Weekly Market Wrap 08/07/2022

The UK’s ongoing political chaos appears to finally be turning a corner after Boris Johnson announced on Thursday that he would resign as leader of the Conservative party. The announcement came after more than 60 government ministers and officials resigned this week, many stating that they could no longer support Johnson as Prime Minister. Defense minister Ben Wallace is the current favorite to become the new leader of the Conservatives, although Boris Johnson has stated he will stay in office until a new leader is appointed. Japan’s Former Prime Minister Shinzo Abe was killed on Friday after being shot whilst campaigning for an upcoming election, police arrested a suspect at the scene. US Nonfarm payrolls came in ahead of expectations, whilst unemployment remained low at 3.6%. Markets had expected to see a significant slowdown in the number of jobs added in the US during July. Sterling fell sharply against the dollar this week, as economic uncertainty in the UK and a stronger US meant the pound was out of favor. The pound rose on Johnson’s resignation, as an element of political uncertainty has now been removed.  

US Markets 

The S&P 500 is currently ending the week up 1.31% at 3,876 and the NASDAQ is down 3.49% at 11,989. US and China discussed the current state of international trade this week, with the US government said to be considering lowering tariffs on certain Chinese goods, a move which could help ease inflation. US Nonfarm payrolls, increased by 372,000 in June, significantly above the consensus of 268,000 as unemployment remained close to pre pandemic levels. Both measures point towards a strong labor market and increase the likelihood that the Federal reserve will implement another 75-basis point rate hike in July. US markets fell on Friday after the data was released, as markets fear strong interest rate increases could be just around the corner. 

UK Market   

The UK market ended the week flat. Despite Boris Johnson’s resignation, political risk in the UK has not yet flowed through to equity market volatility. The next general election is not scheduled to occur for at least another 2 years and the Conservative party retains a healthy majority in Parliament despite recent by-election defeats. However, a new leader is unlikely to significantly change the current gloomy macro-outlook for the UK with consumer confidence at record lows, inflation expected to reach double figures this autumn and the UK’s current account deficit at the widest level on record. The UK’s catalysts for its outperformance YTD, including commodity exposure, swift monetary policy and limited exposure to Russian energy sources remain intact. 

European Markets   

The Euro Stoxx 50 gained 0.79% to 3,475, the DAX was up 0.67% at 12,895 whilst the CAC 40 ended 0.93% higher at 5,986. In May 2022 Germany imported more than it exported for the first time in 30 years, a move that German regulators say was in part impacted by fears that the country’s economy will be significantly affected by the large exposure to Russian energy. German authorities have begun rationing energy, telling residents to lower heating temperatures, dimming streetlights, and have discussed the possibility of cutting off hot water for certain buildings. 

Fixed Income  

Yields on the US 10-Year Treasury rose slightly to 3.05%, however US bond funds saw inflows in the last 7 days as concerns about US economic growth pushed investors to look for stability in fixed income. Yields jumped by 4 basis points on Friday after higher than expected nonfarm payrolls data pushed rate interest expectations higher.  

Commodities 

Brent Crude fell by 6.20% this week to $104 per barrel, as fears over a potential recession and a subsequent slowdown in demand. Global oil supplies remain at low levels and stand poised to rebound sharply should economic growth surprise to the upside.  

The Week Ahead  

Monday – US Monthly Budget Statement 

Tuesday – BoE Governor’s Speech 

Wednesday – US CPI 

Thursday – US Initial Jobless Claims 

Friday – China GDP & US Retail Sales 

*Price changes as of last week’s close unless stated otherwise.