Market Update Week-end 15 October 2022
A week is a long time in politics as we saw again this week. Growing opposition on the Conservative backbenches, international criticism and extremely hostile financial markets forced Liz Truss to sack Kwasi Kwarteng as chancellor and rethink plans to cut taxes. It would probably have been the most honourable thing for the ailing Mrs Truss to have done if she had also sacked herself at the same time, and to give Rishi Sunak the opportunity that many felt he deserved. The government has been in damage limitation mode all week as it tried to reassure its critics that a bit of economic orthodoxy is not too bad after all. News that Kwarteng had to rush back to London for a crisis meeting on the fate of his mini-budget saw sterling rise and brought some calm to the gilt markets, and subsequently the announcement that Jeremy Hunt will step in to try and shore up the situation at the Treasury.
The reputation of the Bank of England also took a hammering this week, as it appeared to be briefing against its own Governor at one point. Andrew Bailey gave pension schemes until the end of the week before the bank withdrew its support for the gilt market but this appeared to have little effect. Instead it was speculation about a government U-turn that was the catalyst for the end of this week’s gilt sell off. A new Chancellor and revision of the planned tax cuts may have calmed markets but has damaged Liz Truss’s credibility during her early days as PM, during which she has ably proven herself to be totally out of her depth, a liability for the Tories and an even bigger liability for “UK plc”.
UK: BATTLE FOR CREDIBILITY
Liz Truss has been trying to restore credibility in her government’s fiscal plans as she sacked chancellor Kwasi Kwarteng and reviewed the tax cuts set out in the mini-budget. Criticism of the government’s plans has been growing and Truss is trying to face down increasing hostility from Conservative MPs. Truss has been forced to review tax cuts after she explicitly ruled out a reduction in government spending despite the Institute for Fiscal Studies predicting that cuts of £60bn will be needed to pay for them.
Meanwhile, the Bank of England’s credibility was also strained by its threat to end intervention in the gilt market at the end of this week, while briefing that support may continue. The Bank’s confused messaging and low take up of its support for gilts saw gilt yields return to the levels they touched last week before speculation about a government policy U-turn caused gilts to rally late in the week. Separately, BoE chief economist Huw Pill said the next interest rate meeting would see a significant response to rising inflationary pressures. If you’re concerned about your current assets and inflation, you can seek professional advice from our expert team.
UK: PLAN TO CURB RENEWABLE ENERGY PROFITS
In a week of U-turns, Liz Truss had already partially reversed her commitment not to impose a windfall tax on energy companies as she continues to lurch from self-made crisis to self-made crisis. The government announced plans to impose a revenue cap on energy generators that do not use fossil fuels after failing to get the industry to sign up to fixed price contracts. The new revenue cap will affect companies that generate electricity from onshore wind, biomass, nuclear and solar energy.
The details of the cap have yet to be announced but the government expects its tax on revenue will raise billions for the Treasury. The news caused the shares of renewal energy companies like SSE, Centrica, Greencoat UK Wind, Drax and RWE to fall. These companies have seen a huge increase in revenues and profits as gas prices have soared, but their shares have been under pressure recently due to the government’s attempts to get them to move to fixed price contracts. There are currently no plans for a windfall tax or revenue cap for gas powered electricity generators.
US: CORE INFLATION FIGURES RATTLE MARKETS
US inflation came in higher than expected and sparked a wild day’s trading in equity and currency markets. Headline inflation as measured by the Consumer Price Index was 8.2% for the year to September. This was a small drop from 8.3% for the August reading but was higher than expected. However, core inflation, excluding energy and food prices, increased from 6.3% to 6.6%.
Minutes from last month’s US Federal Reserve interest rate meeting showed the bank’s decision makers are concerned about doing too little to fight inflation. The higher core inflation reading saw equities and bonds fall sharply and the dollar jump higher due to fears of even more aggressive monetary tightening. However, sentiment changed significantly later in the day and US stocks reversed an intra-day loss of -2.4% to end the day up +2.6%. The dollar reversed most of its gains but US Treasury yields ended the day higher as their value failed to recover.
We continue to work at maintaining low volatility (inherent risk) across our clients’ portfolio relative to benchmarks, whilst looking to buy in at cheaper levels. This has seen us out-perform all 7iM’s and Asset Risk Consultants Growth, Balanced risk and Cautious multi-asset benchmarks both in terms of performance and volatility over the past difficult quarter, and we consider ourselves very well placed currently.
Please note that nothing written here by the author should be construed as giving advice, it merely outlines our thinking. Any advice will be discussed and proposed on an individual basis with each client when any advice that is given should be fully discussed with us before proceeding with any proposals made.
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Philip A. Simmonds MBA, LL.B(Hons), FPFS, Chartered MCSI
Chartered Wealth Manager | Chartered Financial Planner
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Chief Investment Officer | Head of Strategy
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