Quilter Cheviot|Weekly Comment

Stocks dip on slowdown signs

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Soft economic data weighed on investor sentiment last week with the MSCI All Country World Index falling 2.2% (+12% YTD). UK government bonds responded to a weakening economic outlook and a larger than expected increase in the Bank of England base rate with some selling in the short end of the curve and buying further out, pricing in a higher terminal rate in excess of 6% in the process.

The Bank of England (BoE) finds itself in the unenviable position of having a stalling economy and sticky inflation. The day before rate setters announced a 50 basis point increase, a step up from previous 25 basis point moves, the latest inflation data made for not too pretty viewing. Headline consumer price index (CPI) remained at 8.7% in annual terms, above consensus forecasts for a decline, but the most concerning aspect came from another increase in the core component, which rose to a new high for the cycle at 7.1%.

This marks a 31-year high for the core reading, suggesting that higher price pressures are becoming more ingrained throughout the economy and not merely a near-term result of the exogenous shock to energy prices following Russia’s invasion of Ukraine. The Monetary Policy Committee voted 7-2 to step up the pace of policy tightening, lifting the base rate to 5.0% – its highest level since 2008. The day after the announcement flash purchasing managers’ index (PMI) readings pointed to a slow down in economic activity, with both services and manufacturing prints coming in worse than expected. The 10-year gilt yield decreased by nine basis points on the week, closing at 4.32% as the level of yield curve inversion deepens.

UK stocks declined on the week, with large-cap indices falling 2.3%, roughly in line with global peers, but there was some stronger selling in the mid-cap space where benchmarks declined 5% to slip back into the red year-to-date. The pound pulled back from its recent peak against the US dollar to close at 1.27, down from 1.28.

Continental European markets fell 2.8% on the week on reports that the European Central Bank plan to tighten monetary policy further and a weak set of PMI data. A reading a 43.6 marked a new cycle

low for the Eurozone manufacturing PMI, the fifth consecutive month this metric has come in lower than consensus forecast and the 12th month in a row the reading has been in contractionary territory below 50.

The US seems to be better placed than its European peers at present, with its economy faring relatively better according to latest PMI prints and the Federal Reserve closer to ending its cycle of raising interest rates. This was reflected in a relative outperformance in US stocks last week, declining by 1.4%.

Russian insurrection

Events over the weekend brought heightened scrutiny on Russia after Yevgeny Prigozhin attempted the first armed uprising in over three decades. Prigozhin has been an outspoken critic of Russian leaders in recent months and his Wagner group numbering 25,000 men were reportedly set to march on Moscow. However, an 11th hour deal brokered by Alexander Lukashenko, president of Belarus, stopped the advance in its tracks.

As always with developments of this nature it is seldom wise to jump to overarching conclusions as to what the fallout will entail. Financial markets were closed over the weekend so there was no immediate reaction but by the time they re-opened for the new week the deal had been reached and there was little sign of any major moves in response.

One school of thought is that this blatant disregard for authority represents a loosening in Vladimir Putin’s ironclad grip on power. However, there is the possibility that Putin will feel the need to retaliate with a demonstration of force, which could lead to further escalation in the conflict in Ukraine.

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