“The only way is up” is a good theme to characterise the start of the week.
Firstly, many key markets opened with a bounce this week, with the FTSE 100 (at the time of writing) up 2.34% this week, and the S&P closing up 2.8% yesterday. We are currently in the midst of earnings season in the US. Whilst some financials have already beaten expectations, there remains a likelihood for a broader drop in earnings. We’ve seen the dollar weaken and markets rally of the back of this, given that weak earnings are likely to loosen the Fed’s stance on interest rate tightening.
Secondly, the temperature has been rising as we experience record heat here in the UK. Heathrow airport recorded 40.2 degrees Celsius as the sun was beating down on the tarmac – the hottest temperature on record for the UK.
Although the heatwave saw many workers (and therefore consumers) working from home after being urged not to use public transport, markets weren’t concerned. Due to the Covid-19 pandemic and associated lockdowns, working from home isn’t uncommon; consequently, markets weren’t worried about the impact on the economy.
Thirdly, hot off the press – UK inflation was released this morning at 9.6%. Whilst this shows that inflation is continuing to heat up, we believe that inflation will peak later in the year, and fall back towards targets over 2023.
And lastly, employment data was released in the UK this week; the increase in the number of employed people surged, based on the latest three-month moving average. Over the last three months an additional 296,000 people in the UK were in work vs. the three months before. We’re seeing more people return to the workforce who left over the pandemic. This should help to fill the huge number of vacancies in the UK, and also help to ease some of the pressures behind inflation by addressing staff shortages.
Looking ahead, the ECB will release their interest rate decision; they’re due to increase rates for the first time since 2011. Markets have speculated that we may see a 0.5% increase, and – following a dice with Euro-dollar parity, the Euro has strengthened on the outlook.
Due to the complexity of the EU makeup, and the ECB being essentially the central bank of many countries, the ECB are likely to move incredibly slowly, if only to keep the Euro from collapsing.
The bank’s current rates are still in negative territory, so a move to parity (0%) would be a statement in itself, likely without impacting markets negatively.
Hannah Owen, Portfolio Specialist