19th September 2023
A brighter economic outlook shines from the east
Several equity markets bounced last week as investors processed relatively positive economic news from China, with the country’s industrial output rising 4.5% in August, compared to a year earlier. This rise, which was higher than the 3.7% increase reported in July, was followed by the relaxing of rules around reserve requirements for banks by 0.25%. This move aims to increase liquidity in the Chinese market – although it does come with its own risks.
Nevertheless, all positive moves – and ones that have made investors optimistic that China might have weathered the worst of the post-Covid storm.
Fuel prices spark inflation bump in US
Inflation is still very much on investors’ minds, though. Rising US inflation served as a caution that inflation might take longer to reduce and that interest rates might also remain higher for longer.
Indeed, the US saw inflation increase from 3.2% in July to 3.7% in August. The culprit? Oil prices – which have been on the climb since July due to events overseas. Oil has been especially politicised since Russia’s invasion of Ukraine and recently Saudi Arabia announced plans to cut production through to the end of 2023. A barrel of Brent crude will now cost your over $90 a barrel, compared to the $70–80 you could find it as a few months ago.
Ian Shepherdson, Chief Economist at Pantheon Macroeconomics, commented:
“[The new inflation figures] raises the odds of a rate hike next week but not by much; we expect the Fed to remain on hold, but to signal willingness to hike again depending on the data. Our take on the data over the period before the November meeting suggests the Fed won’t hike then, either. We think the chance of another hike is about 25%.”
Reasons to be cheerful in Europe
In Europe, softer messaging – and a 0.25% hike on interest rates – from the European Central Bank (ECB) lifted markets.
While the change in central interest rates wasn’t a huge surprise, the accompanying commentary drove market direction. ECB president Christine Lagarde said that although inflation continues to decline, it’s still too high. She noted:
“Based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.”
Lagarde added that future decisions will be set at ‘sufficiently restrictive levels’ for as long as needed.
Interpreting this statement, Felipe Villarroel, Partner at TwentyFour Asset Management, explained:
“Our take is that this is likely to be the ECB’s last rate hike for now. We see economic data for the remainder of the year continuing to weaken, albeit we do not expect a significant recession as we see growth being barely positive. In the meantime, inflation will be materially lower mostly due to the impact of past rate hikes and base effects. This is not an environment that’s conducive for further rate rises considering the monetary policy stance is already considered restrictive.”
European indices like the STOXX 600 and DAX 40 finished the week up – taking heart that European interest rates were likely to flatten for now.
The favourable economic winds didn’t stop at the channel, with a number of UK shares also lifted by the news from China. It was also a good week for UK equities, with the FTSE 100 finishing the week up over 3%. The messaging from the ECB combined well with the successful listing of UK chip giant Arm Holdings Plc to create a ‘feel-good factor’ for UK markets – despite Arm ultimately listing on the NASDAQ, not the FTSE.