10th October 2023
Decreasing global oil prices
Dramatic events around the world significantly affected investment performance last week.
Oil prices are likely going to face increased pressure as a result of the developing situation in the Middle East. In response to the weekend attacks, Brent crude prices increased by about 5% at the start of Monday.
Last week, despite continuous supply cuts by the world’s two largest producers, Saudi Arabia and Russia, prices last week were hit by a spike in treasury yields, prompting markets to once again consider the possible damage that a longer-term increase in interest rates may do to the world economy. From Monday to Friday, the price of Brent Crude oil decreased 11.3% overall.
US economy remains strong
Even though oil prices were beginning to decline, equity markets still delivered a ‘mixed’ performance. With a 0.5% gain, the S&P 500 in the US was able to break through its four-week losing stint. This was fuelled by a handful of large technology companies that did substantially better than the wider market.
The continued strength of the US economy, which has been supporting the idea that interest rates would stay higher for longer, is one of the challenges facing US equities. For example, US employment figures were announced last week. In September, 336,000 new jobs were generated, which was over twice as many as economists had predicted. The figure from the previous month has also improved.
Mark Dowding, Chief Investment Officer at BlueBay, commented on the positive sentiment:
“For now, economic activity remains relatively upbeat, as suggested by business sentiment surveys and a rebound in the number of job openings, in the wake of weaker data last month.
“Anecdotal discussions in the US this week have also highlighted a shortage of housing inventory (in the Connecticut area) and shortage of new autos for sale (in Minnesota). It is interesting that such discussions remain much more prevalent than worries related to rising credit card bills or fears of economic slowing. However, sentiment can quickly shift, as we saw in March of this year.”
The effects of a turbulent US government
Markets now face an extra obstacle due to US politics. Republican House of Representatives Speaker Kevin McCarthy was fired at the beginning of last week. The Republicans hold a slim majority in the House, and McCarthy had difficulty uniting the many factions within his own party. He had contributed to the passage of a compromise bill the weekend before, which averted a 45-day government shutdown.
His departure, though, raises the possibility that a US government shutdown would happen once more before 2023 is through. Significant short-term uncertainty is being caused by the tumultuous political environment right now.
Markets encouraged by potential inflation slowdown
The US’s September inflation data will be made public next week. Headline inflation may climb as oil prices rise, but analysts will be focusing on the core inflation figures, which exclude more volatile areas like fuel.
Any decrease in the evidence will support the idea that the Federal Reserve will maintain stable interest rates when it meets in November to review the matter. Markets are likely to be encouraged by such thinking.
Disappointing performances in Europe
These difficulties have extended to European markets. Europe had weekly losses as the MSCI Europe ex UK index and the FTSE 100 declined by 1.1% and 1.5%, respectively.
The economic situation has become more difficult for European markets and most of the large markets are growing slowly.
The previous week serves as a useful reminder that markets may be unpredictable in the short term and that investments should be thought of in the long term due to unforeseeable events that can have a significant impact on investment performance.