Geopolitical tensions rose in Asia after China carried out military exercises close to Taiwan in protest at US House of Representatives’ speaker Nancy Pelosi’s visit to the island.

UK
The FTSE 100 gained 0.2% over the week.

The Bank of England raised rates by 50bps to 1.75%, marking its largest rate rise in 27 years and taking rates to the highest level since the financial crisis. The Bank also downgraded its UK economic forecast, saying the UK faces a protracted recession starting in the fourth quarter of this year, while inflation is likely to reach 13% by year-end.

US
The S&P 500 rose 0.2% over the week while the tech-heavy Nasdaq jumped 2.2% to hit a three-month high.The US economy added 528,000 jobs in July, accelerating from the 398,000 jobs added in June. The stronger-than-expected data caused traders to start pricing in a larger rate increase at the next FOMC meeting in September. Expectations are now that interest rates will stand above 3.6% by the end of 2022, up from 3.4% before the release of the report and compared to a current range of 2.25-2.5%. The unemployment rate moved down to 3.5% in July, matching a half-century low last reached just before the start of the pandemic in 2020.

Federal Reserve officials moved to dismiss market speculation that the US central bank would start cutting rates early next year in response to an economic slowdown. St Louis Fed president James Bullard said that US interest rates would “probably have to be higher for longer” to reduce inflation from 40-year highs, while San Francisco Fed president Mary Daly said that the central bank was “nowhere near” done with its fight to cool inflation, which continues to run at 40-year highs. The Institute for Supply Management’s manufacturing purchasing managers’ index slipped to 52.8 in July, its lowest level since June 2020. The Institute for Supply Management’s non-manufacturing index rose to a stronger-than-expected reading of 56.7 in July, the highest level in three months and confounding expectations of a slowdown.

Europe
The FTSEurofirst 300 slid 0.5% over the week. German retail sales slumped 8.8% in June compared with the same month in 2021. The decline is the steepest since records began in 1994.

Japan
The Nikkei 225 rallied 1.3% over the week.

Emerging Markets
Turkish president Recep Tayyip Erdoğan and Russian leader Vladimir Putin pledged to deepen the economic and energy ties between their countries during a meeting in Sochi. A Turkish official also confirmed that Turkey had agreed to begin paying for Russia’s gas in roubles.
Argentina’s new economy minister Sergio Massa pledged to bring fiscal order to the country, vowing to fund the budget through deficit reduction or private-sector borrowing, rather than by printing money, as well as building dollar reserves and “reworking” state subsidies in order to narrow the country’s large deficit and meet budget targets. Bond prices have rallied since Massa was selected by President Alberto Fernández to oversee a new department dedicated to economic, manufacturing and agricultural policy. Investors appear more optimistic about Massa’s ability to shepherd reforms to bring down inflation than his predecessor who lasted just 24 days in the job.

In Poland, banks are warning of a hit to profits after the government placed a moratorium on mortgage repayments. Borrowers will be allowed to suspend payments for eight months, split between this year and next. Hungary recently announced a €2bn windfall tax on lenders and energy companies, while Romania is also considering relief from mortgage payments for households that are hardest hit by inflation.

Bonds
US bond yields rose sharply after the US jobs report. The yield on the 10-year US Treasury bond closed the week up 16bps at 2.85%, while the yield on the two-year note surged to a two-week high of 3.25%. As a result, the yield curve between two- and 10-year bonds became the most inverted since August 2000.

The yield on the 10-year German Bund closed the week up 14bps at 0.95%.