WeeklyWatch – Interest rate hikes escalate, leaving markets floundering

21 June 2022

Stock Take

US rate hikes

With growing apprehension around an impending recession, and central banks continuing to raise interest rates, global equities posted some of their worst returns last week since the outbreak of the pandemic.

The US Federal Reserve made its biggest move since 1994, increasing rates by 0.75%. Unlikely to be the last of the hikes, the Fed forewarned that it “anticipates that ongoing increases in the target range will be appropriate.”

This came about just a few days after the official revelation that US inflation had hit a four-decade high of 8.6% – way above the Fed’s 2% target.

The enormity of this rise was felt throughout financial markets, with investors increasingly concerned about a potential recession. Not only that, but the S&P 500 plunged by -5.8% – its poorest weekly performance since the first half of 2020.

This week will see markets watch with anticipation when Fed Chairman Jerome Powell testifies to the upper and lower chambers of Congress.

Elsewhere on markets

Interest rate rises were likewise seen elsewhere, with the Swiss National Bank making a surprise move with its first rate increase since 2007. This opening Swiss salvo was a 0.5% increase, and it advised of further potential increases in the future.

The Bank of England (BoE) raised rates by 0.25% – for its fifth consecutive meeting. Given the Fed’s acceleration, questions are now being posed about whether the BoE might follow in its footsteps and start to increase the rate by larger amounts.

AXA’s Adegbembo Modupe commented:

“We see a 0.5% move in August as firmly on the table, but for now continue to expect 0.25% increases in August, September, and November as our base case.”

There could be a number of influences at play – commodity and energy markets are unstable and are set to remain so as long as the war in Ukraine continues. Recent weeks have shown that this, in turn, will impact on inflation, and the ongoing inflation expectations will themselves have an effect. On the other hand, Modupe called out the labour market as being critical to the BoE’s assessment of medium-term inflation pressures, and remains tight.

Modupe said:

“Signs of further labour market tightening would likely steer the Committee towards a sharper move next month – particularly if wage growth continues at the high monthly rate posted in April. For now, we remain of the view that Bank Rate will rise to 2.0% by November and will close the year at this level – far short of current market expectations.”

Striking a balance

Over the course of the week, both the FTSE 100 and 250 dropped sharply – by -4.1% and -3.8%, respectively. In a similar vein across Europe, the MSCI Europe ex. UK declined by -4.5%.

The problem that central banks now face is attempting to equalise the need for growth with attempts to control inflation. Indeed, increasing interest rates helps to reduce inflation, yet this can also hamper economic growth by making it more expensive to borrow. Due to the fact that growth is already struggling, many fear that an abrupt increase rate rise could push economies into a recession.

The debate around increasing rate rises will likely continue to directly affect investor returns.

Alexander Robinson, Associate – Global Assets at leading investment consultancy Redington, proposes:

“At the moment, Central appear to have embarked on a rapid tightening of monetary conditions, with interest rate hikes accompanying balance sheet reduction (otherwise known as Quantitative Tightening). If they hold to this path, it seems unlikely that equity markets can move meaningfully higher unless valuations become much more attractive. If inflation does, belatedly, prove somewhat transitory and economies are starting to weaken, then it is likely that central banks will need to change tack, and in turn this would be more positive for equity markets.”

Wealth Check

Cash ISAs have remained extremely popular since their launch in 1999. In the 2019/20 tax year, Cash ISAs made up 75% of all accounts, with savers paying into 9.7 million plans – 1.2 million more than the previous year.1

Cash ISAs are undoubtedly favourable – your money can be easily accessed, meaning you have funds on hand in the event of an emergency, plus it’s protected from tax.

However, that isn’t necessarily the best setup for all your savings. Investing too much money into cash accounts could mean that savers miss out on potential growth opportunities that will help safeguard them from the rising costs of living and help them meet their financial goals.

Even despite the recent increases, interest rates are very much below the rate of inflation. For money saved in a Cash ISA, this means a loss of purchasing power over time.

Investing in a Stocks & Shares ISA could be a viable alternative. A higher-risk option – in that the value of your savings will drop when markets fall – over time, you have the potential to earn more than if you’d only kept your money in cash. Plus, you still won’t pay tax on the gains within your pot.

Taking stock

While it can be intimidating to increase your exposure to the stock market, professional advice can be transformative. Discussing your short-, medium- and long-term financial goals with your adviser could see you working out how much you need to keep in easy-to-access cash accounts and how much you can afford to invest in stocks and shares to achieve those longer-term goals.

What’s more, your adviser can give you peace of mind by helping you find investments that align with your risk profile and investment horizon.

The value of an ISA with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA.

The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.


1 Commentary for annual savings statistics: June 2021, gov.uk, 15 June 2021

The Last Word

“This culture of compromise is one we will have to adopt but we must do so around clear values, ideas and political projects for France.”

Bruno Le Maire, French Finance Minister reacts to the French Parliamentary election, in which president’ Macon’s party failed to win a majority.

The information contained is correct as at the date of the article.

AXA is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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