Market Commentary 20th March 2023 from Charlie Hancock

Fears of a global recession prompted a fall in commodity prices, with FTSE 100 energy and mining companies dragging the broader index lower as a result. Oil giants Shell and BP declined by 12.09% and 12.61% respectively, whilst mining company Anglo American moved 10.95% lower.

The chancellor, Jeremy Hunt, unveiled a range of measures in the spring budget last week, including an extension to the energy price cap for households. The budget also included an expansion to free childcare, as well as changes to the limits on pension contributions and total pension savings. Hunt stated that the UK will avoid a recession this year and that the Office for Budget Responsibility (OBR) predicts the rate of inflation will decline to 2.9% by 2024.

Swiss investment bank Credit Suisse dominated the headlines last week after a key shareholder, the Saudi National Bank, stated they would not provide any further capital to the business. The Swiss central bank was forced to offer Credit Suisse a liquidity injection of more than $50 billion, however, investors feared a collapse would still occur, with possible contagion risks rising. Over the weekend, Swiss bank UBS announced that they had agreed a deal to acquire Credit Suisse for $3.25 billion, which is significantly lower than the market cap as of Friday’s closing share price.

The European Central Bank (ECB) raised their key interest rate by 0.50% last week, with inflation still the main focus for the central bank. Some investors speculated that the bank would not hike rates given the recent issues in the banking sector, however, the ECB stated that it is monitoring developments, but that the “Euro area banking sector is resilient, with strong capital and liquidity”.

Investors paid close attention to the fall out following the collapse of Silicon Valley Bank (SVB) and Signature Bank. It was confirmed that all SVB deposit holders would be able to access their monies on Monday morning, whilst the Federal Reserve also implemented measures to improve liquidity for other regional banks.

Official data showed that the Consumer Price Index (CPI) recorded a year-on-year increase of 6.0% during February, with headline inflation slowing from the level recorded in January. Data released later in the week showed that the Producer Price Index (PPI), which measures output prices from manufacturers, unexpectedly declined by 0.1% during the month.

Economic data in China indicated that the post covid-zero economic recovery is still fragile. Consumer spending in January and February rose by only modest amounts, whilst the unemployment rate for those aged 16-24 increased during the same period. Data for the property market pointed to an improving picture, with sales and house prices rising, however, China’s largest property developer, Country Garden, issued a profit warning last week, with the company expected to suffer their first annual loss since 2007.

The annual spring-wage negotiation period in Japan finished during the week, with many large employers agreeing to the biggest pay increases since the 1980s. The Prime Minister, Fumio Kishida, has placed pressure on businesses to improve wages in order to achieve the government’s aims in reducing income inequality. With the Bank of Japan (BoJ) scheduled to hold their first policy meeting under the new governor in April, investors will be paying close attention to possible clues on the direction of policy in the coming weeks.

The bigger than expected spending measures announced by Jeremy Hunt during the spring budget appeared to have little impact on Gilt yields.

Expectations for weaker economic growth and softer monetary policy before the end of 2023 contributed to the decline in yields.

GBP / EUR – Current 1.1417 Previous 1.1311

The Pound made gains against both the US Dollar and Euro last week, rising by 1.19% and 0.94% respectively. Currency traders may have been encouraged by the spring budget, with chancellor Jeremy Hunt stating that the UK will avoid a recession this year.