For most people this will have felt like just any other week, but as I sit here collecting my thoughts on what has happened, it feels like there has been a shift in market positioning and narrative. There were however some consistencies with previous weeks – elevated inflation – with UK CPI hitting 9.1% in May, a new 40-year high. Fuel prices are nearly 33% higher than May 2021, the largest annual jump in prices since 1989. This rise in inflation continues to raise pressure on households and intensifies demand for wage rises to offset higher prices.
Inflation aside, there were some different dynamics this week. Commodity prices, which have been on a tear this year, have been selling off aggressively. The falls have been broad based; wheat is down 13% over the past seven days, copper has fallen 11% and even oil is off over 10%. The reason for this is most likely due to the market pricing in a higher probability of a global slowdown/recession. In that environment, demand for commodities would fall and prices have adjusted to reflect this. It’s worth remembering the supply dynamics in the sector are still extremely tight, and that should be supportive of prices over the longer-term. Lower commodity prices, and in particular lower oil prices, may take some of the pressure off central banks as inflation may begin to moderate.
One of the biggest changes has been in bond markets. Jerome Powell, Chair of the US Fed, spoke to congress this week and declared that the Fed’s fight with inflation was “unconditional”. One might expect that bond yields would have risen (and therefore prices fallen) after such a statement, however, we saw global government bond yields collapse. The best explanation here again is that in a slowing global economy, inflation will begin to moderate, and the US Fed will not be able to take terminal interest rates as high. The yield on the 10-yr US Treasury bond was at 3.49% just 10 days ago but fell as low as 3% yesterday. Falling bond yields acted as a boost to the more growth focused equities, which have struggled this year. The tech-heavy Nasdaq index rallied around 1.5% yesterday. It’s interesting to see that the best performing funds in portfolios this week have been holdings in technology focused equities and UK government bonds, while the laggards have been holdings in resource equities – a complete role reversal compared to the last six months.
Economic data was generally weak, with US existing home sales falling to a two-year low. Housing affordability has tightened dramatically, as house prices have risen and mortgage rates jumped, so it is not a surprise to see housing activity slow. Purchasing Managers Index (PMI) data from Europe and the US came in well below expectations. US Manufacturing data was at the lowest level since June 2020 and services data was at a five-month low. The bad-news-is-good-news scenario seemed to be in play on Friday morning, with European and UK equities rising over 1% following the data releases.
This week once again pointed to the importance of diversification, with recent losers becoming winners and vice-versa. Our approach has always been to diversify across geography, style and asset class, tilting towards our preferred areas, as opposed to taking large portfolio positions. This is especially important at times of heightened volatility and uncertainty. By not losing in the short-term, you can win in the long run.
Andy Triggs, Head of Investments
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 investorsagain