatest impact on the US Dollar but had its effect on stocks was more muted.
Sterling was hit by the announcement that the Bank of England would raise rates less that the market was pricing in, which had an immediate negative effect. The peak in interest rates is expected to be around 4.6%, revised down from 4.75% - rates are currently 3%.
A weaker sterling paradoxically increases the pressure on prices as imported goods priced in US Dollars increases. It’s a fine balancing act that central banks undertake where the effects of any action can take up to 9 months to have a noted effect.
Gold +35 +2.1% UK OIL +2.35 +2.44% US OIL +4.15 +4.7% Bitcoin +501 +2.43%
Commodities were mostly subdued last week until Friday’s fall in the US Dollar, which propelled US Dollar priced commodities sharply higher. Crude Oil jumped over $4 per barrel whilst Gold surged $52 per ounce – recording its biggest one-day advance in several months.
Data / events for the week ahead
A lot quieter week this week for data. The most important event in the US calendar is the Mid-Term elections in Congress.
Monday
COP27 - The start of the annual gathering of nations to discuss the Climate Crisis. This year the event is held in Egypt. The urgency for action increases with each year that passes.
No major data releases or events today.
Tuesday
Australia - Governor of the Reserve Bank of Australia speaking at event in Zurich about Inflation Uncertainty and its Effects on Policy Decisions. Sounds like a book on excuses for policy failings.
Wednesday
China - Inflation Data. CPI expected to fall to a 5-month low of 2.4% from 2.8% previously – the highest since December 2020.
