Please see the below article from Brooks Macdonald providing their commentary on global markets. Received this morning – 03/08/2023.
What has happened
Equities fell sharply yesterday as concerns around the US debt downgrade focused investor attention on the funding needs of the US government. The US equity market fell by over 1%, recording its worst daily return since April of this year.
US debt financing
Concerns over the quantity of US Treasury issuance over the coming months filtered through risk assets yesterday with the near-term borrowing needs being formalised yesterday. Adding concern was the comment from the Treasury that this increase in borrowing was likely to continue, saying that ‘further gradual increases will likely be necessary in future quarters.’ Treasury issuance raises yields as the price adjusts for additional supply. At the same time, this issuance draws liquidity from other areas of the market (such as equities and corporate bonds), decreasing the prices of risk assets. All of this puts the US budget deficit back into the spotlight with the Fitch downgrade effectively just highlighting the funding concerns, recent political impasses and ongoing fiscal spending.
UK
Today the market’s focus will switch to the Bank of England which is unveiling its latest policy change at midday. The consensus expects a 25bp interest rate hike, with economists reducing the chance of a 50bp move given the downside miss to UK CPI last month. The market is only now apportioning around a quarter chance of a 50bp move after it being the most likely outcome a few weeks ago. The political pressure continues in the interim with Prime Minister Sunak saying that inflation was not falling as fast as he would like and stressing the policy importance of a further reduction in price pressure.
What does Brooks Macdonald think
The shift in market expectations towards a 25bp hike at today’s meeting does not mean that the UK will have necessarily reached its peak interest rate after the move. The market is expecting the Bank of England to need to raise interest rates further over the coming months to guide inflation lower. A strong UK labour market is a particular concern to the Bank of England, therefore one should expect the central bank to continue with their hawkish rhetoric alongside the smaller hike.
Bloomberg as at 03/08/2023. TR denotes Net Total Return
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Alex Clare
03/08/2023