Market Update

Financial market volatility has been exceptionally pronounced this week.
Market sentiment took a hit, partly due to the relentless messaging from Fed policymakers emphasizing their commitment to a hawkish stance with aggressive interest rate hikes to combat inflation. Additionally, heightened geopolitical tensions emerged following Russia's annexation of four regions of Ukraine and concerns about potential sabotage of the Nord Stream gas pipeline.
In the UK, headlines were dominated by a sharp drop in the value of the pound against the US dollar and a decline in the price of gilts (UK government debt) following last Friday's (September 23, 2022) mini-budget announcement by Kwasi Kwarteng, the new Chancellor of the Exchequer.
However, it's crucial to keep the situation in perspective. What the news stories often failed to explain is that after Monday's substantial declines, which were broadly in line with other currencies like the Euro, the pound recovered those losses and then some.
In fact, by the end of the week, the pound had strengthened by 2.15% against the US dollar, reaching $1.11 (after briefly touching as low as $1.035). This means it's more or less back to where it stood before Kwasi Kwarteng presented his mini-budget.
Gilts also ended the week roughly where they began, albeit after experiencing astonishing volatility. For instance, the yield on the 30-year gilt began the week at 4.04%, spiked to 5.14% on Wednesday, and then settled at 3.82% by the week's end – resembling the pre-mini-budget levels, much like the pound.
Notably, amid this turbulent environment, the UK Debt Management Office successfully attracted £30 billion in bids for a new £4.5 billion 30-year green gilt issue.
As depicted in the accompanying table, although the FTSE-100 closed the week in negative territory, it fared better than most other major global equity indices.
Nonetheless, it's important to temper enthusiasm because not everything has returned to normal. Short-dated gilts, such as the 2-year gilt, exhibit significantly higher yields (4.17% compared to around 3.5% pre-mini-budget). This suggests that the market anticipates the Bank of England to accelerate the pace and scale of UK interest rate increases to combat inflation.
While we're not defending Liz Truss or Kwasi Kwarteng, acknowledging their subpar communication and execution of the mini-budget, it's crucial to recognize that the current challenges (high inflation, rising interest rates, and a cost-of-living crisis) have their roots in the COVID-19 lockdowns and the Ukraine conflict.
This week, several well-known companies (including Next, Carnival Cruises, and Nike) expressed concerns about the economic outlook. This underscores our reservations about consumers already feeling the pinch of the cost-of-living crisis and why we believe central banks should exercise caution in unwinding their quantitative easing programs or aggressively increasing interest rates at this time.