The weather may be improving, but markets have been looking distinctly rocky of late. A sell-off on Wall Street ahead of the Federal Reserve Bank’s decision on interest rates saw the benchmark S&P 500 Share Index move into bear territory, which is defined as a fall of 20% or more, peak to trough. The more technology focussed NASDAQ had been there already.
The investor disenchantment was kicked off by a surprise leap in US inflation to 8.8%, which led to fears that the Fed would take a more aggressive stance on interest rate policy. Indeed, they did, raising the rate by 75 basis points - the steepest increase in three decades. But once the news was in the public domain, shares rallied and bond yields actually fell. As is so often the case, anticipation is worse than reality.
While the slump in the American market resounded around the world, our own Footsie index had held up remarkably well, being just 7% off its all-time high ahead of the Bank of England’s meeting on Thursday. The dovish approach adopted by the Monetary Policy Committee did bring out the sellers, though. Both shares and the pound traded lower on the news that interest rates were to rise by just a quarter of a point, suggesting that the main concern was the weakness of the economy rather than inflation.
Sterling was already under pressure, having been hit by the twin problems of an unexpected downgrade in our economic performance in April and concerns over a trade war with Europe as plans are put in place to circumvent the Northern Ireland protocol. Generally this helps stock market performance. With so much of the profits from our largest 100 quoted businesses arising outside the UK, a fall in sterling can be seen as a positive for this index.
But there is little doubt that the global growth outlook has deteriorated. Aside from the hangover from the pandemic, which is still affecting China’s short term prospects, inflation around the world could dampen demand, particularly in those countries facing dearer imported food costs. In these circumstances a softly softly approach from the Bank is understandable, but further rate rises will almost certainly take place. We could be in for an interesting summer.
