With the amount of news this week, it seems a long time ago since Monday’s bank holiday for the Queen’s funeral. Around 37.5 million UK viewers tuned in making it the biggest audience for a UK TV broadcast in history. It was a truly global affair, with an estimated 4 billion people around the world watching the state funeral.
We will begin with news hot off the press as Kwasi Kwarteng, the new Chancellor, delivered the mini budget to Parliament this morning. Naming it a mini budget could undermine the extent of the budget as it saw the biggest tax cuts since the 1980s. Key moves to outline area 1.25% rise in national insurance to be reversed, the 45p tax rate for top earners over £150,000 to be abolished, planned rises for corporation tax from 19% to 25% to be scrapped and the level at which house-buyers begin to pay stamp duty to double from £125,000 to £250,000. The Chancellor is looking to accelerate the UK economy by shaking up the supply side with reforms to regulations, boosting investment and increasing incentives to innovate, ultimately making the UK more productive. Brilliant or bonkers – time will tell. The initial reaction from UK markets showed the budget was not well received; equities fell, while yields on government bonds spiked dramatically with questions around how the tax cuts and additional spending would be financed. The 5yr gilt yield jumped up over 50bps (0.5%), the biggest daily rise on record. Sterling, already at low levels against the USD, fell by another circa 2%, falling below 1.11 – the lowest levels since 1985.
Thursday saw the Bank of England (BoE) deliver the expected 50bps rise in interest rates, taking rates to 2.25%. Five members of the nine-person committee voted for the decision but three voted for a more aggressive 75bps rise while the newest member of the MPC voted for a softer 25bps rise. The committee argued that acting faster now could help the BoE avoid ‘a more extended and costly tightening cycle later’. UK GDP is now estimated to fall 0.1% over the third quarter of the year marking a potential second consecutive quarter of decline. This would cement fears of the UK economy falling into recession sooner rather than the predicted landing time of 2023.
We have been speaking about the next US Fed move all summer and on Wednesday the expected 75bps rise was executed raising rates to 3.25%. US Fed Chair Jerome Powell has previously stated that achieving the much-desired soft landing would be very challenging. Hawkish commentary from the Fed Chair has led markets to price in higher rates for longer, which has led to pain in both the equity and the bond markets. The US S&P 500 is now down almost 22% for the year with mega cap technology and growth companies such as Amazon, Tesla and Nvidia falling between 1% and 5.3% for the week. US Treasury yields rose sharply, with the yield on the 10-yr Treasury note rising to over 3.75% on Friday, its highest level since 2010.
It has now been 211 days since Russia invaded Ukraine and the volume of the news covering this has seemingly quietened down, until further developments this week. President Putin ordered a partial mobilisation of Russians with military experience. The mobilisation means that military reserves will immediately be drafted into military services. However, over 1,300 Russians have been arrested for protesting, with Russian men fleeing across the border to countries such as Georgia and Finland. Despite quite sensationalist headlines over the mobilisation, markets were mainly focused on interest rate policy. That being said, we have seen further weakness in the euro, which plunged further below parity and is now at just 0.975 versus USD, a 20-year low.
It has been a tough week for investors and portfolios as equities and bonds sold off in tandem. That being said, these moments of heightened volatility and big moves often create opportunities for longer-term investors. As prices have fallen valuations of equity markets have become more attractive, while yields across the fixed income universe have risen, many to multi-year highs.
Nathan Amaning, Investment Analyst
Risk warning: 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.