Please see the market update below received this morning from Brooks Macdonald:
What has happened
Yesterday saw further swings in bond and equity markets as the ECB and Fed’s latest comments were absorbed by the market
Federal Reserve
In line with the updated market expectations, the Fed hiked interest rates by 75bps yesterday. Whilst you could argue that forward guidance should be taken with a pinch of salt after the well-telegraphed 50bp hike was abandoned with days to go until the meeting, markets still paid much attention to Fed Chair Powell’s words. The phrase that investors have focused on is the comment from Powell that he didn’t expect 75bp ‘moves to be common’. The market took this positively, with 2-year yields falling sharply and risk assets, particularly rate sensitive areas such as technology, posting gains. Whilst this was the key message that markets took away from the Fed press conference, the economic projections from the Fed underline how difficult it will be for the central bank to engineer a soft landing where inflation comes down but economic growth remains positive.
ECB
We have learnt time and time again to focus on action from the ECB rather than words that can give a misleading impression that there is unity amongst the ECB Governors. Despite this, risk assets appreciated the urgency shown by the ECB in calling an emergency meeting to discuss plans to avoid fragmentation of Eurozone bond markets. The statement suggested that the ECB may use some of the funds generated by bonds maturing in their existing asset purchase programmes to support the peripheral bond market though the general consensus is that such support would be a drop in the ocean compared to the size of outstanding Italian debt. Of more interest is the development of a new ‘anti-fragmentation instrument’ although specific details on the size or conditions of such a plan remain elusive. Despite this room for cynicism, peripheral bond markets rallied significantly yesterday with Italian and Greek 10-year yields falling sharply.
What does Brooks Macdonald think
With the ECB and Fed out of the way, markets will now focus on the Bank of England meeting later today. The BoE have similar inflation considerations to the aforementioned banks however they have been more nervous around the UK’s economic growth momentum. Showing how little consensus there around whether the BoE will prioritise inflation or growth, the market is predicting a 50:50 chance of the bank choosing to hike by 25bps or 50bps.
Bloomberg as at 16/06/2022. TR denotes Net Total Return
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Please keep safe and healthy.
Carl Mitchell – Dip PFS
Independent Financial Adviser
16/06/2022