A week dominated by large interest rate hikes in the US, the UK and several countries across Europe. On Friday, the UK government unveiled large tax cuts – and markets did not react well. Further details of last week’s interest rate hikes and tax cuts and can be found here.
Last week’s performance – major stock markets
| S&P 500 | -4.65% |
| Nikkei 225 | -1.50% |
| CSI 300 | -1.95% |
| Euro Stoxx 50 | -4.34% |
| FTSE 100 | -3.01% |
Commentary
US: Federal Reserve (‘Fed’) hikes aggressively
The Fed increased interest rates by 0.75 percentage points, bringing interest rates to a target range of 3-3.25%, the highest level since March 2008, which it was cutting rates. This week the Fed announced that it expects interest rates to continue rising over the next few months. Whilst the central bank believes that inflation will trend downwards in 2023, it also acknowledged the risk that sharp interest rate hikes could lead to a recession.
Japan: Government intervenes to support currency
Largely speaking Japanese markets tracked losses seen in US markets because of the large interest rate hike in the US. This now means that the different in interest rates between the US and Japan is widening, which is negative for the Japanese currency. This week Japan intervened in the currency market to support the yen for the first time since 1998 as the yen continued to weaken. Despite inflation accelerating, the Bank of Japan has kept interest rates very low and has said that they don’t believe they will be hiking rates anytime soon.
China: Global growth slowdown fears weighs on markets
Stock markets fell as global growth slowdown fears gripped investors. China is also facing a depreciation of its currency against the US dollar. In August, China took the decision to lower key interest rates. This together with the sharp hike in interest rates in the US, has left the Chinese yuan and other currencies around the world weakening. The economic outlook for China remains fragile, thanks to the persistent problems in the property market and continues coronavirus outbreaks.
Europe: Fears of prolonged economic slowdown intensify
Shares fell sharply as central banks such as Sweden, Switzerland and Norway raised interest rates sharply, intensifying fears of a prolonged economic slowdown. These interest rate hikes, together with the European Central Banks large hike earlier this month, sent government bond yields higher across Europe. Yields on bonds are rising because investors are expecting interest rates to rise more than they previously thought. When yields go up, bond prices go down. Separately, business activity in the Eurozone contracted for the third consecutive month in Europe as the economic downturn deepens.
UK: Bank of England raises rates and government unveils tax cuts
On Thursday, the Bank of England raised its interest rates by 0.5 percentage points to 2.25%. On Friday, the UK government unveiled the biggest tax cuts since the 1970s in an attempt to push the UK economy back into growth. Markets did not like to the idea of escalating public debt and yield on UK government bonds rose rapidly (when yields go up, bond prices go down). The UK pound also fell to 1.09 USD – a 37-year low – as a result. You can watch a video of our Client Portfolio Manager explaining the market reaction to the rate hikes and the ‘mini-budget’ here.
