Markets Weekly podcast – 12 September 2022
12 September 2022
Listen in as Henk Potts, our Market Strategist, discusses the market’s reaction to the new UK government’s much-anticipated energy support package, and its potential impact on UK inflation and interest rates. And following a bumper rate hike from the European Central Bank, Henk also shares our latest growth and inflation outlook for the continent.
You can stream this podcast by scanning the QR codes with your smartphone camera or clicking the buttons below.
Henk Potts (HP): Hello. It’s Monday, 12th September and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets.
My name is Henk Potts, Market Strategist for Barclays Private Bank. I’m here to discuss both risks and opportunities for investors.
I will start by analysing the events that moved the markets and grabbed the headlines over the course of the past week. I’ll then go on to preview the major events and data releases that are likely to shape the week ahead.
As we know, it was another dramatic week for global financial markets. Investors weighed up the implications of the escalating energy crisis in Europe, a radical shift in policy by the British government, and an aggressive rate hike by the European Central Bank.
Equity markets rebounded, gold and oil slumped, and sterling fell to its lowest level since Margaret Thatcher was in power. The S&P 500 rose 3.1% over the course of the week. In Europe, stocks posted their first weekly gain in a month on hopes that governments can, indeed, introduce policies to mitigate the impact of rising energy bills. Banks, which we know benefit from higher rates, were amongst the biggest gainers after the European Central Bank committed to further rate hikes. The STOXX 600 in Europe was up 1.3%.
Gold drifted lower last week as bond yields surged and the dollar continued to strengthen. Gold fell below $1,700 an ounce, a fall of more than 5% over the course of the past month, down 6.6% year to date.
The decline comes despite elevated levels of geopolitical tensions and multi-decade high inflation. The US 10-year yield was at 3.28% last week, creating greater competition for the zero-interest-bearing precious metal. Meanwhile, the US dollar has surged to a two-decade high, making purchases more expensive for non-dollar denominated investors and buyers.
Investment demand has also been easing back. Exchange-traded funds have cut their holdings for nine straight days. The total gold held by ETFs is back to its lowest level since 10th February.
In terms of gold’s placement in the portfolio, we still think that gold should be used as a diversification tool, but we don’t think it can drive long-term growth. Gold is more likely to preserve wealth during periods of turbulence rather than grow portfolios over time. Therefore, we think allocation should still be in that very low single-digit range.
Sterling fell to a near four-decade low against the dollar last week, cable hitting 1.14 for the first time since 1985. The weakness has been driven by the deteriorating economic outlook for the UK economy, rising borrowing requirement to fund the energy support package, and the widening trade deficit. A lower inflation profile, due to the support programme, could also limit future rate hikes by the Bank of England.
Elsewhere, in commodities, crude slumped to its lowest level since the start of the year. Brent dropped below $90 a barrel, as traders worried that the stronger dollar, weakening global activity, and the implementation of movement controls in a number of major Chinese cities will reduce demand.
China imposed restrictions in Chengdu and Shenzhen, and data showed consumption of the world’s largest importer fell 9.7% in July, in fact to its lowest level in two years. The decline came despite the ongoing supply risk from Russian oil and OPEC+ decision to make a symbolic cut in production levels coming through in October, although OPEC data still shows you that demand will outstrip supply in the fourth quarter, leading to an inventory drawdown of round about 300,000 barrels per day, according to Bloomberg data
The European Central Bank meeting took centre stage, from which the Governing Council sent a clear message to markets that they are determined to tame inflation and normalise policy, despite the risk of recession. Policymakers delivered an unprecedented three-quarter point hike, pushing deposit rates to 0.75%, that’s the highest since 2011 and pledged that several further increases were on the cards.
The historic increase came after inflation hit a record 9.1% in July and the central bank appeared concerned that inflationary pressures are starting to become entrenched. Staff raised their inflation projections to average 8.1% this year, then 5.5% in 2023, 2.3% in 2024.
The European Central Bank forecast is for the economy to slow down substantially later this year as high inflation is dampening firms’ production and people’s spending, less demand from the rest of the world, and a slump in business and consumer confidence.
In terms of our forecast, we now expect average euro area real GDP growth to be minus 1.1% next year, with inflation averaging 6.3%. We expect the European Central Bank to back up its bumper hike with a further 75 basis points in October, 25 basis points at the December meeting, taking the deposit rate to 1.75% at year end.
The new British government’s plan to mitigate the impact of higher energy bills is expected to dramatically alter the UK’s inflation profile. Based on the new cap, we now predict that UK inflation peaked in July at 10.1%, will be slightly below 9% at year end, before dropping quickly through the course of next year as the negative base effects of energy pass through. We now see UK CPI printing at 3.9% in December 2023.
In terms of the impact on policy, the cap supports, we think, argue that the Bank of England will hike by 50 basis points at the September meeting and 25 basis points at the November meeting, but will then remain on hold at 2.5% as job creation cools, economic activity slows down, and falling inflation removes the support for a prolonged hiking cycle.
In terms of inflation, well that will continue to be a key market driver during the course of this week as we await the latest US inflation print on Tuesday. We expect the August headline reading to show a further moderation, forecast that CPI will decline by one-tenth of 1% month on month, or coming in at 8% year on year, with a decline in energy prices helping to offset elevated food inflation, though shelter is still likely to be strong and is anticipated to push core inflation higher, printing at plus three-tenths of 1% month on month, 6.1% year on year, although we do expect price pressures in housing to ease in the coming months.
The report, we think, should add weight to our theory that US price pressures will continue to moderate. Markets will monitor the inflation data and the labour market reports very carefully, as they are likely to define the size of future rate hikes by the Federal Reserve.
One point to note, of course, is the Bank of England’s interest-rate decision has been postponed from this week and will be delayed until 22nd September.
With that, I’d like to thank you once again for joining us. I hope you found this update interesting. We will, of course, be back soon with our latest instalment, but for now may I wish you every success in the trading week ahead.
Previous editions of Markets Weekly
Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.
- Has been prepared by Barclays Private Bank and is provided for information purposes only
- Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department
- All opinions and estimates are given as of the date of this communication and are subject to change. Barclays Private Bank is not obliged to inform recipients of this communication of any change to such opinions or estimates
- Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person
- Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation. Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents
- Is confidential and is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays Private Bank
- Has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Barclays is a full service bank. In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation. Law or regulation in certain countries may restrict the manner of distribution of this communication and the availability of the products and services, and persons who come into possession of this publication are required to inform themselves of and observe such restrictions.
You have sole responsibility for the management of your tax and legal affairs including making any applicable filings and payments and complying with any applicable laws and regulations. We have not and will not provide you with tax or legal advice and recommend that you obtain independent tax and legal advice tailored to your individual circumstances.
THIS COMMUNICATION IS PROVIDED FOR INFORMATION PURPOSES ONLY AND IS SUBJECT TO CHANGE. IT IS INDICATIVE ONLY AND IS NOT BINDING.