There is being fashionably late to the party and then there is the European Central Bank (ECB). Despite high levels of inflation and other central banks looking to tighten policy, the ECB had refrained from joining the party and until recently intimated that interest rates would not rise in 2022. On Thursday, however, Christine Lagarde, head of the ECB, signposted that they will raise rates in July, for the first time since 2011, and end its bond-buying stimulus program. This is being done in an effort to cool inflation, which is running at multi-decade highs in the Euro area.
The shift in approach from the ECB led to European equities falling and European government bond yields pushing higher. The yield on the 10-year German bund now stands at 1.43%, compared to this time last year when it was still in negative territory, yielding -0.25%.
Chinese equities have been somewhat of a bright spot over recent weeks, rallying strongly as COVID lockdown measures appeared to be easing. However, Shanghai and Beijing now look to be going back into a form of lockdown and mass-testing as the country’s dynamic zero-COVID policy is implemented. This news pulled down Chinese stocks and will create a headache for Chinese exporters once more, just as the Port of Shanghai was reporting numbers almost back to normal. The average waiting time for tankers at the port had fallen by almost 37 hours. This trend could reverse with lockdown measures returning.
Elsewhere in China there were rumours circulating this week that Ant Group’s failed initial public offering (IPO) may be revived. This would mark a sea change in China’s regulatory policy, which has been a headwind for sectors such as technology over the last 12-18 months. Chinese headline inflation data was reported at 2.1% on Friday, coming in slightly below consensus. With inflation seemingly under control in the world’s second largest economy, there is scope for interest rates to be cut further and stimulus measures to be implemented to help support the economy. We are beginning to witness this already, and it often boosts not just China but the global economy as well, albeit with a 10–12-month lag.
On domestic shores, it was once again Boris Johnson who stole the headlines, with the PM narrowly surviving a vote of no confidence on Monday. Despite remaining in leadership there are still question marks over how long he will last, with comparisons being drawn to Margaret Thatcher and Theresa May, who both resigned, even after coming through their own votes of no confidence.
Oil prices have been rising this week, in part due to China’s reopening and an expectation of a pick-up in demand. This has led to UK petrol prices rising, with the RAC group estimating that it would cost over £100 to fill up a 55-litre tank. Higher petrol prices act as a tax on the consumer and will negatively impact consumption in other parts of the economy.
Although the weather has certainly improved over the last week, the same cannot be said for flights around Europe. EasyJet have axed 72 flights today just as Britons were hoping for a summer break. British Airways have also cancelled almost 100 short haul flights from its main base London Heathrow. This has been caused by massive staff shortages. This follows news of rail strikes occurring from June 21st to June 26th. The Transport Salaried Staffs Association said its members on East and West Midlands trains were protesting over pay, conditions and job security.
The last piece of data this week, and one of the most important was US inflation, which showed inflation has yet to peak, coming in at 8.6%, a 40-year high. The elevated figure is likely to do little to deter the US Federal Reserve from raising interest rates by 0.5% at their next meeting.
The current backdrop continues to be challenging, with heightened volatility across equities and bonds. That being said, volatility does create opportunities, and we will look to pivot the portfolios as opportunities present themselves. At the moment that means making the portfolios increasingly diversified by adding to some of the defensive elements of the portfolios, at low valuations.
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.