OUR REVIEW OF KEY EVENTS DURING THE LAST MONTH
31/07/2022
Global Financial News
Developed markets largely had a positive month and clawed back some losses made earlier this year as investors digested the impact of the war in Ukraine, the rise in inflation and the monetary response, amongst many other things. The resumption of Ukrainian grain exports was a relief for many poorer nations in what has become a war of attrition. This together with increasing sanctions, the militarisation of Ukrainian forces, and a huge drop in gas imports to Europe, is putting a lot of pressure on Russia and the sustainability of the war. The second-round effects of the loss of Ukrainian and Russian exports are still filtering through as countries and companies scramble to find alternative sources. This has been a primary source of the inflation surge seen since February but second-round effects such as increased logistics and labour costs are still filtering through to consumers. Unsurprisingly perhaps inflation has reached double digits and Central Banks have responded with rate hikes, however, future inflation pricing continues to project the level of inflation to curtail to more reasonable levels.
Asian and Emerging Markets had a more mixed month with the Japanese Nikkei index performing well, whereas the Hang Seng pulled back. The overcoming of Covid, Chinese geo-political tensions, global inflation, the strength of the US Dollar and increased competition for food and fuel weighed in, as a slowdown in global consumption and increased costs is a negative drag for these regions.
Domestic News
The FTSE100 had a good month again due to its defensive nature, a bias toward Oil & Gas sectors, and stalwart banks. The political machinations of the Tory party have somewhat overshadowed the real concerns around the increased cost of living, the lack of available labour, increasing industrial unrest, and the increasing impacts of Brexit that are coming to light. The housing market despite increasing costs continued to perform strongly for most of the country, but this remains a constrained market. Consumption patterns however have started to change with a greater emphasis on services, evidenced by queues at airports and ports, but the effect of a big rise in the cost of living will be an increasing focus if consumers start to defer spending.
The lack of available skilled labour is another factor as companies struggle to fill vacancies and compete for existing labour. This is impacting throughout the economy from fruit pickers to brain surgeons and is impeding many businesses and public service's ability to recover to pre-Covid levels.
Market Data
Looking Forward
We think the rest of the year will be dominated by two key factors - Gas and inflation.
1. Gas – as we have discussed before the race is on for Europe to avoid a deep recession and wean itself off Russian gas. Russian imports are currently down to 33% normal volumes, with German storage now at the 65% full level (the target is 95% full by 1st Nov). The ramp-up of finding alternative gas supplies, building infrastructure, and political management of Russian gas propaganda has been impressive, but the time horizon for the next major dialling down of Russian gas is probably next year, and therefore how cold this winter is will be a key focus. Energy costs are therefore likely to remain elevated and spot prices volatile.
2. Inflation – will be a major global focus whilst a stabilisation and pull back in headline rates is anticipated, the medium-term level of inflation and how quickly this is arrived at is a key concern. The impact on consumers and producers will continue to be felt and could lead to a potential global slowdown, industrial action, and political decisions on benefits and subsidies, at a time when the post-Covid costs are a heavy burden.
And finally, despite the shortage of microchips, the latest UK electric cars sales data for 2021 saw a 66% growth in numbers with 175,000 new vehicles, and 2022 promises to be an even better year. Great for reducing the UK’s oil dependence, jobs, and the environment.