Market Overview – 03/08/2022

Global stock markets ended the month of July on the front foot with the MSCI All Country World Index rising 3.3% last week. The main macroeconomic event was the Federal Reserve’s (Fed) latest policy meeting, which saw rate-setters deliver a widely expected 0.75% increase in the base rate. The move marked the second meeting in a row the Fed delivered a 75 basis points hike and leaves the Federal Funds Rate at 2.25%-2.50%.

US stock markets outperformed last week, with broad-based benchmarks gaining around 4.3%. The absence of any fresh hawkish rhetoric from Fed chair Jerome Powell caused bond yields to extend their recent decline, with the US 10-year Treasury bond falling from 2.75% to 2.65% on the week. The latest central bank update and a softening in economic data means the market is now expecting the Fed to slow or stop its rate hikes sooner than previously thought.

Last Thursday the US advance GDP release for Q2 showed a 0.9% contraction quarter-on-quarter. Coming after a decline in the first quarter, the data confirmed the US is in a technical recession, defined as two consecutive quarters of negative growth. That said, broader definitions for a recession, such as a fall in personal income or lower employment are yet to be met. Looking at the bond market, the two-year/10-year part of the US Treasury yield curve remains inverted, seen by some as a harbinger to recession.

Corporate earnings season is now in full swing and overall, the results have been pretty solid. Compared to previous quarters the ratio of companies beating estimates compared to those missing has declined, but on the whole the updates have not been as bad as some feared. However, it is important to remember that these results are backward looking and therefore any recent softening in economic activity is more likely to be seen in Q3 and Q4 updates.

UK growth to lag

Economic growth in the UK is expected to be slower than its peers next year, due to stubbornly high inflation and a fall in household spending following interest rate rises, according to the IMF. A predicted further rise in inflation towards the end of the year when the energy price cap is lifted will weigh on the 2023 figures, with inflation set to peak at 10.5% at the end of this year. The estimate for next year’s growth of 0.5% puts the UK at the slowest pace among the group of seven advanced economies. The outlook is brighter for the current year however, with a projected expansion of 3.2%, putting it second fastest in the group of its peers.

Last week UK stock benchmarks moved further into the green for the year, adding just over 2%. The pound also gained, appreciating to 1.22 versus the US dollar from 1.20. The UK 10-year gilt yield fell by eight basis points to end Friday at 1.86%. This week the Bank of England (BoE) rate decision is the key event for UK assets, with the Monetary Policy Committee expected to raise the base rate by 0.5% to 1.75% on Thursday. Should the BoE hike by 50 basis points then it would be the largest interest rate hike delivered by UK rate-setters in 27 years.

European shares traded broadly inline with global benchmarks last week, rising just over 3%. German indices lagged a little but French, and in particular Italian, bourses outperformed, with the latter adding over 5.5% on the week. Core eurozone bond yields fell on concerns surrounding global growth and the threat of Russia reducing its gas supplies into the continent.

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