Market Commentary 16th October 2023 – from Charlie Hancock

The week’s news regarding conflict in the middle east prompted investors to increase their exposure to commodity related stocks and aerospace/defence companies. Oil giants BP and Shell gained 8.33% and 5.44% respectively, whilst BAE Systems, which is the largest defence company in Europe, gained 10.09%.

A data release on Thursday showed that the UK economy expanded by 0.2% in August, however, the 0.5% economic contraction recorded for July was revised to a bigger decline of 0.6%. Increased spending on education contributed to the growth in August, whilst activity in the construction sector was particularly weak. The growth in August meant the UK economy was 2.1% bigger than it was before the recession caused by the Covid pandemic.

The European Central Bank (ECB) released the minutes from their September policy meeting, which showed that there were some committee members arguing the central bank should pause interest rate hikes. The decision to hike interest rates to 4% appeared to be largely based around the central bank maintaining credibility regarding their determination to bring inflation back to their 2% target. The ECB acknowledged that the growth outlook for the eurozone has deteriorated.

The German government revised their economic forecast for 2023, predicting that the economy will shrink by 0.4% for the calendar year. This came following the International Monetary Fund (IMF)’s prediction of a 0.5% contraction.

Investors appeared to shrug off the week’s inflation data. The Consumer Price Index (CPI) recorded an annual inflation rate for September of 3.7%, which was slightly higher than the median economist estimate for 3.6%. The month-on-month increase in the overall CPI index, which came in at 0.4%, was largely driven by housing costs.

Investors paid close attention to the release of minutes from the Federal Reserve’s most recent policy meeting. The minutes suggested that the central bank is focused on how long to keep interest rates on hold, rather than whether further hikes will be necessary, however, the voting committee “all agreed that rates should stay restrictive for some time”.

News reports suggested that the Japanese government were drawing up new rules for loans to small and medium sized businesses, which will allow lenders to grant loans based on a business’s growth potential. The measure aims to make it easier for start-up ventures to obtain borrowing. It is increasingly likely that Japan will intervene to try and stop the Yen’s decline vs the US Dollar, following comments from Japan’s Finance Minister, who stated last week that they may need to take “appropriate action” in foreign exchange markets.

The government in China were reportedly considering new infrastructure spending plans in an effort to lift economic growth. The proposals include raising debt to fund projects focussed on areas such as water efficiency improvements.  The rumours of further fiscal spending came as new data showed that China remains at risk of a period of deflation, with the year-on-year CPI inflation rate coming in at 0% for September.

Andrew Bailey, the governor of the Bank of England (BoE), stated that there are “clear signs progress is being made on the UK’s high inflation”, however, Bailey added that there is still work to be done and future interest rate decisions will be “tight”.

Comments from Federal Reserve officials appeared to contribute to the move in Treasury yields. The vice chair, Philp Jefferson, told attendees at a conference that the central bank has to be mindful of the recent rise in bond yields, which could negate the need for further interest rate hikes. He stated that the Fed’s voting committee “have to balance the risks of not tightening enough against the risk of policy being too restrictive”.

GBP / EUR – Current 1.1556 Previous 1.1560

The Pound declined by 0.77% against the US Dollar last week, with the greenback strengthening against most major currencies as investors increased their exposure to traditional “safe haven” assets. Against the Euro, the Pound was broadly flat (-0.03%).