Global Markets Update Monday, 26 September 2022

Global equities and bonds fell sharply amid expectations that interest rates would hit higher peaks more quickly than had previously been forecast.

UK bonds and the British pound tumbled after the government’s bonanza give away in the mini budget sparked fears that interest rates may have to go even higher to offset rising inflation as well as concerns over the sustainability of UK borrowing levels.

Vladimir Putin called up reservists immediately and announced referendums on becoming part of Russia in four regions of Ukraine: Luhansk, Donetsk, Kherson and Zaporizhzhia.

UK

The FTSE 100 fell 5.6% over the two weeks.

In a surprise move, new UK chancellor Kwasi Kwarteng announced the biggest tax give away since 1972, including abolishing the 45% rate of tax for the highest earners, a cut in stamp duty, cutting the basic rate of tax by 1% to 19%, abolishing the recent increase in national insurance contributions, and abolishing the planned increase in corporation tax to 25% (from its current rate of 19%). In total, the tax cuts amounted to £45bn. This is in addition to the energy support package previously announced, likely to cost around £100bn over two years. The IFS forecast that public borrowing would top £190bn this year, the third highest level since WW2. NIESR said the UK recession would now be shorter and shallower than had previously been feared but that UK interest rates would likely have to rise to 5% and stay there until at least 2024.

The Bank of England raised rates by 50bps to 2.25%, the highest level since 2008, and hinted of another big rise in November. The Bank also announced that it would begin selling the gilts it holds on its balance sheet from October.

The annual rate of UK inflation slid to 9.9%, down from 10.1% in July, as petrol prices fell.

The UK economy grew 0.2% in July. Over the three months to end-July, growth stagnated.

The flash reading of the S&P Global/CIPS UK composite purchasing managers’ index (PMI) slipped to 48.4 in September from 49.6 in August.

GfK’s UK consumer confidence index dropped to -49 in September, the lowest level since records began in 1974.

Tensions between the UK and EU appeared to ease, with the new UK administration seemingly more reluctant to invoke Article 16, raising the prospect that a negotiated settlement may be possible.

US

The S&P 500 slumped 9.5% over the two weeks while the tech-heavy Nasdaq declined 10.5%.

The Federal Reserve raised rates by 75bps, the third increase of this size which marks its most aggressive campaign to tighten monetary policy since 1981, taking the fed funds rate to a range of 3.0% to 3.25%. Jap Powell refused to rule out a US recession after the rate rise, with the “dot plot” of policymaker predictions indicating that US rates would rise to 4.4% by the end of 2022 and peak at 4.6% next year.

US consumer prices rose 0.1% over the month of August, compared to expectations of a 0.1% decline. The annual rate slid to 8.3%, down from 8.5% in July but above forecasts of 8.1%. The data boosted expectations that the Fed would raise rates by another 75 bps at its next meeting, with the fed funds rate now expected to reach 4.4% in March, up from forecasts of 4.0% earlier in the week. The flash estimate of the S&P Global US composite PMI increased to 49.3 in September from 44.6 in August. Services activity rose to 49.2 while manufacturing increased to 51.8.

US retail sales rose by a stronger-than-expected 0.3% in August, while data for July was revised down to a 0.4% decline.

Europe

The FTSEurofirst 300 fell 8.0% over the two weeks. The sell-off takes European equities into bear market territory, defined as a fall of 20% from a recent peak.

The EU proposed a windfall tax on energy companies’ “abnormally high profits” and redirecting proceeds to households and businesses struggling with soaring bills.

European Central Bank president Christine Lagarde said interest rates need to rise fast and possibly to a restrictive level to avoid the risk of inflation becoming more entrenched in the economy.

The flash estimate of the S&P Global euro-zone composite PMI fell to 48.2 in September, its lowest level since January 2021 and the third consecutive month below 50.

The German government seized control of three Rosneft refineries based in Germany. German Economy Minister Robert Habeck also said Germany has a chance of getting through the winter “comfortably” despite the lack of Russian gas, with the country on track to meet a 95% storage capacity target by November.

Italy goes to the polls on Sunday 25 September, with the far-right coalition expected to win. Giorgia Meloni, the leader of the Brothers of Italy party, is aiming to become the country’s first female prime minister.

Switzerland raised rates by 75bps to 0.5%, ending the era of negative rates in Europe. Sweden’s Riksbank hiked rates by 100bps, its largest increase in three decades, while Norway’s central bank raised rates by 50bps.

Japan

The Nikkei 225 retreated 3.8% over the two weeks.

The Bank of Japan maintained its dovish stance but intervened to prop up the yen for the first time since 1998after the currency tumbled to a 24-year low. Japan is now the sole country in the world to have negative interest rates (rates are -0.1%).

Japan’s core consumer prices hit 2.8% in August, the fastest rate of increase in nearly eight years. Pacific ex Japan
China’s state-run banks cut rates for the first time since 2015. Industrial and Commercial Bank of China, Bank of China, Bank of Communications and Agricultural Bank of China cut interest rates for three-year deposits by 15bps to 2.6%, while rates for three-year certificates of deposit were reduced by 10bps to1.45%.

Chinese economic news for August was better than expected. Industrial production was up 4.2%, while retail sales rose 5.4%.

Vietnam raised rates by 100bps, while the Philippines and Indonesia each raised rates by 50bps.

Emerging Markets

Russia’s central bank cut rates by 50bps to 7.5% but warned that further rate cuts were unlikely.

Turkey cut rates by 100bps to 12%, despite inflation reaching 8% in August.

South Africa raised rates by 75bps to 6.25%.

Brazil kept rates unchanged.

Bonds

The yield on the 10-year US Treasury bond traded as high as 3.8%, before closing at 3.74%, a rise of 28bps over the two weeks, while the yield on the two-year note hit 4.2%, a fresh 15-year high.

The yield on the 10-year German Bund rose 25bps to an 11-year high of 2.02% over the two weeks.

Gilt yields shot higher after the new chancellor’s budget, suffering their worst one-day sell-off since the 1990s. The 10-year UK benchmark bond rose 70bps to a yield of 3.83%, an 11-year high, after borrowing jumped sharply. The Debt Management Office said the additional borrowing, which takes total gilt sales for the 2022-23 fiscal year to £193.9bn, would be concentrated in shorter-term bonds.

Currencies

The British pound declined to a 37-year low against the US dollar, slumping below $1.09 following the new chancellor’s mini budget which raised concerns that the UK was on an “unstable” fiscal trajectory.

Commodities
Brent crude fell back to around $86 a barrel, its lowest level since January, amid mounting fears of a global recession.

Gold fell to a two-year low as US bond yields moved higher.