The Cambridge Weekly – 21st August 2023

The Cambridge Weekly – 21st August 2023

Bonds are back

Both equity and bond markets have had another rather difficult week and with it August has mostly erased the positive returns of July. From the medium-term perspective, UK-listed equities are nearly back down to the level at which we started the year. Asia, pressured by Chinese stocks, is about 1% below its January starting point. Overall, world markets are largely unchanged from a year ago.

Sterling too strong

You might be surprised to learn that, on a trade-weighted basis, the best performing major currency of the year so far is none other than our Great British pound. Sterling has gained 5.13% against the UK’s trading partners since the start of 2023. The euro is up just 2.3% over the same period, while the dollar is basically flat (in fact down 0.2%) and Japan’s yen has sunk 8.6%.

Moves in currency values are normally seen as reflecting confidence – or lack thereof – in regional economies. But the commentary around Britain’s economy this year has been nothing but glum. We have had persistently high inflation (now much higher than other countries), and aggressive interest rate rises leading to soaring mortgages and falling house prices. Although the UK has not officially dropped into recession, growth has been effectively zero for over a year.

Russia struggling to shift supply

Oil traders are feeling bullish. Crude prices are around $5 per barrel higher than a month ago – despite a fairly sizable pull-back last week. In July, international oil benchmark Brent crude was one of the best performing indices, gaining 11.9% in sterling terms. Last week’s jitters came after further economic disappointment in China, but some industry analysts see them as just a hiccup. Thanks to meaningful production cuts from OPEC+ (which includes Russia), predictions of $90 per barrel (pb) or even $100pb are being floated.

That would be quite the turnaround. Brent is a little under $85pb at the time of writing, and has not settled above the $90 mark since mid-2022. Since then, supply side fears have faded, and global demand has become the key concern. Developed markets have slowed, and a few have slipped into recession, while the Chinese economy – so often the main driver of global commodity demand – has severely undershot expectations from the start of this year. Tellingly, during the fall back from 2022 highs, Brent fell below the five-year average price in real (inflation adjusted) terms.