1st July 2022

Weekly round up

As the quarter ended, UK markets faced selling pressure with the FTSE 100 Index falling by 0.7% during the week to 7,175 points at the time of writing.

Gross domestic product data released this week revealed the fragility of the UK economy. The Office for National Statistics reported that GDP growth was 0.8% in the first quarter, in line with expectations, but still down from 1.3% in the fourth quarter of 2021.

More worryingly household incomes fell for the fourth quarter in a row, down 0.2% after adjusting for inflation, in the longest successive decline since 1955. This left household incomes down 1.3% year-on-year even before energy bill hikes and a national insurance hit in April.

Nationwide’s latest house price report showed a cooling in the property market. The building society said prices were up 0.3% in June, taking the annual increase to 10.7% but on a quarterly basis, prices have increased 6% versus 7.4% in the previous three months. Property prices have risen faster than wages over the last few years which is leading to an affordability squeeze. This, along with higher interest rates to rain in runaway inflation, is likely to go some way towards taming frothy house prices. The British Pound ended the second quarter at $1.21 and is down more than 10% in the first half of the year, which is the worst six-month performance since the Brexit referendum in 2016.

In the commodity markets, Brent crude futures traded around $110 per barrel on Friday and were on track to decline for the third straight week amid concerns that a potential recession will dampen energy demand. Investors weigh fears of an economic slowdown driven by central banks’ aggressive action to combat surging inflation, and signs of a weakening US gasoline demand, with near-record prices likely suppressing consumption.

Gold traded below $1,800 an ounce on Friday, its lowest level in nearly seven weeks as a strong dollar continued to dampen bullion demand, while a broad selloff in risk assets forced investors to liquidate gold positions to offset losses in other holdings. Although gold is widely considered as a hedge against inflation and economic uncertainties, higher interest rates raise the opportunity cost of holding non-yielding bullion.

US equity futures fell further on Friday after the US benchmark S&P 500 Index closed out its worst first-half performance in decades, as concerns over heightened inflation and the prospects of a recession continued to weigh on markets.Thursday marked the end of the first half of the year, where the S&P 500 dropped by 20.6%, its worst first-half decline since 1970. The Dow Jones Industrial Average was also down over 15% in the first half of the year, while the Nasdaq Composite lost 29.5%, with technology stocks hit especially hard. These first half losses came as investors grappled with surging inflation and aggressive interest rate hikes, exacerbated recently by fears that tighter financial conditions could lead to a recession.

Covid lockdowns in China and Russia’s invasion of Ukraine escalated volatility further. Meanwhile, the core PCE Price Index inflation, the preferred gauge of inflation by the Federal Reserve, eased to a six-month low of 4.7% in May 2022, indicating that price increases could be slowing.