Global markets remain tormented by inflation concerns.
US – In the first week of November, the Federal Reserve of the US increased its main ‘Fed Funds’ interest rate by 0.75% percentage points (to 3 per cent) for the fourth consecutive time with the Fed chairperson, Jay Powell, saying the bank would need to see a series of monthly lower inflation readings before switching to smaller increases.
Powell’s comments suggest policy-makers are willing to entertain the possibility of opting for a less aggressive increase at the Fed’s next meeting i.e. a slowdown in the pace of further interest rate rises is upon us. And it is this feeling that the worst of the dramatic interest rate increases may be behind us that is supporting US and global equity markets with at one stage this year the NASDAQ index down 30% and the S&P down 25%. But improved investor confidence saw the US Dow Jones Industrial Average (the 3rd major US stock market) post its best monthly performance in October since 1976 after a 14% rise. No doubt inflation fears persist but investors are trying to focus on the outlook 18 months or so out.
Interest rate expectations over 2 and 10 years are denoted by the 2-year US government bond yield at 4.50% Yield-to-Maturity and the 10-year 4.0%
UK – Financial markets saw a political rollercoaster in October with failed Truss economic and fiscal policy seeing 20-year UK government bond yields go from 3.5% Yield-to-Maturity to 5% with forced selling by UK pension funds to remain liquid – the UK pound falling from 1 GBP=1.15 USD to 1 GBP=- 1.03 USD and the UK FSTE 100 index sinking to 6,800. With Sunak now seen as a much safer pair of hands – 20-year gilt yields are below 4%, the Pound is back at 1 GBP=1.13 USD and the FTSE is trading at 7,200.
Although the Bank of England themselves raised the Base Rate by 0.75% (the biggest rate rise for 30 years) to 3%, the BOE indicated that interest rates /borrowing costs will not increase in the future as much as markets expect.
COMMODITIES: OIL remains caught between reduced supply due to the ongoing Russian/Ukrainian war and perceived reduced demand from an oncoming global recession with Brent Oil trading at $95 dollars per barrel, well below if $140 p.b. high of the last 12 months.
GOLD: Normally does well during inflationary times as a bar of gold has intrinsic worth i.e. it will always be worth a bar a gold, but it is a non-interest-bearing asset and with bond yields offering returns of over 4%, gold is not viewed as an attractive investment hovering around $1,650 per ounce well down on its high of the last 18 months.
FOREIGN EXCHANGE The biggest driver of any foreign currency is the level of short-term interest rates. As such, of note, the US Dollar is close to 20-year highs against many currencies, with the US leading the world in interest rates rises and indeed a 24-year high versus the Japanese Yen at 1 USD= JPY 140 with Japan one of the few countries in the world not raising interest rates right now.