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Equity and bond markets became increasingly more volatile in August, increasing investor expectations of further interest rate rises being required to counter the high and persistent level of inflation. During August Sterling continued to weaken, particularly against the US Dollar.
Equity and bond markets staged a recovery in July as forward looking economic activity indicators weakened, allowing investors to anticipate a lower, and perhaps earlier, peak in the interest rate cycle. However, central banks’ current aggressive interest rate hikes to combat inflation, pose a danger to global economies as they may push them into recession.
Investors continued to contemplate whether inflation will remain elevated and impact upon consumers ability to spend during June. This in turn led to most equity markets having a negative month, with the exception of China, where the relaxation of Covid restrictions led to a significant positive return.
Headwinds for investors continue to remain significant. Inflation continues to rise and developed market central banks have responded by raising interest rates. The Russian invasion of Ukraine and lockdowns imposed in China have added to supply chain difficulties. These headwinds have had a negative impact on both bond and equity markets.
At the start of 2022, it was expected that inflation would ease as the
pandemic began to dissipate. However, with the war in Ukraine continuing and the prices of energy, metals, fertilisers and food rising, inflationary pressures have not eased. Inflation in the US alone has reached a 40 year high of 8.5%, with record numbers also projected for the UK and in Europe.
During March, concerns over the economic implications of the Russian invasion of Ukraine has weighed on both equities and bonds. Russia is a major energy and commodity producer with the conflict pushing prices markedly higher, which has exacerbated the surge in inflation. Furthermore, the global supply chain remains disrupted from the impact of the pandemic and remains a risk to global growth, especially in China where further lockdowns have been enacted.