PESSIMISM FROM THE FEDERAL RESERVE IS CONTAGIOUS AS VOLATILITY RETURNS TO EQUITY MARKETS

  • PESSIMISM FROM THE FEDERAL RESERVE IS CONTAGIOUS AS VOLATILITY RETURNS TO EQUITY MARKETS

    PESSIMISM FROM THE FEDERAL RESERVE IS CONTAGIOUS AS VOLATILITY RETURNS TO EQUITY MARKETS

    Data Sourced from FE Analytics, and Bloomberg Finance LP

    PESSIMISM FROM THE FEDERAL RESERVE IS CONTAGIOUS AS VOLATILITY RETURNS TO EQUITY MARKETS

    This week government bonds took another leg down and volatility returned to previously bullish equity markets. The outbreak of pessimism was due to a combination of another strong reading for US Core PCE inflation, the Fed’s most keenly watched measure of inflation, and surprisingly strong employment data. In addition, the Fed appears much keener to return to rate hikes than previously appreciated. The minutes of the Federal Open Markets Committee are usually dry affairs but the account from last month showed most members are in favour of further hikes.

    For most of this year, equity markets have remained unmoved by the difficulties seen in bond markets. However, this week concerns cut through as the good news is bad news theme from 2022 returned. Strong job creation and expansion in service industries would usually be welcomed. But by forcing banks to keep hiking, markets have returned to concerns that rates are going to go high enough to engineer a recession. Bond and equity markets appear to be on the same page for the first time in a while. Unfortunately, this chapter does not make for enjoyable reading.

    US: BOND YIELDS RISE AS FED SAYS FURTHER HIKES ARE LIKELY

    US government bonds fell following the release of minutes from last month’s Federal Reserve interest rate meeting. The Fed left rates unchanged but the minutes show most voting members see further rate hikes as inevitable given the slow progress in bringing inflation down. The latest reading for Core PCE inflation, an indicator that is watched closely by the Fed, showed a very slight decline to 4.6%. The yield on 10-year US Treasuries has risen to almost 4%, up from 3.6% at the start of June.

    UK gilt yields have also risen as investors consider the likelihood of further rate hikes from the Bank of England. The bond market is now pricing in peak interest rates of 6.5%, considerably higher the current rate of 5%. The yield on 10-year gilts is now 4.58%, which is above the yield seen following Kwasi Kwarteng’s disastrous mini-Budget. There were some positives this week, as EU producer price inflation contracted last month and European consumers are expecting inflation to fall steadily and fall below 4% in 12 months’ time.

    UK: SIGNS OF CONSUMER STRESS AS SAVING HABITS CHANGE

    UK savers withdrew cash savings at a record rate in May. In total, a net £4.6bn was withdrawn from bank deposits. This is a big change from April when savers paid in net £3.7bn. Although consumer confidence has risen, it remains negative and consumer spending has fallen behind inflation. Data from the Bank of England shows unsecured borrowing fell in May. Rising rates have pushed up the cost of mortgage borrowing and the average rate for five-year fixed term mortgages passed 6% this week. The interest on credit cards and personal loans has also been increasing rapidly.

    Businesses are reporting a mixed picture when it comes to consumer behaviour. Airlines Wizz Air and Ryanair said passenger numbers are still rising, despite air fares remaining high. Jet2 said annual pre-tax profits for the year to end of March increased 142% as customers returned to international travel. However, shares in retailer Currys fell 12% on Thursday after it reported full year sales were down 7% as high inflation eroded customer demand.

    MARKETS: EV CAR MAKERS BENEFIT FROM RECORD SALES

    Shares in listed electric vehicle makers surged following a string of positive sales updates. Tesla delivered 466,000 cars in the second quarter. This is 87% up from last year as recent price cuts achieved their aim of growing sales and securing market share. Leading Chinese EV maker BYD reported record sales of over 700,000 fully- electric and hybrid cars and US start-up Rivian also reported record quarterly sales and said it is on track to double sales this year. Established car makers are also increasing EV sales. US car giant GM doubled its sales for the second quarter to 15,000.

    Shares in Rivian and Lucid are up more than 30% in the last two weeks and Tesla’s shares are up more than 10%. Aston Martin’s shares also got a boost after it agreed to source batteries and electric powertrains from Lucid for its new EVs. Toyota has generated interest in its EV production after announcing a breakthrough in the development of solid state batteries – which could significantly reduce the size and increase the output of EV batteries.

    For more information regarding our weekly market reports, we encourage you to give us a call on 01732 746188 or send us an email at enquiries@foxgroveassociates.co.uk.

    This document has been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. Financial Express Investments Ltd, registration number 03110696, is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit https://www.fefundinfo.com/en-gb/about/legal-and-policies/.

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