Jenson Holmes from Titan Wealth offers this week’s round-up of global markets
CENTRAL banks dominated market attention this week as policymakers in the US, UK and Japan continued to grapple with inflation and interest rates.
In the US, the Federal Reserve raised interest rates by 0.25%, a move that was widely expected by investors. US equities, treasury bonds and the dollar all strengthened following the announcement, reflecting confidence that the Fed remains committed to keeping inflation under control. The Fed’s Summary of Economic Projections suggests policymakers may be content with just two hikes in total, while markets expect a further three rate rises over the next year.
In the UK, inflation rose slightly in August, from 2.9% to 3.1%. Higher fuel prices, as oil prices rose and a shortage of refinery capacity boosted costs, were the main drivers of the increase, while core goods and food inflation encouragingly remain relatively subdued. The Bank of England’s Monetary Policy Committee voted six to three to leave interest rates unchanged at 3.75%. It also took steps to support the government bond market by maintaining its holdings of longer-dated bonds while continuing to sell shorter-dated debt.
The MPC sees risks to inflation to be skewed to the upside, especially if oil prices stay elevated for an extended period. However, it also highlighted that knock-on effects from higher energy prices have so far been more limited than expected. The meeting minutes suggest a further rate rise in November is likely. However, investors are expecting several additional increases over the next year, although this seems excessive given the fragile state of the UK economy.
In Japan, the Bank of Japan raised rates to 1.25%, a 31-year high, and reiterated concerns that underlying inflation could deviate upwards from its 2% target. The yen weakened versus the dollar and Japanese government bond yields fell, signalling that the market was expecting a more hawkish move and narrative from the BoJ.
Investors are currently pricing in a further three interest-rate rises over the next year, an outcome that appears consistent with the bank’s latest comments. However, it also seems that this will be insufficient to materially strengthen the yen, which remains the cheapest currency in the world when measured on a purchasing power basis.
Following a brief pause in the treasury and sovereign bond sell-off, ten-year treasuries climbed to around 5% on speculation that elevated energy prices could fuel inflation, prompting further Fed rate hikes. Equities have spent the past few weeks churning on the back of rising bond yields as they look for direction, which will likely come once the third-quarter reporting season starts in the next couple of weeks.
Elsewhere, investors continued to monitor geopolitical developments and trade relations. Canadian Prime Minister Mark Carney welcomed the EU’s ambition for Canada to become its first “associate member”, calling for closer co-operation on defence, critical minerals and energy security. However, US President Donald Trump called the idea “laughable” and threatened “very serious tariffs” on Europe if he considered it a “hostile act”.
In corporate news, Berkshire Hathaway founder Warren Buffet is stepping down as the company’s chairman to be replaced by his son Howard, effectively ending roughly six decades at the helm of the conglomerate. Buffet will become chairman emeritus and will remain a board member.
