Market commentary – November 2022
10th November 2022
Gavin Jones See profile
Rishi Sunak has taken over as Prime Minister following Liz Truss’s resignation after 44 days in office. Mr Sunak has reappointed Jeremy Hunt as Chancellor, after he gave confidence back to the markets after attempts at a huge fiscal giveaway were poorly received by the financial markets and the Conservative party.
Markets seem to have welcomed the change in leadership and appointment of Rishi Sunak as Prime Minister following an extremely turbulent couple of weeks which saw the (not so) mini-Budget send domestic markets into panic as concern spread regarding the UK’s ability to manage its borrowing. Falling currency and gilt prices seen in the crisis have been rebounding with Sterling trading at almost $1.15 against the US Dollar at the time of writing from its $1.03 low at the end of September. In addition, government bond yields have retreated by around 125 basis points from their peak.
At its latest meeting, the Monetary Policy Committee (MPC) was faced with a difficult decision on the appropriate path for the policy rate. Inflation has now been above the 2% target for over a year, but it won’t have taken into account any measures that the delayed Autumn Statement – now set for Thursday 17 November – includes for example, substantial fiscal tightening such as tax rises and spending cuts. Ultimately, the MPC could only react to the information it had at hand, with the committee increasing the Bank rate by 0.75% to 3.00%, as widely predicted. Although this is the highest rate for almost 14 years, putting it into an historic context, from 1971 to 2022, the interest rate in the UK averaged over 7% reaching an all-time high of 17% in November 1979 and a low of 0.10% in March 2020. It would seem despite the recent rate rises, we are still in an era of historically low interest rates.
The war in Ukraine provides ongoing risk to the Eurozone’s post pandemic economic outlook. Whilst the EU countries most reliant on Russian gas – Germany and Italy have almost full reserves, meaning that there should not be shortages this winter, if the war continues a solution will need to be found next year. With COP27 going on this week, it is certainly a strong incentive to implement more renewable energy sources.
Elections in Italy in September have led to Giorgia Meloni, leader of the ‘Brothers of Italy’ party taking office. She is the first ever woman to be the Italian premier and is head of the most right-wing party since the Second World War. After Brexit there were a number of European right-wing parties calling for their countries to also exit the EU, most notably Marine Le Pen in France. In what is seen as a moderate move by the Italian coalition they have ‘full support’ for European integration in the context of the country’s loyalty to NATO and the Western alliance. It is expected however for Italy to push back against closer political and monetary ties for the union.
The midterm elections took place on Tuesday and will set the scene for the balance of political power over the next two years in the US. The latest results at the time of writing suggest that Republicans have taken control of at least the House of Representatives which will prevent the Democrats from passing any purely democrat legislation. The Senate is still a coin toss between the two parties.
Whilst there has been the appearance of political alignment over the last two years between the US President, Senate and House of Representatives, which were previously all Democrat, the day-to-day reality has been far less united. Given the Democrat’s wafer-thin majority within the Senate, moderate Democrat Senators have been hugely influential in watering down policies over the last two years.
A divided Government will mean that the President is limited, in practice, to executive powers and only using Congress for measures that have the agreement of both parties. Budget Bills could prove to be particularly contentious with Congress needing to decide how to deal with the US budget deficit. Should a split Congress threaten not to raise the US debt ceiling, this could cause a broad market concern over the US economy and US dollar as we have seen several times in the past.
China continues as somewhat of an outlier in the global community. In the middle of October, the 20th National Congress of the Chinese Communist Party confirmed President Xi Jinping’s third term in office, as was expected. Despite changes to the wider leadership, there will be a continuation of policy with the zero-Covid strategy continuing despite the economic harm associated with Covid restrictions.
Against a challenging economic backdrop, with headwinds from slowing global demand and ongoing property market woes, actions by China’s policy makers suggest a desire to maintain stability for both the economy and its financial markets.
There are undoubtably challenges for many resource-export-led Emerging Market countries such as Brazil, Indonesia and South Africa having experienced the pandemic and a rapidly strengthening dollar they now face a recessionary global economic outlook and the risk of weaker commodity prices.
In the UK, the vast increase in spending proposed by former Chancellor Kwasi Kwarteng resulted in markets sharply repricing interest rate expectations -, at one point pricing in a peak in base rates of over 6%. This was fuelled by the expectation that the Bank of England would have to raise rates aggressively to counteract the inflationary impact of the extra stimulus over the medium-term. In portfolios, we saw this impact the Inflation Linked Gilt fund with further falls in value. The fund has seen greater falls in value but forms a smaller part of portfolios. Currently the fund has fallen just over 20% since the start of the year, but after the mini budget there was a further dip of 10%, with a subsequent recovery as the growth plan measures were rolled back.
After intervention by Jeremy Hunt and the appointment of Rishi Sunak as Prime Minister however, markets have deemed that a lower peak interest rate is appropriate, now below 5%. With economic effects of rising interest rates, including falling house prices starting to be seen in statistics, the Bank rate may not need to rise even as high as this. Some economic commentators are even suggesting rates peaking at 4% may be sufficient to pull inflation back towards the 2% target.
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