21st June 2021

Stock markets struggled last week following a hawkish meeting from the US Federal Reserve where they indicated that interest rates would be rising faster than they’d previously guided towards. This led to falls in stocks, falls in gold and a rise in the US Dollar.

The strong dollar did have the effect of boosting overseas returns for UK investors – such that returns for global equities were actually modestly positive in GBP terms – but the tone for the week was generally negative and that has continued into this week with Asian markets heavily down overnight. The fallout from the Fed meeting will likely be the big driver of markets this week with a fairly light calendar of scheduled events.

Last Week

  • Stock markets were generally negative although Pound weakness helped to cushion overseas returns
  • UK stocks sold off with Mining shares performing worse
  • The US Federal Reserve met and gave a more hawkish tone: suggesting that rate hikes would come sooner than previously forecast
  • Oil continued its rise higher
  • Gold had its biggest one day sell-off in over 10 months

This Week

  • There’s a fair amount for markets to digest this week, with the June flash PMIs on Wednesday giving us a good marker on the various different global economies and how they’re performing into the end of the second quarter.
  • We have the Bank of England’s meeting on Thursday, where it’s widely expected that rates will be kept on hold at 0.1%. The statement will be keenly read through for any clues about future hikes, particularly after the US meeting last week.
  • There are also a few scheduled speeches from US Central Bank Governors which will likely be instructive for markets, given the big moves we’ve seen since their meeting last Wednesday night.

Last Week’s Highlights​

Stock markets were generally negative last week, although weakness in the Pound meant that overseas returns were flattered for UK investors. The UK market fell by 1.6%, with the US and European markets falling by 1.9% and 1% in local currency terms. However, the Pound being down by some 2% versus the Dollar on the week meant that returns for the global index in GBP terms were actually modestly positive, with global stocks up some 0.1% on the week. It was a similar story for Emerging Market stocks, with those assets seeing a return of 0.6% for UK investors.

Within the UK market, there wasn’t a whole lot to choose from across the various indices. The FTSE All Share was down by 1.6%, which was the same as the FTSE 100, while the FTSE 250 was down by 1.8%. The big disparity in the market came on a style basis, with “value” sectors such as Basic Materials performing poorly and being down some 7% on the week. Within the FTSE 100 index, Anglo American was the worst performer on the week (down by 13.7%), followed by Glencore (down 9.6%) and Antofagasta (down by 8.8%). Admiral group was the best performer in the 100 (up by 4.6%), followed by BT Group (up 4.2%) and the London Stock Exchange (up by 3.1%).

The big news event of last week was the Federal Reserve’s meeting, where they revealed a slightly more hawkish tilt towards rate hikes. This meeting was fairly noteworthy as it came hot on the heels of the most recent inflation reading in the US, which showed that consumer prices were rising at their fastest clip in 20 years. The Fed’s dot plot showed that they now expect two rate hikes by the end of 2023 after previously predicting no hikes until 2024. Fed Chair Powell also acknowledged in the press conference that the Fed has begun to discuss slowing their bond purchases (currently running at $120 billion per month) and he acknowledged that observers could characterise the meeting as “talking about talking about tapering”.

Bond markets were pretty choppy during the week but finished it fairly flat. 10-year UK government bonds were up by about 0.2% on the week (with yields closing at 0.75%), whilst US Treasury bonds were up by 0.16% (with yields there closing at 1.44%). Sterling corporate bonds were down by about 0.08% and global high yield bonds down by 0.19% as spreads widened on the week. UK Investment grade credit spreads closed out the week at 1.07%, whilst global high yield spreads ended the week at 3.51%: extremely low levels across both markets.

Following the high number from the US the previous week, it was the UK’s turn to surprise on the upside with inflation, with the CPI number coming in at 2.1% for May which was above the 1.8% level that was expected. RPI came in at 3.3% and average weekly earnings also increased to 5.6% year-on-year, with the unemployment rate coming down to 4.7% (from 4.8%).

Oil prices continued to rise, with WTI oil rising by 1% on the week, which made for the fourth consecutive weekly rise. WTI closed out the week at $71.64/barrel, which is the highest level it has been at since October 2018.

Gold had a rough week, falling by just over 4%, and was hit particularly hard on Wednesday (following the Fed meeting), where it suffered its biggest one-day drop in over 10 months. Generally speaking, higher rates (notably higher real rates) are bad news for gold, as the opportunity cost of holding it increases (on the premise that gold pays no yield).

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

The most recent Fed “dot plot” points towards two rate hikes by the end of 2023

Source: Psigma / Bloomberg

Rory McPherson
Head of Investment Strategy