By Haith Nori
August has seen some level of order being restored to markets but could simply be a bear market rally. Central Banks continue to shock the economies by taking aggressive action to control inflation. The first ships have been allowed to leave Ukraine, ending the Russian blockade on the Ukrainian Ports. Nancy Pelosi, speaker of the United States House of Representatives has made a political statement by visiting Taiwan to publicly show support for the island’s independence, however, this may ignite the buried tension between China and the US.
Inflation once again remains a key factor in Global Economies. The cost of energy is rising and a bleak forecast for January 2023 has been painted that energy bills will reach a new record high having serious implications for the cost of living. Food prices also remain at a higher cost causing a shift in consumer spending to more affordable options. Ships carrying much needed grain have finally left the Ukrainian shores with the first carrying 26,000 tonnes of corn to Lebanon. Since the sea blockade was lifted on August 1st more than 50 ships have set sail from Ukraine delivering to not only the poorest regions, the immediate plan, but branching out to the rest of the world. This marks a major breakthrough since the Russian invasion as this now will help address global hunger and restore some normality. At the beginning of August, the UK joined the US and EU in a ‘shock’ increase in interest rates, the largest in 27 years, up 50 basis points to 1.75%, the sixth time since December 2021. In the US, markets were shocked by the Non-Farm Payroll figures on 5th August, adding 528,000 jobs, versus the 250,000 expected providing positive efforts to reduce unemployment. On 10th August the US released the CPI data for July of 8.5% vs 9.1% in June. Equities rallied and Treasury yields decreased with signs of ‘decelerating U.S. inflation prompted bets that the Federal Reserve would “pivot” raising rates at a slower pace than previously expected’[i]. In the UK CPI data was released on 17th August which saw Consumer Price Inflation jump to ‘10.1% in July, its highest since February 1982, up from an annual rate of 9.4% in June, intensifying the squeeze on households’[ii]. The Bank of England will continue to increase interest rates if they need to, keeping a tight control on inflation. Analysts at Citi Bank have suggested that the CPI figure in the UK could reach as high as ‘18.6% in January, more than nine times the Bank of England’s target’[iii]!
On 26th August at the Jackson Hole meeting in Wyoming, Federal Reserve Chair Jerome Powell gave a very ‘hawkish’ speech sending US markets into a downward spiral, reiterating the central bank’s commitment to halting inflation and price stability. The next Federal Reserve meeting will be on September 21st where they will review the decision to increase interest rates once more. After the last interest rate hike of 75 basis points in July, Powell mentioned ‘another unusually large increase could be appropriate at our next meeting’[iv]. There will be several economic data inflows to review before that meeting which will guide the next decision. European and Asian markets also fell after the meeting. The outlook from the meeting that many investors were hoping for that there would be one large rate hike in an attempt to bring inflation back to normal, sadly was not witnessed suggesting further surprising rate hikes to come. Also at the Jackson Hole meeting, Isabel Schnabel, an ECB executive board member, called for ‘strong determination to bring inflation back to target quickly’[v], adding that the persistence of inflation must not be underestimated and that sacrifices would be needed to tame surging inflation. Clearly, not only the US will be continuing to tighten monetary policy after the Jackson Hole meeting.
In the UK Fixed Interest Markets two year Gilt yields increased by more this month than any other month since May 1994. On August 24th two year Gilt yields hit 2.959%, their highest level since November 2008, up from 1.72% at the start of the month.
Countries around the world are attempting to assist with the energy crisis in Europe. The US, in particular, has shifted more Liquified Natural Gas (LNG) to Europe in the month of June than it did for the whole of 2021 and is planning more in the second half of the year. Currently, Europe has filled their reserve tanks 70% for the winter but to fully refill will come at a cost of c.50-55 billion Euros with the end consumer taking the brunt of the cost. With Russia still limiting the distribution of LNG to Europe, it is essential for them to find alternative options. Olaf Scholz, Chancellor of Germany signed a green hydrogen deal with Canada on Tuesday 23rd August. This is a promising step towards both an alternative and sustainable source of energy, but the first deliveries will not be until 2025, meaning the current situation still needs to be urgently addressed.
Overall, August has seen a correlation in asset markets. We still believe a focus on diversification across asset types, styles and strategies remains of critical importance to portfolios. However, global markets have eased after rallying back in July. Central Banks are still taking aggressive action to try and combat inflation with most stating the end is still not in sight. The two year UK Gilt yield has hit its highest level since November 2008 while Brent Crude has fallen below $100 a barrel. At the Jackson Hole meeting Powell gave a very hawkish view suggesting further interest rate hikes are coming in order to halt rising inflation with the potential of other central banks following suit. Sterling has been depreciating in the run up to the announcement of the new Prime Minister in the UK scheduled to be announced on September 5th.
[i] https://www.reuters.com/markets/europe/global-markets-midday-wrapup-1-2022-08-10/
[ii] www.reuters.com/world/uk/uk-cpi-inflation-rate-rises-101-july-2022-08-17/
[iii] https://www.reuters.com/world/uk/uk-inflation-hit-18-early-2023-citi-forecasts-2022-08-22/
[iv] www.bloomberg.com/news/articles/2022-08-26/read-fed-chair-jerome-powell-s-speech-at-jackson-hole-symposium
[v] www.ft.com/content/5afd5140-605f-447d-a30c-cc7355ceea59
Our investment strategy committee, which consists of seasoned strategists and investment managers, meets regularly to review asset allocation, geographical spread, sector preferences and key global market drivers and our economist produces research and views on global economies which complement this process.
Our quarterly report presents our views on the world economic outlook and equity, fixed income and foreign exchange markets. Please click the link to download.
