Weekly round up
UK markets saw significant losses this week with the FTSE 100 Index falling by 4.3% to trade at 7,195 points at the time of writing. The pound has recorded its steepest decline against the US dollar since the aftermath of the Brexit referendum, falling 4.5% in August 2022, and falling by just under 3% against the Euro.
US investment bank Goldman Sachs warned this week that UK inflation could hit 22.4% in January and that the country was likely to fall into a lengthy recession later this year. Britain will also get a new Prime Minister next week in either Liz Truss or Rishi Sunak. Leadership favourite Liz Truss is rumoured to be favouring new policies such as £30 billion in tax cuts and plans to slash VAT, which could create further uncertainty for markets and the value of sterling.
Her opponent Rishi Sunak claimed that Truss’s policies could force up inflation and interest rates and increase UK borrowing costs. According to the End Fuel Poverty Coalition, around 28 million people in 12 million homes, or 42% of all households will not be able to afford to adequately heat and power their properties from January, when a typical yearly energy bill is forecast to exceed £5,300.
In the commodity markets, Brent crude futures traded around $94 a barrel on Friday, and are headed for a sharp weekly loss, as tighter monetary policy from the US Federal Reserve and renewed Covid lockdowns in China weakened the demand outlook.
Brent has lost approximately 6% so far this week and is down more than 30% from this year’s high as major central banks stemmed overall demand with aggressive rate hikes to calm surging prices, sparking a sell-off in commodity markets. On the supply side, investors are closely monitoring progress around efforts in reviving the 2015 nuclear accord, as a potential deal could unlock substantial flows from Iran.
Gold prices held slightly above $1,700 an ounce on Friday and are on track for a third straight weekly fall, pressured by strong US economic data that reinforces the US Federal Reserve’s aggressive stance against inflation, having committed itself to keeping interest rates higher for longer. While gold is widely considered a hedge against inflation and economic uncertainty, higher interest rates increase the opportunity cost of holding non-yielding bullion, reducing its appeal.
US equity futures rose slightly on Friday as investors look ahead to a key jobs report later in the day that could offer insight on the state of the economy and influence the outlook for monetary policy. The US economy likely added 300,000 payrolls in August of 2022, the smallest job gains since April of 2021, and compared to 528,000 jobs added in July. Another big upward surprise could bolster bets for further monetary tightening.
Robust US manufacturing data in August also supported the case for US interest rate hikes as factory activity in other major economies showed signs of weakness. US Federal Reserve officials have recently signalled that the fight against inflation will take priority over growth concerns, with markets currently priced for another 0.75% interest rate increase in September.
All three US major averages were set to end the week sharply lower after last week’s hawkish remarks from Federal Reserve Chair, Jerome Powell caused investors to reassess the economic outlook amongst rising interest rates and fears of slowing economic growth.
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