Global equities had a strong week, gaining 1.5% in local currency terms and a larger 2.6% in sterling terms as the pound fell back to $1.32 against a stronger dollar. These gains leave markets up year-to-date a sizeable 12.7% and 13.8% respectively.
Returns last week varied widely between regions with emerging markets returning as much as 5.6% in sterling terms. Buoyed by a renewed surge in the semiconductor chip sector, Korea was up as much as 12% although the other emerging market heavyweights – Taiwan, China and India- also saw good gains.
Japan also fared well with a 5.3% rise while the US and Europe saw increases of 2.4% and 1.6% respectively. Only the UK failed to participate in the party, falling 0.9%. It was dragged down by its lack of tech stocks, its overweight in energy stocks which retreated, and possibly the political turmoil.
The agreement of a memorandum of understanding between the US and Iran was clearly the main factor behind the burst of market optimism and the oil price fell back further, ending the week a bit below $80 per barrel. That said, the week’s events highlighted that the path ahead to a more long-lasting peace deal will be a bumpy one.
There was renewed fighting between Israel and Hizbollah, followed by yet another ceasefire. This in turn was followed by Iran declaring that it was closing the Strait of Hormuz again, only for there to be talk over the weekend that the negotiations between US and Iran were proceeding well. The bottom line is that, although it clearly won’t be plain sailing from here, the Strait still looks set to re-open to a considerable extent, justifying a major retreat in oil prices – but not to the $60-70 range prevailing before the conflict.
Bonds had a much more subdued week with UK gilts and US Treasuries only returning a slight 0.1-0.2%. The retreat in oil prices will reduce significantly the extent and duration of the spike higher in headline inflation. While this is a relief for bond markets, they had their eyes just as much focused on the Fed, Bank of Japan and Bank of England meetings taking place.
Most importantly, the Fed meeting on Wednesday was the first chaired by Kevin Warsh and saw an unexpectedly hawkish shift in policy. Rates were left unchanged as expected at 3.5-3.75% in a unanimous vote but the Fed abandoned its previous easing bias with half the Fed members now forecasting a rate increase later this year with the other half forecasting no change (although Warsh declined to submit his own forecast).
Warsh is intent on minimising the Bank’s forward guidance on where policy is headed and the statement accompanying the meeting was a shadow of its predecessors, ending with the terse assertion that the Fed will deliver price stability.
Fears that Warsh would just be Trump’s lapdog and push for lower rates whatever the economic backdrop have been removed at least for the moment. Markets now expect rates to be raised 0.25% over the summer, in response to the resilience of the economy and core inflation running at 3.3% well above the Fed’s 2% target, with another hike pencilled in for early next year.
Meanwhile, the BOJ raised rates 0.25% to 1.0%. The move was expected, continues the slow return over the last two years of rates to more normal levels and should be followed by a further modest tightening around year-end.
Lastly, there was the BOE meeting which saw no real surprises with a 7-2 vote to keep rates unchanged at 3.75%. The latest inflation numbers were better than expected and, along with the fall in oil prices, have reduced the pressure to tighten policy.
Headline inflation was unchanged at 2.8% in May while the core rate edged up to 2.6%. Underlying private sector wage growth also slowed in April to 2.9%, a five-year low. Even so, the BOE retained its tightening bias and the market continues to expect a 0.25% increase later in the year with a possibility of a further rise early next year.
But the big UK news was of course Andy Burnham’s stonking victory in the Makerfield by-election and Keir Starmer’s resignation this morning. The market impact, however, has been very limited. Gilt yields were little changed last week and this morning’s news saw minimal effect on gilts, equities and the pound. The weakness of UK stocks and the pound last week were more down to other factors than the political turmoil.
Andy Burnham now looks certain to become Prime Minister by September when Parliament returns from its summer recess – or possibly earlier if he is the only candidate in the leadership contest now Wes Streeting has thrown his support behind him. Market worries over Burnham’s policies have been assuaged recently by his newfound commitment to the fiscal rules, his ‘big spending vibes but small spending commitments’ and reports of him being advised by well-respected mainstream economists.
Still, there is every likelihood that ways will be found to loosen fiscal policy somewhat and Rachel Reeves will be replaced as Chancellor. Once again therefore, the UK economy and markets face the prospect of a period of uncertainty and worries about further tax increases – despite Burnham confirming his commitment to Labour’s manifesto pledge not to raise rates of income tax, national insurance or VAT – ahead of this winter’s Budget.
This coming week, major macro releases are limited to June business confidence numbers for the US, EU and UK on Tuesday and the Fed’s favoured inflation measure on Wednesday. But here in the UK, all the attention will clearly be on the forthcoming leadership contest – if there is a contest at all – and clues as to Burnham’s plans for economic policy and the Chancellor.
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