Weekly Comment: Stocks gain as energy support packages are announced

Global equities advanced in the first full trading week of September, with the MSCI All Country World Index rising 2.7%. Good news on the inflation front came in the oil price falling to its lowest level since Russia’s invasion of Ukraine and the Federal Reserve’s latest Beige Book release, while the announcement of large fiscal packages in the UK and across Europe, aimed at reducing soaring energy costs, will also apply downward pressure on prices.

Liz Truss wasted little time in announcing an estimated £100bn package to ease the burden of the energy crisis just days into her tenure as UK prime minister. The move will limit household average annual bills at £2,500 for the next two years but the help for businesses was less generous, covering only the next six months. The package will be funded by government borrowing and there was a notable increase in UK government bond yields last week, with the 10-year gilt increasing by 17 basis points to 3.09%.

The state intervention does also pose an issue in that there is now little incentive to reduce usage despite soaring costs and longer-term this could prove inflationary. However, in the short-term it will prevent inflation gauges, such as the Consumer Price Index, from rising as far as they would have done if no action was taken. This may allow the Bank of England a greater degree of flexibility in the coming months, as they could adopt a less aggressive hiking path for interest rates in their bid to curb rising inflation.

This flexibility is a welcome development for the central bank considering the softening in economic activity in recent months. The latest UK GDP figures showed a stagnant economy in the three months to July as the data fell short of fairly modest growth expectations.

UK large-cap benchmarks added around 1% last week, as the more domestically focused mid-cap indices outperformed, rising by around 1.8%. Although it bounced off its lows into the weekend, the pound fell further against the US dollar, dipping below the 1.15 level at one point to trade at its lowest level in decades. Sterling ended the week around the US$1.16 level.

ECB delivers record hike

The European Central Bank announced a record 75 basis points increase in its key interest rates as it delivered its strongest action yet to halt soaring inflation. After a 50 basis points increase at its previous meeting both the deposit rate and refinancing rate stand at their highest levels since 2011, at 0.75% and 1.25% respectively. Core government bond yields rose by a similar amount to their UK counterparts on the week, with the German 10-year bund yield up 17 basis points to 1.69%. The hike also provided a boost to the euro and the single currency moved back above parity against the US dollar following the news.

There was also a large fiscal support package announced by Germany, with chancellor Olaf Scholz promising €65bn for households and businesses to help with their energy bills. Unlike the UK though, this will be funded from a tax on electricity companies and a planned corporation tax. The news was well received by equity investors and Eurozone stock benchmarks rose by around 0.7% on the week.

Reports of a successful counterattack by Ukrainian forces in recent days has brought some positivity to Eurozone assets. Approximately 3,000 square km of Ukrainian territory has been recaptured, although the Kremlin has struck back with artillery and missile strikes. A strike on Ukraine’s second-largest thermal power plan caused a total blackout in Kharkiv.

US equities outperformed their UK and European peers last week, breaking a string of recent weekly losses to rise around 3.7%. The move was supported by the Fed’s latest Beige Book indicating the price increases are moderating in nine of its 12 districts. Lower fuel prices, alleviated cost pressures -especially freight shipping rates – and declining prices for copper, lumber and steel were all noted as factors easing inflationary pressures.

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