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Market Update November 2022

Government react to cost of living crisis

  • The Bank of England raised base interest rates by 0.75% to 3%, the biggest hike since 1989, and forecasts a recession until 2024.

  • Inflation reaches 11.1% for October, up from 10.1%. Food price inflation is even higher, rising from 14.6% to 16.4%, its highest level since 1977.

  • The US Federal Reserve also raise their Fed Funds Rate by 0.75%, although inflation continues to fall, down from 8.2% to 7.7% in October.

  • The Chancellor, Jeremy Hunt, delivered his delayed autumn statement to the House of Commons, which focussed on measures to stabilize the economy amid a cost of living crisis.

  • The UK's Royal College of Nursing announces the first strike in the union's 106-year history as it demands higher wages for medical workers in order to keep up with rising inflation.

  • China lifts its most severe Covid-19 policies following widespread protests.

  • The US dollar sees biggest monthly loss since September 2010, as risk appetite returns to markets.

  • Cryptocurrency exchange FTX files for bankruptcy, leaving an estimated 1 million customers and other investors facing total losses.

  • Former President Donald Trump announces he is running for the Republican Party's nomination in the 2024 U.S. presidential election.

Equity markets continued to recover in the first half of November, as weaker than expected inflation data in the US increased hopes that the US Federal Reserve (Fed) will begin slowing its pace of interest rate hikes. This also helped bond yields to retreat, with the rate on 10-year US Treasury Bonds falling sharply. The yield on 10-year UK Gilts also fell, from 3.51% at the start of the month, to less than 3% at one point. The rate settled a little higher by the end of the month.

Both the Fed and Bank of England increased their key borrowing rates by the 0.75% that markets were expecting in November. For the UK, this represents the biggest single interest rate rise since 1989. According to the BoE, the UK economy faces a “very challenging outlook”, with a recession that began this summer now expected to last until the middle of 2024. With the possibility of a general election being held in 2024, the Conservatives face campaigning to remain in government at the tail end of a prolonged slump, during which the Bank said it expected unemployment to rise from 3.5% to 6.5%.

However, there was some relief for mortgage holders as the central bank downplayed City expectations of a steep rise in the cost of borrowing to above 5%, arguing that the prospect of a two-year recession meant it was likely to take a much less aggressive stance.

Inflation remains high throughout the world, with the UK reading of 11.1% in October representing a new 41 year high. Even Japan, which has battled with deflation for over three decades, saw its inflation rate reach a 40 high of 3.7%. The October inflation report from the US showed that consumer price inflation fell to its lowest rate since January, although the rate of 7.7% remains well above the Fed target of 2%.

Later in the month, the Chancellor, Jeremy Hunt, delivered his delayed autumn statement to the House of Commons. The result being that the £50bn of tax cuts from Kwasi Kwarteng will be replaced by circa £55bn of spending cuts and tax rises under Jeremy Hunt – a swing of well over £100bn. The biggest giveaway for 50 years has become the highest tax burden since the second world war. Amongst the announcements was a reduction in the level at which additional rate of income tax is payable from £150,000 to £125,140 next year. A freeze on income tax bands will move many more people into higher tax bandings. Added to this, state pensions and benefits were increased by 10.1%, underlining that the previously questioned triple lock remains firmly in place and central to the promises of a Tory leadership.

Equities generally weakened during the second half of the month after Fed officials warned that markets could be getting ahead of themselves and bringing down inflation might not be possible without triggering a recession. The US Dollar, which has reliably acted as a safe haven this year during risk-off periods, reversed course and suffered its biggest monthly loss since September 2010. Sterling rose 3% versus the greenback during November.

The MSCI World Equity Index ended the month up 3.5% in Sterling terms, with the majority of the gain occurring on the last day of the month after Fed Chairman Jerome Powell signalled that interest-rate increases could indeed slow down. UK equities outperformed, with the FTSE 100 Index gaining 7.1%. Chinese equities were the clear winner during the month, fuelled by signs that the country is starting to shift away from its strict zero-Covid policy following widespread protests. There were also moves by the government to ease pressure on its wobbling property sector. The MSCI China Index ended the month up 25.4%, although the Index remains down 10% over the past three months.

Commodity markets gave mixed signals during the month. The price of crude oil dropped, meaning it has now fallen for five of the last six months. At one point the price fell below its 2022 starting point. Market commentators generally blamed a global economic slowdown and a surge in Covid-19 cases in China for falling oil demand. However, silver, which is traditionally quite highly correlated to economic changes due to its industrial uses, enjoyed a very strong month as it rose by 17%. The price of gold jumped 9%, snapping a seven-month losing run.

Elsewhere, cryptocurrency prices crashed following the filing for bankruptcy of exchange FTX, amid allegations of fraud against founder Sam Bankman-Fried. The price of Bitcoin slid 16%, to end the month at its lowest level since October 2020.

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

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