Jenson Holmes, from Titan Wealth, offers a weekly round-up of global markets
EQUITIES enjoyed a positive week and remain supported by resilient economic growth, strong corporate profits growth and excitement around AI. However, investors continue to keep a close eye on inflation, interest rates and rising bond yields, which remain key risks for markets despite the positive backdrop.
Attention is now turning to the third-quarter earnings season, where investors will be looking for signs that companies can maintain their strong profitability and provide a reassuring outlook for the months ahead.
Meanwhile, government bond yields in the US, UK, Europe and Japan have risen to their highest levels in more than two decades as markets price in a strong growth outlook, rising fiscal deficits, volatile oil prices and persistent inflation. Higher yields are problematic for both bonds and equities, as well as governments and central banks, although stocks are largely shrugging off any concerns thanks to the positive drivers mentioned above.
The US midterm elections are rapidly approaching, and President Donald Trump has ruled out attacking Iran until after the elections, with the White House reporting “positive discussions” with Tehran. Oil prices remain volatile, fuelled by persistent tensions in the Strait of Hormuz and escalating hostilities between Yemen’s Houthis and Saudi Arabia.
Minutes of the Federal Reserve’s (“Fed”) recent meeting confirm that officials expect to raise interest rates once more this year as they look to bring inflation back towards their 2% target. They were keen to point out that they approach each meeting with an open mind and decisions at future meetings would depend on the relevant economic data and its implications for the outlook and the balance of risks.
While the Fed is expected to raise interest rates once more this year, markets continue to anticipate a further three to four rate hikes over the next 12 months across the UK, US, Europe and Japan. In our view, this is likely to be too aggressive, as we expect inflationary pressures to ease, especially if events in the Middle East de-escalate, and the pace of economic growth to slow modestly.
Bank of England governor Andrew Bailey has urged governments to exercise restraint and adopt credible tax and spending policies that support lower inflation and financial stability. He warned that prolonged high energy prices could cause inflation to become entrenched if households and businesses incorporate the shock into wages and prices, rather than treating it as temporary. Mr Bailey noted that UK inflation was currently at 3.1% and expected to rise above 4% due to soaring energy prices. He warned that high inflation expectations could lead to persistent inflation if not managed properly.
The Institute for Fiscal Studies has warned that Chancellor John Healy faces a £35bn choice between raising taxes or cutting public spending to protect public services and increase defence spending to 3% of GDP by 2030/31. Meanwhile, UK businesses are experiencing their strongest inflation pressures in three years as energy, fuel and raw-material costs rise, adding to pressures on the Bank of England.
