The Cambridge Weekly – 10th October 2022

Reading the runes of last week’s market bounce

Market volatility has been in the air all year and, given the macroeconomic backdrop, this is not at all surprising. A weakening global economy marred by war and labour market-driven supply squeezes, while simultaneously trying to cope with aggressive central bank rate hiking to prevent inflation turning permanent, all makes for the distinct whiff of recession. But volatile markets do not always swipe down, as the beginning of last week showed, nor do they stay volatile forever. Last Monday and Tuesday saw a formidable ‘relief’ rally in global equities. Indeed, on Tuesday, US stocks recorded their biggest daily gain since 2020, leaving the S&P 500 up 5% by midweek.

September review: Recession expectations take hold

September’s market activity displayed similarities to August: after an encouraging start, every asset class bar gold headed south. The month ended with an acceleration in the sell-off, which brought the summer quarter to a disappointing close. Fast-rising bond yields and another slump in £-sterling relative to the US dollar were the drivers for UK-based investors, but the acceleration in the US stock market decline relative to the UK market, meant that not even the appreciation in the value of the dollar was enough to counterbalance the decline. The energy crisis and rising costs of living affected sentiment and, as a result, all major equity markets ended the month in the red. Global equities declined 5.7% for sterling investors.

Europe’s fiscal fight

Last week saw Britain’s most powerful political duo (Liz Truss and Kwasi Kwarteng) scrambling to contain the fallout from their ‘fiscal event’ two weeks before. A reversal on the 45% top rate of income tax and vague affirmations of fiscal prudence are what they have to show for it, but they at least seem to have partly done the job. Gilt yields have stabilised, while sterling is back above $1.10 and looks unlikely to fall down again in the short-term (touch wood). Both are in a significantly worse position than before though, and a gaping hole in the public purse remains. The reasoning is well rehearsed by now: a dramatic loosening of fiscal policy, at a time of runaway inflation and acute supply shortage, will dramatically increase cost pressures, threaten budget stability and push up interest rates, draining the system of liquidity.

Another oil shock in the pipeline?

News of production cuts from the world’s biggest oil exporters pushed crude prices higher last week. Onlookers fear yet another energy price shock, which could be a hammer blow to a fragile global economy. In truth, the world economy has been hit by so many ‘shocks’ in recent years that each one feels distinctly less shocking – though no less harmful to growth. On top of the pandemic hangover and Europe’s natural gas crisis, OPEC+ countries – led by Russia and Saudi Arabia – agreed last Wednesday to cut output targets by two million barrels per day (bpd) from November. That represents about 2% of global oil production and, coming in the middle of rapid inflation across the Western world, parallels have been drawn to the devastating oil shocks of the 1970s.