Hello,

Within investment markets, there is often much talk about trends, momentum, and inflection points. Hindsight will confirm this in due course, but a series of potential inflection points may be occurring, the peak in US inflation, the end of negative rates, the market low for equities, and the end of dollar strength.

Whilst not making any predictions of our own, much of the above is likely to be positive for multi-asset investors. However, currency movements are always an important consideration within our process, with the Euro vs USD being the key rate. The global stock market is approximately 70% in the US, with the Hong Kong dollar pegged to the US dollar. Include currencies heavily influenced by commodity prices (CAD & AUD) and you have at least three of every four companies listed around the globe explicitly affected by the movements of the greenback.

For those who keep a keen eye on the local vs Euro currency returns in the table below, you’ll know that the strengthening US dollar (from 1.14 to below parity this year) has insulated Irish investors from the worst of the falls in equities so far this year. However, this trend has reversed somewhat in the last two weeks. For example, global equities were positive last week in local terms, but negative in Euro terms. As per the above, time will tell whether this is an inflection point or just a short term movement. However, the key point here is that currencies matter in investing - and should matter to your investment manager.

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

Weekly Investment News

Last week saw markets slow in pace somewhat as the positive momentum which had fuelled a rally in recent weeks gave way to modest losses in US equities. The previous positive sentiment was somewhat curtailed by the warnings of St Louis Federal Reserve President James Bullard, who cautioned investors that rates could rise higher than market expectations of a terminal rate of 5.25%. US equities ended the week down 0.1% from the perspective of a Euro investor. Despite this, signs of inflation easing, in the form of softening producer price pressures in the US, permeated through to provide some optimism from investors. The US Dollar fell again this week from its 20-year highs and the Euro/Dollar exchange rate ended the week above parity at 1.026, this came as the prospect of less monetary tightening and slowing inflation led investors to move away from the safety of the Dollar.

The US bond market also had a relatively subdued week with the benchmark 10 Year US Treasury yield falling marginally to 3.80%.  The yield on the US 2 Year, which is more sensitive to interest rates rose to 4.53% as investors priced in the aforementioned hawkish comments from central bankers during the week.

Within Europe, last week saw the release of the UK’s latest budget by newly appointed Chancellor of the Exchequer Jeremy Hunt. The budget represents a U-turn to the previously appointed Kwasi Kwarteng’s tax cutting plan. Hunt’s budget which involves expenditure cuts, tax rises and increases to state-pension and household benefits, was largely greeted with approval by investors, with UK equities ending the week up 1.5% in euro terms.

Finally last week saw the meeting of US President Biden and his Chinese counterpart Xi Jinping at the G20 leaders’ summit in Bali. This meeting was largely seen as a success in terms of global openness and cooperation. It remains to be seen however, to what extent this will result in less hostility in the future. Asian equities continue to rely on movement from China in scaling back their Zero-Covid policy to stimulate growth. Last week saw an uptick in Covid-19 infections across China which put these plans in doubt. Hong Kong equities slowed from their recent gains as a result, ending the week up only 0.3%.

To download a PDF of last weeks' market movements and economic news, click below: