in July and early August from depressed levels at the end of June. We have since seen a wave of political and central banker announcements that have negatively impacted that short-term recovery.
From a political perspective during the quarter, we now have both a new Prime Minister in Liz Truss and a new cabinet. The new team got straight to work announcing a freeze on energy bills and of course a now infamous ‘mini-budget’ that caused a spike in volatility across sterling asset classes. This triggered the Bank of England to take the unprecedented action of stepping in to support the long-term UK government bond “gilt” market. Further afield there was damage done to the Nord Stream pipelines, which provoked speculation about the root cause but also concern around the gas supplies to Europe as we move into winter.
Away from politics, central banks continue to take centre stage. Interest rates are being increased globally to fight high inflation levels. The Bank of England has now increased interest rates to 2.25%, the highest level since the financial crisis. The European Central Bank (ECB) has now taken its interest rates positive, with its key deposit rate increased to 0.75% from zero, and its main refinancing rate, how much banks have to pay when they borrow money from the ECB, now at 1.25% from 0.5%.
Across the pond, the US Federal Reserve continues to increase interest rates, or federal funds rate, which now stands at 3% to 3.25%. Probably the most notable event during the quarter was Federal Reserve Chairman, Jerome Powell, stating at an annual meeting of Central Bankers that he will continue to keep increasing interest rates until the fight with inflation is won. This is something that has been said many times, but this spooked the bond and equity market at the end of August and into September.
As we touched on in the recent Luna Perspective, 2022 has been a challenging year because of weakening investor confidence. This has been driven by the central bank moves outlined above but also because the second largest economy in the world, China, is still impacting their own and global economic growth by reintroducing Covid restrictions, whilst the war in Russia/Ukraine continues with seemingly no end in sight.
However, we do not need to look too far into the future to see these dynamics changing. Just as quickly as inflation has increased it can also fall back. The recent energy bills announcement in the UK and falls in global commodity prices suggest that we are close to peak inflation in the UK, and inflation is starting to fall in other parts of the globe, most notably the US. This might not be at the pace investors or central banks want right now but this can gather momentum.
In summary, it has been another volatile period for investment markets. July and August showed signs of how strong markets can bounce from low levels in short order. However, the political and central bank change has unsettled investors who were already low on confidence, particularly in the UK. Short-term periods of volatility do often happen in markets and history has taught us that these have traditionally been good entry points when taking a longer-term view. Some of the key headwinds to markets this year appear to be changing direction and seasonally we are running into what is usually a good time to invest.
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