30th September 2022

Weekly round up

It has been a turbulent week for the global financial markets with the FTSE 100 Index falling by 1.3% to trade at 6,925 points at the time of writing. UK equities came under heavy selling pressure, falling to levels not seen in over a year, after markets reacted badly to last Friday’s mini budget.

While UK chancellor Kwasi Kwarteng said his £45 billion of tax cuts and borrowing would support the economy, the IMF noted the strategy is likely to increase inequality, and the rating agency Moody’s warned that unfunded tax cuts were credit negative. The British Pound recovered to around $1.12 on Friday, after plummeting to $1.03 on Monday as investors worried about the new tax cut plan, soaring debt levels, inflation and a looming recession.

The Bank of England has delayed gilt sales, which was to be the start of the reversal of quantitative easing, instead making temporary purchases of long-dated gilts to restore orderly market conditions. The UK central bank stated that “the purchases will be carried out on whatever scale is necessary to effect this outcome”. However, investors remain worried that the Bank of England’s strategy could drive inflation even higher.

UK markets saw a slight recovery on Friday after an upward revision of the second quarter GDP by the office for National Statistics implies the UK is not in recession, as predicted by the Bank of England earlier this month. Official figures show Britain’s economy grew by 0.2% in the three months to June, reversing the initial estimate of a 0.1% contraction.

In the commodity markets, Brent crude futures traded around $89 per barrel on Friday and are down by more than 20% this quarter, pressured by mounting fears about a potential global recession-driven demand downturn. Persistent headwinds from surging inflation, worsening global financial conditions and its subsequent implication on economic activity remain a significant downside risk for demand.

Adding to the bearish outlook, a strong US Dollar exerted additional downward pressure on the dollar denominated commodity.

Gold prices recovered to around $1,670 on Friday but are still set to drop for the sixth straight month, weighed down by a strong dollar and elevated treasury yields amid expectations that the US Federal Reserve will push ahead with its aggressive plan to curb surging inflation. The metal is down nearly 3% so far this month, and trading approximately 20% below this year’s high, as investors continued to prefer to hold the dollar over gold as a safe store of value during these times of heightened economic uncertainties, given the US economy’s strength relative to other developed nations.

US equity futures rose on Friday, after a broad market selloff on Thursday, but were still set to end the week and the month lower as the bear market decline continues. In Thursday’s regular trading session, the Dow Jones Industrial Average fell 1.54%, the S&P 500 tumbled 2.11% and the tech-heavy Nasdaq Composite sank 2.84%. Investors remain concerned about tightening financial conditions and slowing economic growth. US core personal consumption expenditures (PCE) prices for the second quarter came in above expectations, raising concerns of inflation becoming even more entrenched. Simultaneously, better than expected jobless claims numbers suggested the US economy can likely withstand more central bank tightening. Federal reserve officials reiterated this week that the central bank needs to raise interest rates to restrictive levels amid persistent inflationary pressures, even at the risk of some economic pain and financial market turmoil. The Dow Jones Industrial average and the S&P 500 Index are on track for their third consecutive quarterly loss for the first time since 2015 and 2009, respectively.