Good morning,

Global equities in euro terms are now almost 10% higher from their low of 20^th June. Whilst this does make the year-to-date returns a little bit more palatable for investors, there is still likely to be some difficult investing terrain ahead. The ECB hiked back to the 0% level last week, but Friday’s PMI release shifted future rate expectations downwards. Therefore, despite a relatively surprising move higher in interest rates, bond yields moved lower (and prices higher) by the end of the week. This doesn’t match the conventional theory. However, this can be explained by the fact that investors shifted to the view that ECB will have to put the brakes on interest rates hikes as the spectre of a recession in the single currency bloc looms ever larger. A hiking cycle over before it even starts?

Overall, the higher rates cause ‘financial conditions’ to tighten further, with the aim of curtailing spending which should lower the demand driven variable of inflation. However, the efficacy of higher interest rates in helping to control supply driven inflation is less clear. For consumers, tracker and variable rate mortgages and personal loans are likely to shift upwards as a result. Whilst a very different interest rate and mortgage market the US this year is a useful case study - in the first week of January a 30-year fixed rate mortgage would have cost you 3.2%, whilst last week it stood at 5.5%. This increase in borrowing costs in borne out directly in the latest housing data (more below) with a predictable result. The Fed will shift rates higher again this week

For the week ahead, keep an eye out for earnings. Alphabet, Microsoft on Tuesday with Amazon, and a plethora of other big names later in the week.

Weekly Investment News

Stock markets finish the week broadly higher as investor sentiment struck an extremely bearish note in Tuesday’s BofAML monthly fund manager survey. Cash levels were the highest since September 2001 (9/11) and forecasts for lower corporate profits at their highest since September 2008 (Lehman crash). Earnings overall last week were positively received, with Netflix one of the most prominent beneficiaries. The week did finish on a negative note, as July’s flash PMI reading indicated that economic activity has moved below the key 50-point level and into contraction territory.  Manufacturing fell from 52.1 to 49.6 in June, whilst the services sector slipped from 53.0 to 50.6.

Within the eurozone, the ECB raised interest rates with a move of 0.50% to bring the headline rate back to 0.0%, and out of negative territory for the first time in a decade. The ECB also approved a new mechanism called the ‘Transmission Protection Instrument’ which is designed to keep core vs periphery bond spreads under control. The timing of this announcement was appropriate given that Mario Draghi, former president of the ECB, resigned as the Italian Prime Minister on Thursday sparking a return to political uncertainty in Italy.

Economic data from the US was broadly negative, with the housing market index experiencing its second largest drop ever. The 12-point drop to 55 was only surpassed by the pandemic induced decline observed in April 2020. The effects of higher borrowing costs, combined with higher production costs, are clear in the market. In the UK, retail sales held up better than expected in June, with commentators pointing towards the Jubilee celebrations. UK inflation also moved higher once more, reaching a new 40 year high as the annualised figure hit 9.04% in June from 9.1% in May. In Japan, the BoJ further committed to their ultra-loose monetary policy path. The widely expected stance confirmed further divergence from the policies of other global central banks.

As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.

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