This week saw volatility pick up across major asset classes as US and UK central banks raised interest rates. The moves in markets were extreme, in many cases to levels we haven’t seen in years. I will apologise in advance for the frequent use of phrases such as “the highest since…” or “the largest since…”.
All eyes were focused on the US and UK central banks who both met this week to set their key interest rates. Following a two-day meeting, the US Federal Reserve raised interest rates by 0.5%. Ahead of the raise, US equity markets sold off heavily on Tuesday, however, this fall was reversed on Wednesday as investors responded positively to comments from Fed Chair Powell who said the US Fed were not contemplating raising rates by 0.75% at the next meeting. By Thursday, the US market rolled over once more, falling over 3%, with the tech-heavy Nasdaq index falling over 5%, its largest daily fall since 2020. The move coincided with a big sell off in fixed income markets, with yields on the 10-year US government bond rising above 3%, at one point touching 3.1% on Thursday, the highest since 2018. The moves in US equities have largely been driven by falls in valuations, as opposed to concerns about earnings. At both a consumer and housing market level, the indicators are very strong, with consumer bank accounts flush with cash (at an aggregate level) and house prices reaching new highs.
The Bank of England (BoE) followed the US’s lead and increased interest rates, although only by 0.25%, taking the rate back up to 1%, the highest level since 2009. Accompanying the rise was commentary from the BoE which said UK inflation could hit 10% this year. There were downgrades to economic growth forecasts and acknowledgement that consumer confidence was falling as real incomes were being squeezed. The biggest loser on the news was sterling (GBP), which fell versus most major currencies, including dropping over 2% against USD, reaching the lowest levels since July 2020.
China’s zero-Covid policy has exacerbated the current supply constraints and has caused concern among foreign companies operating in China. The EU Chamber of Commerce in China published their most recent survey which showed twice as many European companies compared to the start of the year were considering moving investment out of China. The lack of a roadmap for how to manage with COVID in China was causing increased uncertainty for businesses. Staying with China, the services sector PMI data was weak as the lockdowns in Shanghai, the financial hub of China, acted as a major drag.
Oil prices moved higher once again this week, as reports of the EU phasing in bans on Russian oil imports intensified. The EU imports 2.5 million barrels of oil a day from Russia and any ban will lead to a supply squeeze as the EU has to buy the oil elsewhere. The higher commodity environment has benefited oil and gas companies, with Shell posting bumper results this week. At a portfolio level our allocation to a resources fund continues to be a strong contributor this year, with the fund rising this week, bucking the general trend in equity markets.
As is customary, the first Friday of the month saw the release of US Non-Farm Payrolls jobs data. The US economy added 428,000 jobs in April, comfortably ahead of consensus, and highlighting the continued strength in the labour market. US wage growth was 5.5% year-on-year, still below current inflation levels, but strong wage growth nonetheless when compared to history.
The challenges facing multi-asset investors continued this week with equities and bonds selling off. At times like this it can be difficult to insulate portfolios from the market volatility. However, recent changes to portfolios have helped, including our recent increase to USD exposure.
Andy Triggs | Head of Investments, Raymond James, Barbican
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.