MARKETS LOOK PAST BANK STOCKS AS THEY ANTICIPATE THE END OF INTEREST RATE HIKES

MARKETS LOOK PAST BANK STOCKS AS THEY ANTICIPATE THE END OF INTEREST RATE HIKES

This week we have seen equity markets put the problems caused by the bank sell-off behind them. Bank shares have yet to recover, but broader US and European markets are back to their level seen at the beginning of March as investors have settled on a view of where interest rates are headed. The view that we are very close to the peak of the hiking cycle received further support as headline inflation in the EU fell significantly – although core inflation actually rose. Although markets have been swift to move on, the problems facing banks have not disappeared. The huge volume of money leaving banks for the higher yields available in money markets will continue to stress banks that relied on customer apathy.

Meanwhile, the government has been trying to burnish its green credentials with a new energy policy. It’s an easy opportunity for a joke about politicians generating a lot of hot air, but criticism of the plan for being big on intentions but short on investment are fairly well made. Governments were never going to solve this winter’s energy crisis in a matter of months, but keeping the lights on long-term needs more than good intentions.

UK: EVIDENCE THAT CONSUMERS ARE FEELING THE PINCH

The Bank of England has warned that households and businesses remain vulnerable to high borrowing costs and rising prices. The bank said corporate debt remains manageable overall but many smaller businesses are exposed to higher borrowing costs. Household finances remain under pressure from inflation but should feel some benefit from falling energy prices. The bank expects around 2.5 million fixed term mortgages will have to refinance this year on higher rates. Separate figures on consumer debt show a big increase in unsecured borrowing. Borrowing using credit cards and personal loans remains high, with an additional £1.4bn of new borrowing added in February.

The British Retail Consortium said its measure of shop price inflation hit a record high of 8.9% in March, as fresh food shortages helped drive food inflation to 15%. Retailer Next said sales are likely to fall 1.5% as shoppers cut their spending but says inflation will fall faster than it previously expected and it sees CPI dropping to 3% in the autumn.

Global equities have mostly recovered from the sell-off in bank stocks. The S&P 500 is above its level at the beginning of March and emerging markets have also produced a small gain this month. European equities experienced a big sell-off as speculation about banks’ financial strength culminated in the takeover of Credit Suisse by UBS but the MSCI Europe ex UK index has clawed back most of the losses. Bank stocks have stabilised rather than recovered, but equities in general have benefited from better investor sentiment and the view that central banks are approaching the end of the rate hiking cycle.

UK equities have also staged a recovery, although the FTSE All Share has lagged other developed markets due to the much larger proportion of banking stocks in the index. The strong performance of US equities has been led by its technology sector. These companies have experienced a significant decline as rising interest rates eroded their high valuations but the expected end of US interest rate hikes has helped share prices recover.

ENERGY: UK UNVEILS NET ZERO PLAN AND AIMS TO BRING DOWN COSTS

The government announced plans to hit its net zero target by 2050. This week’s update to the energy policy sees more incentives for investment in solar and wind power, and an expansion of nuclear power. It also includes plans to build the UK’s first carbon capture and storage facilities. The government’s Powering Up Britain policy aims to reduce the current reliance on imported energy and to significantly reduce domestic and business energy costs. The government’s cap on domestic energy prices has so far cost the government £34bn and has been extended to the end of June when energy bills are expected to start falling as the price of natural gas is back to the level of August 2021.

Separately, energy generators are facing a review by regulator Ofgem over the practice of withdrawing production at short notice only to increase prices and come back online to meet the shortfall. SSE, one of the firms accused of the practice along with Uniper and Vitol, this week raised its earnings guidance in advance of expected record annual profits.