Writing a weekly note on financial markets is, in many ways, like writing a weekly note on British weather. There are occasional bouts of great drama, when there’s too much to cover. But, unhelpfully for authors of the weekly summary, most weeks are filled with unremarkable greyness (not that we Brits let that stop us from remarking on it anyway).
As it happens, markets mirrored our weather this week. It was blue skies for the first half, but there was a marked change from Thursday onwards. The cause of this shift was the US Federal Reserve (“The Fed”), who indicated they might raise US interest rates a little sooner than previously expected. So now they expect a rate rise in 2023, instead of 2024.
This is exactly the kind of dull-sounding piece of financial information that may well have passed you by. But in the financial world, a shift by the Fed is the equivalent of a shift in the Gulf Stream: it will impact the returns on global financial assets for years to come.
It’s also another in a series of data points that form the big game that investors are watching closely: inflation. Specifically, after 30 years of falling inflation, have we reached a turning point? Is inflation about to start rising again? Or will it carry on falling into outright deflation? And if it is about to return, does it do so modestly, or are we heading back to the 1970s?
This matters greatly, because the kind of assets that perform well when inflation is falling, such as government bonds, are the kind of assets that will fare very badly if inflation starts rising again. Hence the avid interest: investors are trying to decide if it’s time to hop out of one kind of asset, and into its polar opposite. So any outbreaks of volatility we see in the coming weeks or months will, most likely, be caused by data suggesting one outcome is more likely than the other.
The Fed’s mild shift on interest rates was taken as a sign that inflation may well be coming back. So, big drama for the writers of financial headlines. But, actually, not that much drama in markets themselves. Markets have a way of sniffing out trends, and reacting to them, way before they reach the papers. So the corresponding drama for this particular piece of news most likely happened several months back, when government bonds dropped in price, and the prices of commodities and mining companies (which like inflation) rose sharply.
There was one notable move, however: The US dollar rose against sterling by almost 2% over the week – a big move in the often-glacial world of currencies. Under normal circumstances, this would mean that cooling beer in the heat of the Florida sun had just become more expensive. But, luckily, we’re not allowed to go to Florida, and – I’m pleased to report – a pint of warm ale under a grey sky remains unchanged.
Have a great weekend,
Simon Evan-Cook
(On Behalf of Raymond James, Barbican)
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.