Central banks have been in the spotlight this week, with interest rate rises in the US and UK leading to further volatility across all asset classes.
After last week’s US inflation data surprised to the upside, all eyes were firmly on the US Fed’s meeting on Wednesday. In the run up to the meeting equities and bonds saw sharp price declines as markets digested the likelihood of a more hawkish approach. As expected, the US Fed raised interest rates by 0.75% – the highest single increase since 1994, taking US interest rates to 1.75%. There was an immediate relief rally following the meeting, although these gains were given up on Thursday’s trading session, with equities once again falling. The impact of higher interest rates is likely to cool the red-hot US housing market, with the popular 30-year fixed mortgage rate now above 6%, up from around 3.25% at the start of the year.
The Bank of England (BoE) followed suit on Thursday, increasing interest rates by 0.25%. This was the fifth consecutive interest rate rise by the BoE and takes rates to a 13-year high of 1.25%. The committee voted 6-3 in favour of a 0.25% rise, with three members voting for a 0.5% increase. With inflation already at 9%, the BoE have now raised their forecasts and predicted it will raise to 11% heading into winter. UK households are already bracing themselves for the projected increased energy prices. We’ve previously spoken about the surge in inflation being partly due to the continued Russia -Ukraine war, however there are domestic factors, including the tight labour market and the pricing strategies of firms. With UK unemployment falling to 3.8% and the number of vacancies rising to almost 1.3million, workers are demanding greater wages or moving to higher paid jobs. Employers are forced to pay bonuses to retain staff or hire new ones.
The impact of higher energy and food prices is a major headwind to consumers, and this was highlighted by a profit warning from ASOS, who said inflation is deterring consumers from purchases. The news sent the share tumbling by over 30%, leaving the stock price down over 60% in 2022.
The challenging environment of bonds and equities selling off together continued for much of the week. Bond markets experienced large moves with the US 10-yr Treasury yield reaching 3.49%, the highest level in over 10 years, before falling back later in the week. UK and European government bonds also saw large spikes in yields, providing further pain for bond holders. At an equity level, the US S&P 500 entered bear market territory, characterised as a drawdown of more than 20% from recent highs. To name a few stocks, PayPal has now tumbled almost 75% from its record high last July, Meta (Facebook) has fallen 57% from its 2021 high and Netflix remains the S&P’s worst performer down 72% year to date. These highly valued growth stocks have been badly punished as valuations have tumbled on the back of higher interest rates. In Netflix’s case they have also struggled to pass costs onto subscribers, with subscribers cancelling memberships at an alarming rate.
This has been a very difficult week to be invested in markets. As investors it can be challenging to not allow emotions to dominate decisions in times like this. It’s vital that we fall-back on our investment process and experience, while also maintaining a long-term investment time horizon. One only has to look back to March 2020; the world felt like a very gloomy place, yet it provided a great investment opportunity for investors.
Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst
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