Global stocks ended a bruising three week run of losses, boosted by a retreating Dollar on expectations that US inflation is at, or close to, a peak. The blue-chip S&P 500 and technology focussed Nasdaq indices returned 4.7% and 5.5% respectively.
Whilst some market participants are ready to speculate that US inflation is near a peak, central bankers didn’t ease up on their message that they will keep raising interest rates to ensure inflation doesn’t become entrenched.
However, a noticeable change from recent months is that other central banks are talking, and beginning to act, just as tough as the US Federal Reserve which has taken some of the steam out of the Dollar’s ascent.
The Bank of Canada raised its benchmark interest rate by another 75 basis points to 3.25% on Wednesday despite domestic inflation falling back from a 30-year high last month as gasoline prices eased. In the statement explaining the decision, the BoC warned more rate hikes will follow as it sees a “further broadening of price prices, particularly in services”.
The European Central Bank followed a day later with an identical hike to push its deposit rate to 0.75%. President Christine Lagarde was also uncharacteristically hawkish in the subsequent press conference, asserting that the bank is prepared to front-load further interest rate increases in the next few months to tackle record high inflation in the Eurozone. The message helped to push the Euro back above parity versus the Dollar.
The UK’s new prime minister was already facing a daunting task before the death of our Queen just two days in her term.
A plan to deal with soaring energy prices was at the top of Liz Truss’ agenda and on Thursday she announced a package of measures to parliament, including a cap on the average annual household energy bill at £2,500 for the next 2 years. Bills were set to rise to £3,549 in October and by more than £6,000 by next April.
The emergency measures will cost the government an estimated £150 billion but it resisted calls from opposition political parties to impose further windfall taxes on North Sea oil and gas producers. It will instead be funded by more government borrowing.
The energy bill freeze will head-off one of the principal drivers of the inflation in the near-term but fiscal stimulus to support the economy will likely add to longer-term inflationary pressures.
The Bank of England has pushed back this Thursday’s interest rate decision by a week following the passing of the Queen but futures markets are still leaning towards a 0.75% hike to bring the benchmark interest rate to 2.5% and then further increases to take it to at least 4.25% by next Easter.
Higher government borrowing and interest rates are bad news for bonds which extended their slide to 6 straight weeks. 10-year Gilt yields broke above 3% and are at their highest level since July 2011.
In corporate news, Apple’s reveal of its new range of iPhones was one of the biggest events of the week. Investors follow it just as seriously as consumers given that it accounts for around half of Apple’s overall revenue, or more than $40 billion in the second quarter.
Whilst many were underwhelmed, including Steve Jobs’ youngest daughter Eve who posted a social media meme mocking the iPhone 14 for looking identical to its predecessor, investors were more enthusiastic as pre-order data pointed to strong demand. Apple shares gained 5% last week.
Energy prices moved lower, albeit in volatile trading. Brent Crude fell back below $90 a barrel at one point for the first time since early February before recovering to $94. On one hand traders are concerned demand will fall as the global economy slows but the Opec+ cartel has signalled it is prepared to cut supply to support prices.
(Cover Image Source: Jelleke Vanooteghem)