The UK economy played second fiddle this week to football and athletics. The England women’s national football team dispatched Sweden on Tuesday and now face Germany in the final on Sunday evening. On Thursday the Commonwealth Games kicked off in Birmingham. It is the third time the UK has hosted the games, which sees 72 countries take part with over 5,000 athletes competing.
The US stock market has been first out of the blocks this week, posting some big moves towards the end of the week. The tech-heavy Nasdaq index rose over 4% on Wednesday and followed this up with another strong showing on Thursday, rising over 1%. Bond markets have also rallied this week, picking up the baton from last week and carrying on with the trend of falling yields (and therefore rising prices). The drivers of these market moves have been centred around the US Fed and the potential for a shift in their approach to inflation. The US Central Bank met on Wednesday and announced a much anticipated 0.75% increase to interest rates, however, it was their comments that caught the eye and helped support markets. For the first time this year they recognised a “softening” economy, which has been driven be a slew of weak US economic data. The interpretation here is that the US Fed’s tightening actions so far are now feeding into slowing demand and as such inflation may fall in the near term without the need for continuing aggressive interest rate hikes. If concerns about inflation and higher interest rates have been the major headwind for asset prices this year, it makes sense that asset prices may rebound if these concerns begin to subside.
Staying with the US the country fell into a technical recession following the release of Q2 GDP data. Weaker than expected Q2 GDP showed the economy contracted in real terms. Two consecutive quarters of real GDP contraction is the technical definition of a recession. The White House has dismissed that the US is in a recession, with Janet Yellen stating, “when you are creating almost 400,000 jobs a month, that is not a recession”. The market took the news in its stride, with the weak data supporting the view that the US Fed may indeed ease off on interest rate hikes.
There was a false start this week as Russia quickly cut gas supplies to Germany, days after flows had resumed following a period of maintenance. The restrictions kicked in on Wednesday, meaning there is now only 20% of the volume of gas flowing into Germany from Russia compared to the start of the year. This cut in supply was predicted by many European politicians, but Germany is concerned this reduction in gas will mean they are unable to fill their reserves sufficiently ahead of winter. Energy rationing has already begun for both households and businesses but could lead to industries shutting down over the next few months. Germany could certainly be on the tip of a recession.
Eurozone data showed the area had grown by 0.7% in Q2, while inflation hit a new record high of 8.9%. The stronger than expected growth, coupled with elevated inflation will put pressure on the European Central Bank to continue to move interest rates into positive territory over the coming months.
Company earnings on both sides of the pond continued in earnest this week. Natwest produced much better than expected results as the bank benefitted from higher interest rates and announced a special dividend, with the shares rising 7% on Friday morning. Shell also produced strong results, posting record profit as high oil and gas prices boosted revenues. The company announced a $6bn share buyback programme. Positive results from US firms Apple and Amazon were somewhat offset with poor results from Meta (Facebook) who announced their first ever revenue drop driven by poor advertising revenue.
In these uncertain times we once again continue to focus on diversification and ensuring portfolios are not overly exposed to any particular theme or narrative. The last few weeks have once again highlighted how markets can whipsaw, with leaders and laggards rotating and market narrative shifting. We believe slow and steady is the best way to win the race.
Andy Triggs, Head of Investments & 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.