Jenson Holmes from Titan Wealth offers this week’s round-up of global markets
EQUITY markets fluctuated last week as investors became increasingly concerned that interest rates could move higher following a series of hawkish comments from central bank officials.
However, sentiment improved significantly towards the end of the week, with two positive trading sessions as expectations of further rate rises eased. Investors were encouraged by comments from policymakers suggesting that inflation was continuing to move in the right direction, reducing the likelihood of an imminent increase in interest rates.
Bond markets remain a key focus, with government bond yields remaining near multi-year highs in several major economies. This reflects a number of factors including uncertainty over the inflation outlook, rising government deficits and the challenging geopolitical outlook.
At the Jackson Hole symposium in the US, central bank officials reiterated their commitment to controlling inflation, although recent comments from Federal Reserve governor Christopher Waller indicated that he would be inclined to support keeping rates unchanged if inflation data continues to improve.
As a result, market expectations for a September rate increase have moderated considerably, providing some relief to equity markets. However, a stronger-than-expected US employment report on Friday added to concerns that the Fed might be “behind the curve” and too dovish. Policymakers have continued to emphasise that future decisions will remain data-dependent with August inflation numbers (due next week) a key indicator for investors and the Fed.
In the meantime, rising debt-servicing costs and increased government borrowing requirements have contributed to fears that elevated bond issuance could place additional upward pressure on longer-dated yields.
In Japan, the yen weakened to over ¥160 against the US dollar, while borrowing costs have continued to rise. Markets are increasingly expecting the Bank of Japan to tighten monetary policy further, with interest rates potentially rising by 0.25% to 1.25%. Such a move could help support the currency after a prolonged period of weakness.
The outlook for Japanese monetary policy remains particularly important for global markets, as Japanese investors are among the world’s largest holders of overseas assets. Higher domestic interest rates could encourage some capital to remain within, or be repatriated back to, Japan, potentially influencing global bond and currency markets. A stronger yen would also help reduce the cost of imported goods and energy, supporting Japan’s efforts to bring inflation under control while maintaining economic growth.
Energy markets have also attracted significant attention. Europe is entering the winter period with unusually low natural gas storage levels, leaving the region more vulnerable to supply disruptions, colder temperatures or weaker renewable energy generation. Ongoing geopolitical tensions and competition for liquid natural gas cargoes from Asian buyers have further increased concerns around supply reliability.
Gas prices have risen more than 75% over the past two months and recently reached their highest levels in three years. Higher energy prices could place renewed pressure on inflation, potentially complicating efforts by central banks to bring price growth back towards target levels. Continued investment in energy security and supply diversification is expected to remain a key theme across Europe and other developed markets for the foreseeable future.
