Russia signalled that the Nord Stream 1 pipeline would remain closed until Western nations lift sanctions on Moscow.

UK

The FTSE 100 rose 1.0% over the week.

Liz Truss became UK prime minister after beating Rishi Sunak in the contest for Conservative Party leader. The new prime minister announced that average annual UK household energy bills would be capped at £2,500 for the next two years. Businesses and public sector bodies such as schools would receive “equivalent support” to households — but only for six months. The measures will add circa £150 billion to UK debt, sparking a sharp sell-off in the British pound and rising UK bond yields. The price cap should reduce the headline rate of inflation by around 5% by the end of 2022. The UK will also restart fracking for shale gas and reform the energy market.

Just two days after inviting Liz Truss to become prime minister, Queen Elizabeth II passed away at the age of 96. She was the UK’s longest serving monarch with her reign lasting more than 70 years. She was automatically succeeded by King Charles III. The country is now in a period of national mourning lasting until the Queen’s funeral on Monday, 19 September.

US

The S&P 500 rose 1.1% over the week.

Fed chair Jay Powell reinforced recent hawkish comments from several FOMC members, saying that the central bank needed to act “forthrightly” to ensure high inflation did not become entrenched.

The ISM non-manufacturing index rose to 56.9 in August, far stronger than forecasts of 55.1 and compared to July’s reading of 56.7. The reading contrasted with a separate survey of the same sector published by S&P Global, which was revised lower to 43.7 in August from a preliminary reading of 44.1.

Canada’s central bank raised its key interest rate by 75bps to 3.25% and warned further increases are likely.

Europe

The FTSEurofirst 300 gained 1.1% over the week.

The European Central Bank (ECB) raised interest rates by 75bps to 0.75%. It also said it would start discussions in early October on shrinking its balance sheet. The ECB said that inflation “remains far too high and is likely to stay above target for an extended period”. ECB president Christine Lagarde reinforced this message, saying that reaching the bank’s “neutral rate” would take “front-loading [and] further hikes in the next several meetings of a magnitude and pace that will be determined meeting by meeting and on the data we will receive”.

German industrial output contracted 0.3% on a monthly basis in July, compared with 0.8% growth in June.

Germany unveiled a second support package for households and businesses, worth €65bn.

VNG, one of Germany’s biggest importers of natural gas, said it will request a government bailout after it was forced to absorb heavy losses caused by reduced gas deliveries from Russia’s Gazprom. VNG’s appeal comes weeks after Uniper, Europe’s largest buyer of Russian gas, was rescued by the German government. Sweden and Finland have also moved to provide government funding for utility companies struggling with sharply heightened collateral requirements on exchanges.

The reduction in gas supply means Germany is now using coal to generate up to a third of its electricity.

Japan

The Nikkei 225 rallied 2.0% over the week.

Japan stepped up its verbal support of the yen with Finance minister Shunichi Suzuki saying currency should be stable and reflect economic fundamentals.

Pacific ex Japan

Chinese exports disappointed, rising 7.1% year on year in August, compared with growth of 18% in July, as overseas demand flattened and a new wave of Covid-19 restrictions at home disrupted production and logistics.

Emerging Markets

India imposed a 20% surcharge on the export of certain types of rice in an effort to boost food security.

Bonds

The yield on the 10-year US Treasury bond rose 3bps over the week to close at 3.29%, while the yield on the 30-year bond touched its highest level since 2014.
Futures markets show investors think the Fed’s benchmark interest rate will climb to almost 4% by next March. In late July, the same measure showed expectations of less than 3.2%.

The yield on the 10-year German Bund closed the week at 1.69%, a rise of 13bps over the week, while the two-year Bund yield surged to 137%, its highest level since 2011.

10-year UK Gilt yields jumped 17bps to 3.09% – yields were below 2.0% in early-August.

Currencies

The British pound slipped to $1.14, its lowest level against the US dollar since 1985, while the euro dropped to a 20-year low as Russia suspended all gas deliveries through its Nord Stream 1 pipeline. Meanwhile, the Japanese yen touched a 24-year low against the greenback.

Commodities

Oil prices fell below $90 as recessionary fears outweighed Opec+’s decision to cut crude supply.