30-year gilt yields hit 5.70% last Tuesday morning, marking the highest long-term borrowing costs in the UK since 1998. The sell off reflects investor concerns about persistent inflation and fiscal sustainability amid broader global market volatility.
Comments from Bank of England Governor Andrew Bailey later last week helped to calm markets; he highlighted the fact that the UK has shifted away from debt issuance at the very long end and that investors shouldn’t be ‘overly focused’ on their significance. At the time of writing 30-year yield now sits at 5.496%.
US Equity Market:
Alphabet’s shares rose around 9% last Wednesday after a favourable antitrust ruling rejected calls to break up the company. Last year the US Department of Justice proposed that Google sold Chrome, the world’s most popular web browser, after alleging it had illegally maintained a monopoly over the online search market.
The ruling, however, was milder than expected; it allows Google to retain Chrome and continue revenue-sharing agreements with partners such as Apple, which promote Google’s services on their devices. Google currently pays Apple an estimated $20 billion annually to remain the default search engine on iPhones and other Apple products. Shares in Apple gained over 3% on the back of the news.
As of Friday’s close, the S&P 500 and Nasdaq are up 0.37% and 1.04% respectively.
UK Equity Market:
UK shares have rebounded after suffering their worst day since the beginning of April last Tuesday. Stocks fell at the beginning of last week in response to rising gilt yields and the continued investor uncertainty about the UK economic outlook. By Friday’s close, the FTSE 100 had recovered well, posting a 0.25% gain for the week.
Sterling also suffered in response to rising gilt yields, falling almost 1.5% last Tuesday before recovering later in the week. Sterling trades at around 1.35 against the US dollar.
In UK politics, Chancellor Rachel Reeves confirmed last week that this year’s autumn budget will take place on November 26th, almost a month later than the autumn budget last year. The delay will extend uncertainty for investors and businesses, potentially dampening investment as they await more clarity from the Government.
UK businesses cut jobs at the fastest rate in four years over the summer, with employment falling by 0.5% in the three months to August, according to a Bank of England survey. Nearly half of surveyed firms cited April’s hike in National Insurance contributions as a reason for reducing staff, while others reported lowering wages, raising prices, and shrinking profit margins. Economists are concerned that the increase in National Insurance is acting as a supply shock, pushing up inflation while weakening the labour market.
Inflation, Interest Rates and Bond Markets:
Other major bond markets also saw sell-offs last Tuesday, with 10-year US Treasury yields rising amid continued uncertainty about the Federal Reserve’s direction of travel. The pressure was eased slightly last Wednesday following the release of disappointing US employment data; job openings fell to 7.18 million in July, below economists’ forecast of 7.38 million and down from 7.44 million in June. Treasury yields fell in response to the release of the data as investors increased their bets on a more aggressive pace of interest rate cuts by the Federal Reserve to help boost the economy.
What’s on the horizon:
The US Consumer Price Index (CPI) for August, is scheduled for release on 11th September. Markets are currently fully pricing in a 0.25% cut at the next meeting of the US Central Bank on the 16th-17th September with at least one further cut expected by the end of the year.
The European Central Bank is due to make its next interest rate decision on Thursday. With inflation seemingly under control, economists are expecting the deposit rate to remain at the current level of 2% until at least the end of 2026, with some investors even expecting an increase in the rate in the second half of next year.
Japan is set to release its second quarter GDP figures on Monday, whilst China is expected to release its August CPI data on Wednesday. These releases will provide fresh insights into the health of the world’s fourth and second largest economies, respectively.
You can read our July asset returns review here: August Review