08 February 2022
Interest rates rise…
Volatility was the order of the day last week, with fuel prices, rising interest rates and mixed results from some of the tech heavyweights adding to global market pressures.
In the UK, energy regulator Ofgem revealed its energy price cap would be increasing by £700 a year, feeding worries around inflation and pressures on the cost of living. Traders also needed to assess the potential impact of the price of a barrel of Brent crude oil hitting a seven-year high.
Rising inflation is still on the minds of policy makers, with the Bank of England (BoE) taking measures to counter it by increasing interest rates from 0.25% to 0.50%. This represented the first back-to-back interest rate rise the UK has seen since 2004, and implies that the Bank is being more hawkish than expected. Paul Dales, Chief UK Economist at Capital Economics, commented:
“The decisions by the BoE to hike interest rates from 0.25% to 0.50% and to start reversing quantitative easing were both as expected…It feels as though the Bank is stepping up its fight against inflation. This supports our view that rates will be raised to 1.25% this year compared to the rise to 0.75% that most economists had been expecting.”
Across the channel, on the same day as the BoE’s announcement, the European Central Bank (ECB) opted to keep any policy changes on ice. However, in contrast to their actions, the tone of the press conference itself was one of concern. Azad Zangana, Senior European Economist and Strategist for Schroders, said:
“Christine Lagarde, President of the ECB, was keen to emphasise the concern governing council members felt over inflation, and the impact on the population. When pressed, Lagarde would not repeat the guidance that interest rates were very unlikely to rise in 2022. Instead, [she] stated that a full assessment of incoming data and the risks to the medium-term outlook was required. This will follow next month.”
…while tech stocks fall
Across the pond, it wasn’t inflation but iPhones that were causing a shake-up. The volatility was caused by some mixed results from the largest technology names – Meta (formerly Facebook) revealed a negative impact caused by Apple’s recent iPhone privacy changes, plus its first-ever drop in users. This saw the company lose over a quarter of its market capitalisation in a single trading session – approximately $230 billion, the largest one-day loss in US history.
While Meta witnessed the biggest fall, it was not alone. In a bad day for investors, companies such as PayPal and Spotify also dropped on weaker outlooks. Overall, these falls and the uncertainty they brought helped bring down the S&P 500 by 2.4%, and the NASDAQ down by 3.7% on Thursday. Both indices had started the week well; however much of this momentum was consequently wiped out on Thursday, before a bounce-back on Friday.
This serves as a reminder of the importance of diversification. With parts of the market struggling and others growing, a broad base of investments in your portfolio can help smooth returns in the short-term and provide a stable foundation for achieving long-term financial security.
Spotlight on East-West relations
Wider geopolitical events also remained a factor on global markets – specifically, the tensions over Ukraine, where Russia and the various Western powers remain locked in talks, with both sides accusing the other of stoking tensions.
Speaking at an Invesco Global Investors Forum, Sir Adam Thomson, former UK Permanent Representative to NATO, said investors were going to have to get used to an unstable equilibrium between the East and the West, as Russia attempts to assert itself as a great power and imposes its understanding of interstate relations.
While this might suggest increasing tensions in the future, Thomson suggested the West will get better at handling East-West relations. He also suggested an all-out invasion of Ukraine by Russia was unlikely because “things are going well for Moscow” with the talks – and Russia may be able to receive significant diplomatic concessions preferable to war.