Global Stocks Extend Summer Rally
Global stocks rose for a fourth straight week as investors shrugged off the prospect of higher interest rates. The blue-chip S&P 500 and technology focused Nasdaq indices gained 1.6% and 1.7% respectively.
The Federal Reserve announced it would not raise interest rates at the end of its two-day meeting on Wednesday as members of the Federal Open Market Committee voted unanimously to maintain the target range of 5 to 5.25%. The pause was widely anticipated with headline inflation trending lower but most members of the committee revealed that they still expect to hike interest rates two more later in the year.
Fed Chair Jerome Powell said next month’s meeting will be a “live” one, a strong hint that it will hike rates again then, reflecting unease that core inflation and wage pressures are stubbornly high. The lower headline inflation rate has been pulled lower by falling energy prices.
The European Central Bank also offered few surprises and announced on Thursday it had raised the benchmark deposit rate by 0.25% to 3.5%, the highest level in 22 years. At the press conference following the decision, ECB President Christine Lagarde reiterated that there was still ground to cover to bring inflation down and another hike next month is “very likely”.
The Bank of England’s Monetary Policy Committee will meet later this week and is widely expected to raise its benchmark interest rate by another 0.25% to 4.75%. The UK is experiencing the highest inflation amongst developed economies and the BoE has more to do that other central banks to bring it back down towards the 2% target rate.
Higher wages are contributing to inflationary pressures in the UK. Wages increased 7.2% in May from a year earlier, more than twice the long-term average of 3%, and the unemployment rate fell to 3.8%. The tighter employment market gives workers a much stronger hand in wage negotiations and suggests inflation will be a more persistent problem. Money market futures are now pricing in five more interest rate hikes this year by the BoE, taking the benchmark rate to at least 5.75%.
Interest rate expectations have a direct impact on the cost of borrowing for houses and the average cost of a 2-year fixed rate mortgage climbed above 6% this week. Aside from the aftermath of last autumn’s mini-Budget, it is the most expensive a typical mortgage has cost since 2008.
Decreasing affordability will reduce activity in the property market and may put some pressure on prices. According to data from property website Rightmove, the average asking price for a property coming onto the market fell by £82 to £372,812 in the four weeks to 10 June, the first time it has dipped this year.
In company news, Vodafone and CK Hutchison, the owner of Three UK, struck a deal to merge their UK-based operations, subject to approval from the Competition and Markets Authority. The merged entity would have around 27 million customers, transforming it into the UK’s biggest mobile phone operator, ahead of Virgin Media O2 and BT Group’s EE.
Shares in New York-listed Manchester United gained 22% last week on speculation that Sheikh Jassim bin Hamad Al Thani is now the frontrunner to buy the football club, put up for sale seven months ago. Interested buyers, including petrochemicals billionaire Jim Ratcliffe, have made bids so far which have fallen short of the Glazer family’s reported £6 billion asking price.
Brent Crude gained more than $4 to $76 per barrel last week on back of stronger than expected economic data and measures taken by China’s policymakers to provide stimulus to boost its economy with the post-Covid lockdown recovery disappointing thus far. China, the world’s largest importer of crude oil, cut interest rates for the first time in almost a year on Thursday and state planners are expected to ramp up infrastructure spending and financial assistance for local governments in the coming months.
(Cover Image Source: Mateo Giraud)