Bank Of England Raises Rates To Combat Inflation As Global Markets Post Gains Following 4 Straight Weeks Of Fall

Market Update 4th February 2022

This week’s decisions from the Bank of England and European Central Bank were in line with expectations, but the language used to explain them has pushed up the forecast for rate rises. The difficult position for central banks is they are effectively trying to influence expectations for inflation, rather than inflation itself. Current inflation was triggered more than 12 months ago in the recovery from initial Covid shutdowns, while central bank action now will not have any real effect for another 12 to 24 months. Financial markets in the US are already predicting inflation will be around 2.5% by year end. This leaves central banks trying to win the war of expectations in the short term, with the outcome already decided.

This week also saw most of the world’s stock markets post some welcome gains, which following four straight weeks of losses happily coincided with the very week that we bought into the markets at the better values we have been predicting and discussing with our clients. This gave us an almost perfect start to our 2022 strategy having de-risked across our client portfolios quite significantly over the last quarter of 2021 which extended to the most recent 4 weeks of market pull backs that saw us protect portfolio values significantly and relatively to markets & benchmarks – we bought in to the markets at these lower values at the beginning of this week which has contributed to us feeling rather good about life as we break for the weekend!

Elsewhere, it was a toss-up between Boris Johnson and Mark Zuckerberg over who had the worst week. Johnson has so far avoided a challenge to his leadership but the departure of many of his senior team further undermines his credibility, and piling the pressure on are several MPs handing in their letters of no confidence to the 1922 Committee. As for Zuckerberg the question is whether he will be more upset by seeing £200bn wiped off Meta’s value or by having to admit that no-one under 40 wants to use his flagship service? Facebook has become more popular amongst the over 55’s – but what’s wrong with that!

  GLOBAL: CENTRAL BANKS OPEN DOOR FOR FUTURE RATE HIKES

As expected, the Bank of England announced it will raise interest rates by 0.25% to 0.50% to address surging inflation which is largely due to soaring energy prices after years of the UK mismanaging it’s domestic energy policies. Although markets were expecting an aggressive approach from the BoE this year, the news that four out of nine Monetary Policy Committee members were in favour of a 50 basis-points hike left investors surprised and market-based interest rate expectations have increased to potentially reach 1.5% by the end of 2022. UK government bond prices fell following the announcement and the 10-year bond yield pushed up to 1.36%.

The European Central Bank also contributed to concerns about future rate rises as President Christine Lagarde adopted a more hawkish tone. Although the ECB left interest rates unchanged, Lagarde did not rule out the possibility of rate hikes in 2022 as rising prices pushed Eurozone inflation up to 5.1%. The change in sentiment has now shifted market-based interest rate expectations from zero to potentially four rate hikes in 2022.

  US: TURMOIL FOR TECH STOCK CONTINUES

Thursday saw the biggest one day fall in US stock markets in a year as the S&P 500 dropped 2.4%. Tech stocks were the main driver of the losses with Facebook owner Meta’s shares falling more than 25% after it announced a slowdown in profits and said user numbers have fallen for the first time as it falls behind rivals such as TikTok. Paypal and Spotify also fell sharply after falling short of expectations.

These losses have been balanced by some equally big moves the other way. Earlier this week Google’s parent Alphabet beat expectations by announcing a big increase in revenue, and Facebook rival Snap saw its shares dragged down by Meta’s announcement only to recover by almost 60% after reporting stronger than expected revenues. However, on Thursday Amazon saw its shares rise 15% after it reported strong earnings and announced a big increase in the annual fee for Amazon Prime. The outsized moves in tech stock have masked an overall positive earnings season so far as most large companies exceeded expectations.

   UK: LIFTING RESTRICTIONS BOOSTS ECONOMY

Norway and Denmark have joined the UK in lifting Covid restrictions. Switzerland and Sweden have also said their restrictions will be lifted shortly. Since the UK lifted Covid restrictions on 19th January economic activity has increased steadily. Retail footfall is around 82% of pre-pandemic levels, while debit and credit card transactions are around 90% of their February 2020 level. Pret A Manger reports business in the West End of London is almost back to pre-pandemic levels and its UK business is far busier than other markets such as New York, Paris or Hong Kong.

This recovery is filtering through to business results. This week SSP, owner of Upper Crust and Camden Food Company, said the most recent restrictions saw its recovery slow in December and early January but things are continuing to improve now restrictions have lifted. Retail landlord Shaftesbury has also reported that 88% of rent due in the most recent period was collected as shoppers return to the West End.

If you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week.

Yours sincerely,

Phil Simmonds
Philip A. Simmonds LL.B(Hons), MBA, FPFS, Chartered MCSI

Chief Executive Officer | Solicitor-Advocate (non-practising) Chartered Wealth Manager | Chartered Financial Planner

E: phil.simmonds@private-office.co.uk