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Market Update June 2023

Global economy and equity markets resilient in face of rising rates

  • US Federal Reserve delivers a ‘hawkish’ pause as they decide not to hike interest rates but indicate that further hikes are likely.

  • Bank of England unexpectedly increases UK base rate by 0.5% as the labour market remains strong. The European Central Bank raises its main interest rate by 3.25% to 3.5%, the highest since 2001.

  • US economic data comes in stronger than expected and Q1 GDP growth revised higher.

  • Inflation pressures gradually cooling but core inflation in the US rises to 5.4% in June. UK inflation stays at 8.7%, with food inflation running at 18.3%.

  • UK households withdrew a record £4.6bn from banks in May, the highest total since records began in 1997.

  • UK chancellor Jeremy Hunt announces that UK banks have agreed to delay home repossessions for 12 months.

  • Junior doctors in the UK stage a 72-hour walkout over pay, rejecting the government’s 5% offer.

  • UK annual house price inflation fell for the first time since 2012. Prices down by 1% in the 12 months to May, according to Halifax.

  • Official estimates of manufacturing activity in China showed a third month of contraction in June, as the reopening of their economy from Covid lockdowns continues to disappoint.

  • Wagner Group stages mutiny against the Russian Defence Ministry.

  • Hundreds of protestors are arrested in France during riots following the killing of a teenager by police at a traffic stop.

  • Former US president Donald Trump pleads not guilty to 37 charges related to his possession of classified documents.

Equity markets enjoyed a better month in June. The MSCI World Equity Index gained 3.4% and Apple became the first public company to be valued at over $3trn. Investors were encouraged by a raft of stronger than expected US economic data released by the world’s largest economy during the month, as well as a revised increase to first-quarter GDP growth. At the same time, inflation in most regions is showing further signs of dissipating and the US labour market is cooling.


These factors helped convince the US Federal Reserve to pause its interest rate hiking schedule in June, after ten consecutive rate rises, although the market expectations are still for a further two rate rises before the process finally comes to an end. A belief is forming that a ‘goldilocks’ soft economic landing can be achieved following the recent inflation crisis. This can also be seen in the VIX Index, which is traditionally referred to as Wall Street’s ‘fear index’. The Index fell over 24% during the month and registered its lowest month-end reading since before the Covid pandemic.

During the month, UK headline inflation remained stubbornly high at 8.7%, yet core inflation (excluding food and energy prices) rose from 6.8% to 7.1%. This, as well as the strong labour market, no doubt led to the Bank of England surprising some of the market with a 0.5% rate rise, to take UK interest rates to 5%. Policy makers are ultimately gambling that the UK economy is strong enough to bear the highest borrowing costs in 15 years, whilst casting a deaf ear to those with mortgages that need refinancing in the latter part of the year as interest rates are now expected to peak over 6%. With about a million households refinancing their home loans over the rest of this year, and a similar amount in 2024, the effect of a near five percentage-point increase in official rates will be felt acutely. Against this backdrop, UK equities underperformed, with the flagship FTSE 100 Index rising only 1.4%.


Defensive stocks as well as defensive sectors such as consumer staples and utilities underperformed. Chinese equities also lagged, as data showed that manufacturing activity has slowed and retail sales, industrial production and fixed asset investment in May came in below expectations. The Chinese central bank responded by cutting its key interest rates, but the MSCI China Index only increased 1.3% in June. Brazilian equities outperformed, helped by its strong currency, the Real. The country is benefitting from hiking its interest rates much earlier than most developed nations, which has helped contain inflation. The MSCI Brazil Index rose 10.9%.


Despite broadly cooling inflation around the world, the interest rates on bonds generally rose, especially for shorter dated bonds. This hurt bond prices and caused the US Treasury yield curve to become more inverted. This is relatively unusual situation where bonds that mature soon offer a higher interest yield compared to bonds that mature further in the future. An inversion is usually followed by a recession, although the timing is very uncertain. Credit spreads broadly tightened in June as risk appetite returned, meaning lower quality corporate bonds outperformed government bonds, which are deemed to have no credit risk.


In currency space, Sterling was quite strong, particularly versus the US Dollar (+2.5%). The Japanese Yen continues to be weak as the Bank of Japan continues to keep its interest rate on hold at -0.1%, meaning it has not raised rates since 2007. Sterling gained 5.8% versus the Yen during the month.


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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.


It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.


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Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.


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