There seems only one place to start and that is with UK politics, following the dramatic course of events this week, which led to Boris Johnson stepping down as the Conservative party leader. A string of resigning MPs from Tuesday evening through to Thursday morning effectively made Johnson’s role untenable and forced his hand. It will be interesting to watch the race for the leadership role unfold over the coming weeks. Bookmakers’ early favourites for the role include Ben Wallace, Rishi Sunak, Tom Tugendhat and Penny Mordaunt.
The rather muted reaction in UK assets may have been a surprise to some, however, the likelihood is that a political uncertainty discount had already been applied to UK assets. Sterling actually rallied against the USD on Thursday, while UK equities advanced.
US equities have been strong this week, with the market rising for four consecutive days (Monday – Thursday), matching its best winning streak this year. US bond yields have moved higher this week, with the 10-yr US treasury yield back around the 3% mark, which is still 0.5% lower than the recent highs. The US 30-year mortgage rate fell to 5.3%, down from 5.7% a week ago, which is the largest drop since 2008. While the rate is still much higher than it was at the start of the year, it should provide some support to the housing market and make affordability better than it has been over the last month. US Mortgage applications have recently ticked up, although they are still 17% below last year’s levels. One would expect that the tighter mortgage conditions compared to 2021 and higher house prices would lead to slower house-price growth going forward
Global growth fears continue to hang over markets this week and it has put downward pressure on commodity prices, which have been in free-fall since mid-June. US Crude oil briefly dipped below $100 a barrel this week, while Brent crude oil prices dropped a staggering 11% on Tuesday. Economically sensitive copper remains under pressure and is down 20% over the last month. The weaker commodity prices should provide some much-needed relief on inflationary pressures.
However, EU Natural Gas has bucked the recent falls in commodities and has advanced on fears of Russia cutting supplies to Europe. The Nord Stream pipeline is due to shut for approximately 10 days due to ‘seasonal maintenance’, however there are fears the pipeline will not reopen. Germany has begun to ration hot water, dimmed its streetlights and shut down swimming pools, with all households being urged to cut energy use.
US Non-Farm Payroll data, released on Friday, came in stronger than expected with 372,000 jobs added to the US economy in June. The unemployment rate remained at 3.6%. The news will likely empower the US Fed to continue to raise rates in the near term, and this view was reflected in bond markets with yields rising (and therefore prices falling).
There was sad news to finish the week, with ex-Japanese Prime Minister Shinzo Abe being shot and killed while giving a speech. Mr Abe had a strong reputation for his Abenomics policies which included increasing the nation’s money supply, increasing government spending and economic structural reforms aimed at reviving the stagnant economy.
The market moves this week once again pointed to the importance of diversification. The more growth focused equities, including technology, have been some of the stronger performers over the past seven days, while resources, infrastructure and gold, which helped prop up the portfolios in the first half of the year, have lagged.
Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst
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