Please see below today’s Daily Investment Bulletin from Brooks Macdonald – received this morning – 25/08/2022
What has happened
Bond markets continued to price in higher central bank interest rates as fears over the European energy sector weigh on inflation expectations. Despite this bond volatility, equities managed to make gains yesterday with longer duration equities, such as technology, somewhat counterintuitively outperforming.
European energy
European natural gas futures continued their climb yesterday as investors look ahead to higher demand during the winter period. There has also been a growing concern that Russia may not reopen the Nord Stream 1 pipeline after three days of closure from 31st August. Recent rhetoric has also pointed to little appetite for Russia to seek a ceasefire in the Ukraine War, making it ever more likely that Ukraine War related supply side issues will continue well into 2023. Freeport LNG said yesterday that their natural gas terminal in Texas, which was shut down due to an explosion and fire, would not be reopened until November, later than energy markets had hoped. The latest rises in European energy prices quickly filtered into ECB rate expectations with the bond market now expecting 133bps of additional rate rises before the end of this year.
US politics
President Biden announced yesterday that the US would be providing student debt relief of up to $10,000 for graduates on an income of less than $125,000. Those receiving Federal aid would also be eligible for a larger payment. Federal student loan repayments are currently frozen and this pause will now be extended until the end of this year. This is very much a response to the cost-of-living squeeze in the US and while the US cost-of-living pressures are less pronounced than within Europe, the upcoming mid-term elections make proactive economic policy particularly politically attractive.
What does Brooks Macdonald think
Only a few months ago the Democrats looked likely to lose both the Senate and the House of Representatives in November. Recent legislative wins and targeted economic support, such as yesterday’s student loan programme, have put the Democrats odds on to retain the Senate and close to a 25% chance of retaining the House (which was always a distant prospect). Political cycles, and the global lack of appetite for austerity, mean many governments will be tempted to reach for accommodative fiscal policy at this time. Central banks are already wary of this risk however, in case it prompts even higher inflationary pressures.
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Cyran Dorman
Trainee Paraplanner
25/08/2022