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WeekWatch – ‘…good news was hard to find last week.’ February 23

WeekWatch – ‘…good news was hard to find last week.’ February 23

Just like tomatoes and cucumbers in British supermarkets, good news was hard to find last week.

The empty fruit and veg shelves are down to cold weather in Spain and North Africa, and the cost of heating greenhouses in the UK. However, shelves in continental Europe remain well stocked, drawing inevitable accusations of a Brexit effect.

But salad was not top of the list of concerns for global markets. Geopolitical risks ramped up as the anniversary of Russia’s invasion of Ukraine saw both sides raise the stakes and the rhetoric. China has also stepped up its diplomatic efforts. “It appears that Beijing is growing concerned that a Russian defeat could open the door to a more western-friendly regime in Moscow, whilst a drawn-out war is pushing Europe closer to the US,” observed Mark Dowding of BlueBay. “These outcomes are potentially harmful to China from a geopolitical point of view.”

The profound economic uncertainty triggered by Russia’s invasion, which sent energy prices and global inflation soaring, was underlined by figures from Bank of America revealing that global investors have switched $354 billion to cash since February last year.

News that business activity picked up in the UK, US and eurozone in February was, in theory, good news. The UK’s Purchasing Managers’ Index (PMI) reading registered a return to growth for the first time since last July, adding to hopes that a long recession could be side-stepped.

But markets gave a thumbs-down to the unexpectedly strong growth indicators, which were viewed as strengthening the likelihood of interest rates remaining higher for longer. Financial markets now point to a 95% chance of another rate increase by the Bank of England next month.

The US report added to a recent slew of economic data showing that the economy continues to perform, despite multiple rate rises by the Fed Reserve aimed at tamping down inflation.

Consequently, Tuesday saw US markets put in their worst daily performance of the year so far. The Dow Jones Index saw all its 2023 gains wiped out as investors digested the news that US business activity had expanded for the first time in eight months.

Investors also decided that China’s reopening, the easing of Europe’s gas crisis and strong US consumer spending were more bearish than positive factors. For now, it seems good news is bad news.

Money markets now expect US interest rates to peak at 5.3% in July, with the possibility of a quarter-point cut by December. This signals a massive shift from the beginning of the month, when expectations were for a peak below 5% in July and a first cut coming just weeks later.

By Wednesday, President Putin’s sabre-rattling speech and worries that interest rates will keep grinding higher left world share indices at their lowest levels in more than a month. The VIX Index, the so-called ‘fear gauge’ of global markets, also tested its highest reading of 2023.

Later in the week came news that US jobless claims had fallen, confirming continued strength in the labour market, and the US Commerce Department reported that inflation in the fourth quarter had increased much faster than initially estimated. This was followed by data showing that consumer spending, which accounts for two-thirds of US economic activity, saw its largest increase in nearly two years.

The data added to evidence that the US economy is not slowing enough to give the Federal Reserve confidence that it has got on top of the inflation problem, and that markets have got ahead of themselves in anticipating the pivot in interest rate policy. Wall Street posted its biggest weekly drop of 2023, while key indices in Europe, UK and Asia also edged lower.

BlueBay is a fund manager for St. James’s Place

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