Weekly Market Update Monday 28th November 2022

Markets rally on rising hopes of a moderation in the interest rate cycle

Markets made further ground this week as the minutes of the last US Federal Reserve meeting were released, showing a “substantial majority” of officials supporting a moderation in the pace of interest rate increases. Investors looking for evidence to support this view were rewarded with a further contraction in the US manufacturing purchasing managers indices, which provide a window on the operating environment companies find themselves within, including new orders, hiring, and investment intentions. Whilst lower energy prices within the Eurozone have eased concerns over gas rationing this winter, providing a boost to European equities. However, hopes of further easing over China’s zero Covid policy were dashed, with a sharp escalation in the number of recorded infections.

As of 12pm on Friday, London time, US equities, having been closed for Thanksgiving on Thursday, were up 1.6%, with US technology stocks having risen 1.3%. European equities were 1.8% higher, and the UK market rose 1.2%. Japanese and Australian equities followed suit, rising 2.6% and 1.5% respectively. Whilst emerging markets only increased by 0.3%, held back by Hong Kong stocks which dropped 2.3% on rising Covid cases.

Yield curve inversion deepens as recession fears grow, despite hopes of a moderation in rate rises

As expectations hardened to an impending recession, longer-dated haven government bonds rallied, with yields, which move inversely to price, falling. 10-year US Treasury yields are now yielding 3.72%, with German Bund yields standing at 1.95% and UK gilts 3.11%. Whilst shorter-term debt trades at higher yields, this inverted relationship signals recession. 2-year US Treasuries, German Bunds, and UK Gilts currently yield 4.49%, 2.18% and 3.28% respectively. This picture was reinforced by comments made by Isabel Schnabel, a European Central Bank executive board member who signalled her desire for Eurozone rates to rise by 0.75% for a third time in a row to combat inflation. This was despite prices of goods leaving factories falling for the month of October in Germany, the first decrease in two years, following a decline in wholesale energy costs.

Oil price falls on rumours of a supply increase being considered by OPEC

The oil price weakened further, with Brent crude dropping by 1.5%, now priced at $86.3 a barrel, following rumours that OPEC (Organisation of Petroleum Exporting Countries) were considering an output increase to counteract the loss of Russian crude supplies. However, this was subsequently denied, with OPEC reiterating their plans to stick with the current production cuts.

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