Russia and Ukraine signed a deal allowing Ukraine to resume grain exports as part of efforts to alleviate a growing global food crisis. The following day Russian cruise missiles hit the Ukrainian port of Odesa.  

UK

The FTSE 100 gained 1.1% over the two weeks.

The UK economy unexpectedly grew in May, with GDP expanding 0.5%. GDP data for March and April were also revised higher.

UK inflation hit a fresh 40-year high of 9.4% in June.

The next UK prime minister will either be Rishi Sunak or Liz Truss, after all other candidates were eliminated. The decision is now in the hands of members of the Conversative Party, with results expected by 5 September. Former chancellor Rishi Sunak wants to keep taxes high to pay for debt accrued over the pandemic; current foreign secretary Liz Truss wants to cut taxes, including the recent 1.25% rise in national insurance which has been earmarked for health and social spending and the planned increase in corporate tax.

Andrew Bailey, Bank of England governor, signalled that a 50-basis-point hike in UK interest rates in August was a possibility. This would be the largest hike since 1995.

The volume of retail sales declined for the third consecutive month in June, falling at an annual rate of 1%.

The flash estimate of S&P Global UK composite purchasing managers’ index (PMI) dropped to 52.8 in July from 53.7 in June and the lowest reading since February 2021.

US

The S&P 500 rallied 1.6% over the two weeks, while the Nasdaq rallied 1.8%.

US inflation rose to a fresh 40-year high of 9.1% in June.

The Core PCE index, the Fed’s preferred measure of inflation, eased to 4.7% in May from 4.9% in April and the lowest level in six months.

The Bank of Canada unexpectedly raised rates by 100bps to 2.5%, the highest level since 2008. The central bank said it wanted to “front load” rate rises as inflation had proven “higher and more persistent” than it had flagged in its April monetary policy report.

S&P Global’s US composite PMI fell to 47.5 in July from 52.3 in June, signalling a contraction in activity for the first time since June 2020. Manufacturing activity eased to 52.3 in July from 52.7 in June, but services slumped to 47 in July from 52.7 in June.

US retail sales rose by a stronger-than-expected 1% in July.

The University of Michigan’s consumer sentiment index indicated that medium-term inflation expectations had dropped to a one-year low of 2.8% from 3.1% in the previous report.

In company news: Goldman Sachs warned of job cuts, while Apple and Alphabet also said they were scaling back their hiring plans; Johnson & Johnson cut its full-year sales and profit forecasts because of the stronger dollar; Netflix rallied after subscriber losses were less than had been feared; Tesla profits jumped, despite production disruptions.

Europe

The FTSEurofirst 300 advanced 2.0% over the two weeks.

The European Central Bank raised rates for first time since 2011. The 50-basis-point (bps) increase was larger than the ECB had signalled and takes rates to zero – they have been negative since 2014.

The ECB also unveiled a new “Transmission Protection Instrument”, aimed at tackling a widening in spreads of countries which will be especially negative affected by rising rates. The TPI gives the ECB discretion to buy government debt from eurozone countries where “deterioration in financing conditions [are] not warranted by country-specific fundamentals”, although nations will need to comply with the EU’s fiscal rules, have a sustainable debt trajectory and make sure they follow any commitments made to access post-pandemic EU funds.

Mario Draghi resigned as Italy’s prime minister following the unravelling of national unity coalition government.

Gas started flowing through the Nord Stream 1 pipeline again following its closure for maintenance. However, EU countries remain divided over blanket targets to cut gas use ahead of winter. While Germany backs the plan, it is opposed by Spain and Italy among others.

The flash estimate of S&P Global’s eurozone composite PMI fell to a 17-month low of 49.4 in July from 52.0 in June. Manufacturing activity fell more than expected to 49.6 as factories cut back on procurement after they experienced “the largest build-up of unsold finished goods ever recorded by the survey”, caused by lower-than-expected sales and weaker order books. Services sector activity slid to 50.6 with tourism and recreation, media and transportation showing either stalled growth or outright declines.

Eurozone consumer confidence fell to a record low of -27 in July from -23.8 in June.

The EU has lifted its inflation forecasts and cut its growth forecasts for this year and next. Eurozone inflation is now predicted to hit 7.6% in 2022, compared with the previous forecast of 6.1%. While inflation is predicted to be 4% per cent in 2023, this is significantly higher than the prediction of 2.7% in the Spring. Eurozone GDP growth is expected to be 2.6% this year and 1.4% in 2023.

Spanish banks fell sharply after Spain’s socialist government imposed a windfall tax on their profits. The government also targeted utilities that do not use gas but benefit from rising gas prices.

 Japan

The Nikkei 225 jumped 5.3% over the two weeks. Shares were supported by news that the Bank of Japan was maintaining ultra-low interest rates. It also signalled its commitment to keep policies accommodative.

Pacific Basin

China’s GDP expanded 0.4% year on year in the second quarter, well below consensus forecasts for 1.2% growth. The slowdown reflected the two-month lockdown in Shanghai, which took full effect in April. The weak data prompted speculation that the Chinese authorities would unleash additional stimulus funds to boost growth. COVID-19 infection levels have surged again over July, with 31 cities, including Shanghai, under full or partial lockdowns, affecting just under 250 million people.

Australia launched a review of the Reserve Bank of Australia after the central bank was criticised for delaying interest rate rises as inflation took hold.

Emerging Markets

Russia’s central bank cut interest rates by 150 bps to 8%, citing a slowdown in inflation and an improved GDP forecast. The move was unexpected and suggests the central bank believes Russia is weathering the storm of western sanctions imposed over its invasion of Ukraine better than it had feared.

South Africa’s central bank implemented its biggest rate hike in 20 years, raising rates by 75 bps to 5.5%. Inflation jumped to a 13-year high of 7.4% in June and is likely to remain above target for the rest of this year.

Bonds

The yield on the benchmark 10-year Treasury fell 31 bps to close at 2.79% after early estimates suggested a contraction in US business activity in July. Earlier stronger-than-expected US inflation data for June had caused the yield curve to become the most inverted since 2000, with the two-year note trading 22 bps above the 10-year bond.

The yield on Germany’s 10-year Bund also dropped 31 bps to close at 1.04%, having briefly traded back below 1.0%. The yield spread between German and Italian 10-year debt rose to 230 bps, nearing its recent three-year high.

Currencies

The euro hit parity with the US dollar for the first time since 2002.

Commodities

Oil, as measured by Brent crude, fell below $100 a barrel amid fears of a global economic slowdown.

Copper fell below $7,000 a tonne for the first time since November 2020.