This week has ushered in a new month, and with it a change in market sentiment. After a very strong month of July, equity and bond markets have gotten off to a rocky start in August. It’s also been a tough week for UK Prime Minister Rishi Sunak, whose private home was draped in black fabric by Greenpeace protestors as they reacted to the news of Britain committing to hundreds of new North sea oil and gas licenses.
Staying with the UK, the Bank of England (BoE) met on Thursday and announced a further 25bps (0.25%) rise to interest rates. There was certainly more of a split decision with this vote as six of the nine members voted for the 25bps increase, two members voted for a stronger 50bps increase whereas Swati Dhingra, as usual, was the odd one out, voting for a pause in rates. UK rates are now at a 15-year high of 5.25% with extremely hawkish commentary coming from Governor Bailey. He held firm in a message that the UK population will not want to hear; the bank rate will remain “sufficiently restrictive” in order to reach the inflation target of 2%. The positive is that investors now believe the peak in interest rates will be 5.75%, a month earlier this expectation was at 6.5%. A further 0.25% rise is expected at the next meeting in September.
The housing market is interlinked with interest rates, and it was no surprise therefore to see UK house price data highlight falling property values. Nationwide, the UK leader in mortgage lending, reported average house prices was down 3.8% in July (year-on-year). Mortgage rates remain high which is impacting potential homebuyers. To put it into perspective, first time buyers on a 6% rate would see mortgage payments account for approximately 43% of disposable income.
Eurozone inflation for the month of July (year-on-year) fell to 5.3%, in line with expectations and below the previous month’s figure of 5.5%. Fabio Pancetta, a European Central Bank (ECB) member, spoke this week, making the case for a pause in interest rate hikes. The ECB is due to meet next month, and investors believe a pause in rates could be on the horizon as Pancetta argued sustaining rates at the current level would be enough to see inflation fall to the 2% target without “hurting the economy or jeopardising financial stability”.
The tough start to August was kicked off by the surprise downgrade of US debt by credit ratings agency Fitch. The downgrade from AAA to AA+ was driven by “a steady deterioration in standards of governance”. Investors have previously considered US government debt to be one of the best safe haven assets, so this downgrade could impact this, although we think this is unlikely. Further downside pressure was put on US bonds as it was announced the US was planning to ramp up issuance (increase supply) following the extension of the debt ceiling. There is a risk that funds will be pulled from equities to purchase the new issue of government bonds and as such we saw equity markets suffer. The S&P 500 fell 1.4% on the day whilst the tech-heavy Nasdaq index fell 2% and this ripple effect crossed the waters as the FTSE 100 also closed down 1.38%. After a strong period in equities, it is natural to experience pullbacks and consolidation.
US Non-farm payrolls (NFP) were released this Friday afternoon with 187,000 jobs created, below market expectations of a 200k increase. The data release still signals a robust labour market however this is the second consecutive month that NFP has come in below expectations. The US Fed are likely to continue to measure the impact of the rate hikes on the economy, including the US inflation print next week. ahead of their September meeting. Until then, a pause or further increase in interest rates is anyone’s guess.
To round up the week, our key message is as important as ever. Maintaining a long-term investment mindset to markets best allows to take advantage of the short-term instability. We will continue to blend asset classes in portfolios and take advantage of new opportunities that arise.
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.