It has been a busy week in the sporting calendar with the FIFA Women’s World Cup underway in Australia and New Zealand as well as the fifth Ashes Test taking place at the Oval.
Data releases have been quiet on the UK side this week; however, we did see results from some of the largest UK listed companies such as Lloyds Bank and Shell. Shell reported a 56% fall in profits to £3.9bn, a result of falling energy prices, leading to a slowdown of their share repurchase programme. Shell experienced record profits last year, benefitting from the then rise in energy prices after Russia invaded Ukraine leading to fears on supply shortages. The banking sector has been in the spotlight for much of this year, driven by the collapse of Silicon Valley Bank. It was pleasing to see Lloyds post a robust set of results which included an increase to their dividend. The bank did however set aside £660m as a provision for bad loans, highlighting that they do expect the economy to remain under pressure in the near term.
An event highly anticipated this week was the US Federal reserve meeting on Wednesday determining the next move of US interest rates. Rates were raised by 25bps as US Fed Chair Jerome Powell noted the economy “still needed to slow and the labour market needed to weaken” before we see a cut in interest rates. This is now the 11th rate hike in the last 12 meetings after we saw a pause in rates in June. Despite weaker than expected inflation data in July, the US Fed highlighted their determination to tackle inflation with this latest rise. The Fed may have felt vindicated with their decision on Thursday as both GDP data and unemployment claims data was much better than expected, highlighting the current resilience of the world’s largest economy. The belief that inflation will fall, employment will remain robust, and a recession will be avoided – the so called ‘soft-landing’ scenario – is increasing.
Following the US Fed decision, we saw the European Central Bank (ECB) also raise their benchmark interest rate by 25bps to 3.75%, the highest level seen over the last 20 years. ECB President Christine Lagarde usually follows the meeting with a hawkish tone and this meeting was no different. She claimed to want to “break the back of inflation and we will get there, come what may”. Eurozone inflation fell to 5.5% in the month of June, which was a positive sign, however the outlook for economic growth has begun to look challenging with countries such as Germany suffering slowing growth. Most recently Russia’s withdrawal from the Black Sea grain initiative could lead to a pickup in food prices, which would provide further inflationary pressures.
On Friday morning we saw the Bank of Japan (BoJ) hold interest rates at 0.1%, however they announced a loosening to their yield curve control policy. This is BoJ Governor, Kazuo Ueda’s, first major policy change since he took control in April this year and the effects saw the yields on the 10yr Japan government bonds rise to their highest levels since September 2014 (prices fall). Investors are now left to consider if this move is the beginning of more structural policy change and a potential tightening cycle.
After last week’s fireworks in markets, driven by lower-than-expected UK inflation data, this week has been relatively benign in markets. The latest rise in interest rates from the US could very well be their last, while it looks as though the ECB are towards the end of their hiking cycle as well. The key question as we head into the end of the year and beyond is whether the impact of the lagged effects of interest rate rises causes excessive economic damage. Time will tell, but we believe the best way to approach this is to include a range of assets in portfolios that can perform in a variety of market conditions and avoid being too concentrated in risks and exposures.
Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst
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