Last week’s big news story was the higher than expected US inflation print (more info below), which led markets to their worst day since June 2020 on Tuesday. The contrast with the July figure is interesting – both the reading itself and the market reaction. On 9th August it was reported that US inflation in July was ‘only’ 8.5% YoY, although it wasn’t the ‘0% increase’ that the Biden Administration attempted to spin it as. The positive news helped to send markets up over 3% on that week in August.
The point is, both the above reactions represent trading as opposed to investing behaviours. Whether the July figure was the start of the downward trend and the August figure represents the outlier data point remains to be seen. Or perhaps the opposite is true? However, for the long term investor, making knee-jerk decisions based on single positive (or negative) data release is not good practice. Just as there is not one overriding valuation metric (p/e ratios, eps growth etc) which a fund manager should rely on, there is not a single data point which should inform asset allocation decisions. Operating with a consistent investment process, within a consistent governance framework is much more likely to lead to the best outcomes, for clients, brokers, and investment managers alike.
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Weekly Investment News
Equities were sharply lower last week as the US inflation release for August surprised to the upside. The headline annual rate fell to 8.3%, however core prices rose 0.6%, twice the 0.3% forecast. Consumer price inflation came in below expectations for July, and many expected similar results last Tuesday when the US CPI figures for August came to print. Therefore, the upside surprise led equities to their worst sell off in over two years with the S&P 500 falling 4.3% on the day. The US retail sales figures for last month were also released on Thursday and came in higher than expected with a 0.3% rise MoM. Whilst this is broadly positive for the US economy, many investors see this as an indicator of how aggressively central banks will raise rates. This led to a sell-off in risk assets and markets have priced in a 1/3 chance that the Fed will raise rates by a full percentage point this month. Given the expectation of rapid monetary tightening, the yield on the interest rate sensitive 2 year treasury note 3.90% on Friday, its highest level since 2007. The benchmark ten year yield also rose for the 7th week in a row.
Within the eurozone, inflation and the health of the economy continue to guide the market with the broad eurozone index down 4.5% last week, as investors displayed concerns over volatile energy prices and tightening central bank policy. Within the UK, retail sales for August were released on Friday which came in far lower than expected dropping by 1.6%. This is the biggest fall since December 2021 and underlines increased recession risk within the UK economy. The key EUR/USD rate finished the week below parity, as the dollars safe haven status continued to be utilised. Enduring dollar strength is partly a result of policy tightening by the Fed but is also a function of the US economy’s perceived greater resilience in comparison to Europe’s.
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