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Stocks fall as Fed signals earlier interest rate hike

Most major stock markets fell last week after the US Federal Reserve indicated it would increase interest rates sooner than expected.

The interest rate projection was accompanied by a surprisingly hawkish press conference led by Fed chair Jerome Powell, which sent the Dow down 3.5% in its worst week since October. Investor sentiment was also knocked by an increase in initial unemployment claims to a higher-than-expected 412,000.

Interest rate jitters fed through to Europe, where the STOXX 600 declined 1.2% and Germany’s Dax lost 1.6%. The FTSE 100 also fell 1.6% as inflation jumped and the government pushed back the final lifting of lockdown restrictions in England from 21 June to 19 July.

Over in Asia, Japan’s Nikkei 225 edged up 0.1% after the Bank of Japan left its policy rate targets unchanged and figures showed the highest export growth since 1980. Conversely, China’s Shanghai Composite recorded its third consecutive week of losses amid weak retail sales data.

Last week’s markets performance*

  • FTSE 100: -1.63%

  • S&P 500: -1.91%

  • Dow: -3.45%

  • Nasdaq: -0.28%

  • Dax: -1.56%

  • Hang Seng: -0.14%

  • Shanghai Composite: -1.80%

  • Nikkei: +0.05%

    * Data from close on Friday 11 June to close of business on Friday 18 June.

    Morrison surges after rejecting takeover bid

    Supermarkets led the blue-chip FTSE 100 up 0.6% on Monday (21 June) to 7,062. Shares in Wm Morrison surged 34.6% after the supermarket rejected an unsolicited £5.5bn takeover bid from a US private equity firm, saying it undervalued the chain. Morrison’s peers followed suit, with Ocado, J Sainsbury and Tesco gaining 4.0%, 3.8% and 1.7%, respectively.

UK stocks were also boosted by prime minister Boris Johnson’s remarks that the prospects for ending Covid-19 restrictions on 19 July were ‘looking good’.

Over in the US, the Dow bounced back from last week’s losses, gaining 1.8% as investors brushed off concerns about tighter US central bank policy. European shares also finished higher, with the STOXX 600 adding 0.7%.

The FTSE 100 was up 0.2% at Tuesday’s market open, ahead of Fed chairman Jerome Powell’s testimony to Congress. According to newspaper reports, Powell is expected to discuss the US economy’s recovery from the pandemic and the rise in inflation, while maintaining his stance that monetary support is still needed for now.

Fed ‘talking about talking about’ tapering

Last Wednesday’s Federal Reserve policy meeting took investors by surprise, with the summary of economic projections revealing policymakers expect two rate hikes by the end of 2023. Back in March, the Federal Open Market Committee said it saw no increases until at least 2024.

The central bank gave no indication as to when it will start tapering its asset purchasing programme, but Powell admitted officials had discussed the issue. “You can think of this meeting that we had as the ‘talking about talking about’ meeting,” he stated.

The Fed increased its headline inflation expectation to 3.4%, one percentage point higher than the March projection, while reiterating its position that inflation pressures are transitory. “Our expectation is these high inflation readings now will abate,” Powell said, adding that the reopening of the economy raises the possibility that inflation could be higher and more persistent than anticipated.

Fed officials also increased their gross domestic product (GDP) expectations for 2021 to 7.0% from 6.5% previously, whereas their unemployment estimate remained unchanged at 4.5%.

UK inflation jumps to 2.1%

The UK consumer prices index (CPI) jumped to 2.1% in the year to May, up from 1.5% in April and the highest for almost two years. The reading was above economists’ forecasts of a 1.8% rise and higher than the Bank of England’s 2% target. On a monthly basis, the CPI rose by 0.6% in May.

The Office for National Statistics said the monthly decline in May was most likely driven by the easing of hospitality restrictions, which impacted supermarket sales as people returned to eating and drinking in restaurants and bars.

Indeed, the weakness in retail sales contrasted with the latest UK employment data, which revealed the number
of payrolled employees surged in May by 197,000 – the largest monthly increase since records began in 2014.
The number of employed people reached a total of 28.5m, which was still more than half a million fewer than before the pandemic hit.

The biggest contributor came from fuel prices, which surged by 17.9% on an annual basis, the highest increase for more than four years. Clothing prices increased by 2.3%, the biggest rise since 2018, as retailers reduced discounting. The overall rise in inflation was partly offset by cheaper food and drink prices.

The figures came a week after Andy Haldane, the Bank of England’s departing chief economist, warned that even muted wage price spirals could leave inflation well above target for a protracted period. In a column for New Statesman, he argued that “acting early as inflation risks grow is the best way of heading off future threat”.

Investors will be keeping a close eye on the Bank of England’s policy announcement this coming Thursday (24 June) for any shift in tone around monetary policy and interest rates.

Retail sales fall as shoppers dine out

UK retail sales fell by 1.4% between April and May following a sharp increase the previous month when restrictions eased. The largest contributor to the decline came from food stores, where sales volumes fell by 5.7%. Non-food stores saw a 2.3% increase in monthly sales volumes, with household goods stores (such as hardware and furniture) recording growth of 9.0%.

Overall volumes were 24.6% higher than in May 2020, when the tightest restrictions were in place during the first national lockdown.

The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance.
Performance is quoted before charges which will reduce illustrated performance.
Investment values may increase or decrease as a result of currency fluctuations.


Most major stock markets fell last week after the US Federal Reserve indicated it would increase interest rates sooner than expected.

 

 

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