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24 October 2022
- The political-economic problems in the UK culminated not only in the resignation of Prime Minister Liz Truss, but also in Moody’s downgrading the UK’s credit rating to negative from stable.
- The agency has maintained the rating at Aa3, but given “heightened unpredictability in policymaking amid weaker growth prospects and high inflation,” the outlook is downgraded. Moody’s also reminded that there are major “risks to the UK’s debt affordability from likely higher borrowing and risk of a sustained weakening in policy credibility.”
- It all started when former finance minister Kwasi Kwarteng wanted to help the economy by announcing around 45 billion pounds of permanent, unfunded tax cuts alongside an expensive plan to cap energy tariffs for household and businesses.
- New chancellor Jeremy Hunt now has the task of restoring confidence in Britain’s public finances by bringing down public debt as a share of economic output in the medium term.
Indices
The stock had one of its best weekly results of the year and its best week in four months. Since the start of the week, investors have reacted positively to the strong performance of banking titles. Energy stocks also did well as the price of oil, despite the efforts of the US, managed to strengthen. At the end of the week, speculation about a possible slowdown in interest rate hikes by the Fed helped stocks.
European shares have been gaining since the beginning of the week, mainly thanks to news from the UK, where the direction of fiscal policy has been reversed and the Prime Minister Liz Truss was finally forced to resign. The pan-European STOXX Europe 600 ended the week 1.27% higher, France’s CAC 40 gained 1.74%, Germany’s DAX advanced 2.36%, and the UK’s FTSE 100 Index added 1.62%.
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US30 +4.89% |
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US100 +5.78% |
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US500 +4.78% |
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GER40 +2.36% |
Commodities
A drop of more than 20% in natural gas was one of the main events in the commodities market last week. Several factors are behind this, the main ones being the mild weather in Europe, the still relatively high gas price and limited demand for the commodity, in addition to several ships sailing off the coast of Europe waiting to unload.
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Gold +0.94% |
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Silver +6.21% |
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BRENT +2.05% |
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NATGAS -22.61% |
Forex
The Japanese yen was again the focus of attention late in the week, with the USDJPY pair falling from around 151 to 144 in the space of two hours. On Saturday morning, the Nikkei newspaper reported that the Japanese government and the Bank of Japan conducted intervention in the foreign exchange market, but the apan’s Ministry of Finance declined to comment. Interestingly, the intervention took place at a time when liquidity in the market is at a low as trading in London ends and traders gear up for the weekend. Speculators on the dollar strengthening against the yen may suffer even greater losses as a result.
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EUR/USD +1.38% |
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USD/JPY -0.83% |
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GBP/USD +1.04% |
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USD/CAD -1.74% |
Macro
Prices in Europe continue to rise. Inflation in the Eurozone may not have reached the 10% year-on-year rate that preliminary data showed, but 9.9% is also an all-time high. Compared to August, prices rose 1.2% in September. Core inflation also rose to an all-time high of 4.8% year-on-year In the UK, the annual rate of price growth picked up again, rising to 10.1 in September after falling to 9.9% in August. On a month-on-month basis, prices rose by 0.5%. Core inflation rose to 6.5%, the most in thirty years.
Fed officials spooked investors on Wednesday when Minneapolis Fed President Neel Kashkari said that if inflation doesn’t slow, he sees no reason to slow interest rate hikes. But a Wall Street Journal article later this week reported that some Fed officials don’t want to continue the rapid pace of monetary tightening and want to stop raising rates next year. They want to find out their moves this year are slowing the economy, while continuing at the current pace would not be possible.
Mortgage growth in the U.S. is increasingly weighing on the housing market, which was also seen in existing home sales, which fell for the eighth straight month in September by 1.5% to 4.71 million, the lowest since May 2020.
What to watch out for this week
- Earlier this week, we will get preliminary data on purchasing managers’ indices in Europe and the US, which will give us an idea of how the manufacturing and services sectors are doing. In Europe in particular, activity is expected to fall further. Later in the week we will see consumer confidence data, this time from Germany (Ifo and GkK) and the US (Conference Board).
- The most important data will arrive at the end of the week. Shortly after 2pm, the ECB will announce how many percentage points it will tighten its monetary policy. In general, further growth of 0.75% is expected, despite the looming recession. However, inflation above 10% is a good argument for further tightening.
- Shortly afterwards, the first preliminary data on US Q3 GDP will be released. After two quarterly declines, growth of 2.1% is expected.
- Then on Friday we will see inflation and preliminary GDP data in Germany and then there will be the personal consumption expenditure index data, which is the Fed’s favourite inflation indicator for rate decisions.
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