Global stock markets have managed to hold onto recent gains this week despite increasing speculation that interest rates could be raised sooner than expected.
With above-target inflation a key feature of the global economic recovery in recent weeks, investors have been looking to central bankers for guidance on when it might be necessary to withdraw market stimulus measures and hike rates. And this week’s message from the Federal Reserve in the United States was that interest rates are likely to increase as early as 2023 – rather than in 2024, as most analysts had been predicting.
The Fed’s announcement follows the news last week that inflation in the US had hit its highest level since the financial crisis, with prices also increasing ahead of targets in the eurozone, the UK and China. Share prices initially dipped in the wake of the Fed’s comments, but losses were limited by the central bank’s reassurance that the American economy remained a long way from overheating.
That message was reinforced by official figures published on Thursday showing that new unemployment claims in the US had increased in the past seven days, having hit their lowest point during the crisis last week. This was the latest indication that there are likely to be numerous bumps in the road as major economies recover from the Covid-19 pandemic.
Retail sales in the US, for example, fell faster than expected last month as a result of ongoing supply chain problems and rising input prices. China also reported a slowing of retail sales and factory output for May.
The US
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 1.9% down for the week so far, with the S&P 500 faring slightly better, losing just 0.6%. Increased interest-rate expectations have strengthened the dollar in recent days, resulting in falls in commodity prices – and, consequently, in the value of many industrial stocks such as chemicals manufacturers and construction firms. At the same time, technology companies have had a solid week, shrugging off concerns that rising rates in the future could lead to lower valuations.
The UK & Europe
In the UK, the FTSE 100 ended Thursday 0.3% ahead for the week, bolstered to some extent by declines in sterling – a falling pound means that the revenues earned overseas by the FTSE’s many multinationals are more valuable. A new row between Britain and the European Union over Northern Ireland’s trade status has caused much of the currency’s weakness.
In the UK, the FTSE 100 ended Thursday 0.3% ahead for the week, thanks in no small part to sterling’s decline against the dollar. A weaker pound typically helps to drive up the valuation of the many multinational businesses listed in London.
But problems the government is facing in reopening the British economy continue to weigh on the UK market: news that the June 21 “freedom day” target has been pushed back by at least four weeks was another blow to hospitality and travel firms – although the suggestion on Thursday that Britain might waive quarantine requirements for vaccinated travellers offered a glimmer of hope.
In Frankfurt, the DAX index ended Thursday’s session up 0.2% for the week, while France’s CAC 40 gained 1%. Eurozone industrial output continued to rise in April, while May’s inflation level was confirmed at 2% – just ahead of the European Central Bank’s target. As has been the case in the UK, European markets have also been boosted by the strengthening dollar.
June 11 | June 17 | Change (%) | |
|---|---|---|---|
FTSE 100 | 7134.1 | 7154.4 | 0.3 |
FTSE All-share | 4068.3 | 4071.3 | 0.1 |
S&P 500 | 4247.4 | 4221.9 | -0.6 |
Dow Jones | 34479.6 | 33823.5 | -1.9 |
DAX | 15693.3 | 15727.7 | 0.2 |
CAC 40 | 6600.7 | 6666.3 | 1.0 |
ACWI | 719.5 | 714.9 | -0.6 |
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, data as at 17/6/2021.
