The UK has seen a degree of volatility this month, as oil and gas prices have dipped and interest rates have risen again.
However, there has been some positivity in global markets, mainly driven by the US. We have also seen energy prices start to return to more manageable levels, which is an important development in the battle against high inflation.
Interest Rates Rise Again
The Bank of England has increased interest rates to 5% this month. This is the 13th increase in a row, and the highest rates have been since 2008. This follows continued efforts to bring inflation under control.
The rapid rise in interest rates is having a significant effect on the mortgage market. Borrowers who secured low fixed rate deals a few years ago are now faced with rates of around 6% (or higher) when it’s time to renew. While the property market has not yet experienced a drop, the rise in house prices is starting to slow as it becomes more difficult to borrow.
Rising interest rates also affect investment markets and currency. As yields have increased, the price of bonds has dipped and Sterling fell by approximately 0.4% against the dollar. Market data suggests that investors have concerns about the high cost of borrowing and the general outlook for the UK.
It has been predicted that the base interest rate could rise as high as 6.25% by next year, although it is possible it will reduce again once inflation is at a manageable level.
Central banks across the world are increasing rates in a similar pattern, with the US Fed considering its 11th rise in 14 months but then deciding to hold fire.
Interest Rates and Equity Markets
Credit agency Moody’s has warned of significant challenges in the private credit market this month.
The sector is starting to see some strain as companies are finding it more difficult to repay their loans. Private credit peaked in 2021, fuelled by low interest rates and a strong demand for capital. Many of the loans went to companies that had been turned down for bank lending and were relying on ambitious future projects to fund their cashflow.
Now that rates are rising, and the economy is on the cusp of recession, there is a strong chance that some of these loans could default. With around $1.4 trillion of investors’ money tied up in private credit, this could have a significant impact on global markets.
Companies that rely on borrowing to fuel growth tend to be most affected by interest rate rises. This is not only due to the cost of borrowing, but also how much of the share price is driven by future growth projections.
While equities are not as sensitive to interest rates as bonds, a degree of volatility is to be expected, particularly when the situation is unpredictable.
Are Energy Prices Finally Stabilising?
After months of spiralling costs in the energy sector, the wholesale price of oil and gas has finally dropped. The energy price cap will reduce to £2,074, below the Energy Price Guarantee of £2,500. This means that households should start to see a saving in their energy bills from July onwards.
As the price of energy has been a key driver in global inflation, there is a chance that this will help to bring the cost of living under control.
While this is good news for households and businesses, the reduction in tax revenues will have an impact on public finances. A windfall tax on energy companies was introduced in November 2022, with a tax of up to 75% applied on profits. This was expected to raise £41.6 billion. However, the drop in energy costs has resulted in a £15 billion shortfall in expected tax revenues. This will be partially offset in the short term by reduced spending on support schemes. Over the longer term, the implications for public finances are less clear.
The UK Market
The UK market is lagging behind this month, with dips of around 1.3% starting from the latter half of June. While global stocks have seen a slight rally, the UK’s ‘value’ led market, which includes significant holdings in oil and gas, has fallen behind.
The worst performers this month include vehicle retailer Motorpoint, building supplier Marshalls, and insurance company Direct Line. All three companies have consistently fallen in value over the last five years.
At the other end of the scale, several companies have had an extremely positive month. Cruise company Carnival has soared by over 50% in June, with car companies Lookers and Aston Martin not far behind.
The Global Outlook
US stocks are leading the way this month, with a rise of over 2.5% throughout June. A deal was reached on the debt ceiling in late May, raising the US government’s borrowing limit. This has brought relief to the economy and the market, as the consequences of a default on borrowing would have ripples across the world.
The European and Asia Pacific regions have been relatively stable, with small dips of around 0.5%.
China is in the midst of a rocky recovery from pandemic restrictions and economic growth has been lower than projected. Employment rates, stock values, and the currency have all been impacted. Further concerns have been raised as the government has started cracking down on financial commentators publishing negative analysis on the country’s economy. While the official view is that negative publicity undermines recovery efforts, a lack of transparency may affect external relationships.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.
The content in this article was correct on 05/07/2023.
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