Week ending 14th October 2022.

London stocks managed to finish in the green on Friday this week despite another tumultuous week for new Prime Minister Liz Truss. The PM abandoned plans to cut corporation tax and sacked Chancellor Kwasi Kwarteng; Jeremy Hunt has since been appointed to the role. The pound gained this week rising to 1.13 against the dollar, the biggest rise in almost two years after hitting record lows a few weeks ago.

Bond yields fell towards the end of the week as the Bank of England’s intervention ended on Friday after the bank intervened on Monday doubling the size of its daily purchases to £10bn in order to protect the gilt market from collapse.

Turning to the U.S, President Biden’s administration announced new export restrictions last week, including new measures looking at safeguarding the domestic supply of semiconductor chips. This comes after Biden’s administration signed into law a CHIP for America act providing $280 billion for semiconductor manufacturing, design and research; the bill is a huge boost for the US economy.

US stocks closed higher on Thursday after the annual rate of US inflation slowed for the third month in a row to 8.2% in September compared to 8.3% in August, but the figure exceeded market forecasts of 8.1%. Increases in food prices and rent offset a 4.9% decline in gas prices last month. The core rate which excludes food and energy rose to 6.6% on year from 6.3% from the previous month despite Fed rate rises.

The hotter-than-expected CPI data validated the Fed’s fears that higher interest rates are failing to have a material impact on inflation. Reinforcing our thoughts that they will raise rates at a slower pace than expected, as we have already seen year-to-date. Thursday’s US Consumer Price Index release showed that the main drivers of inflation aren’t subsiding. However, the market’s measured response is promising there is a level of pessimism already priced in. In the Fed minutes released this week officials reiterated the need to “calibrate” the pace of future interest rate hikes in order to reduce the negative effects on the economy. With all this in mind, strong US retail sales, whilst not aiding inflation, shows the consumer is still spending which is good for corporates.

The National Congress of the Chinese Communist Party will commence on Sunday (16th October) in Beijing, President Xi Jinping is likely to secure a third term. Congress could be the perfect time to put an end to the strict zero-Covid policy they have abided by for so long. Whilst we are not expecting Xi to alter its narrative right away, we have already seen domestic travel restrictions ease, group sporting events such as public marathons and the world badminton championship signed off, as well Covid quarantine periods slashed. As China continues to reopen we will continue to see a rebound in demand for sectors such as luxury goods, hospitality and travel. China’s inflation data came in at 2.8%, lower than expectations and significantly lower than other major economies; a huge boon for Chinese corporates as the economy comes back online.

Japan officially reopened its doors to visitors this week after more than two years of Covid-19 isolation; restrictions remain strict in relation to other countries as PCR tests and visas are required for entry and mask-wearing is mandatory. The economy welcomes a much-anticipated boom in the tourism industry which in turn could help strengthen the currency as the Yen hit record lows against the US dollar earlier in the year. This is further evidence of the global reopening as governments progressively ease lockdowns, putting an end to restricted growth.

Coming up this week we have US industrial production, weekly unemployment claims & the Fed’s Beige Book. UK inflation, retail sales and Euro zero inflation. Chinese balance of trade and GDP for Q3. China’s 20th Communist party congress will continue until Saturday (22nd October).

Investment Management Team

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