Market Updates

Global stocks were resilient during the first three months of 2023. After a strong start to the year, confidence faltered somewhat as investors digested the impact of a difficult macroeconomic backdrop, the ongoing conundrum of the direction of interest rates, stubbornly high inflation and a banking crisis.

There was a sharp sell-off over the quarter after the collapse of Silicon Valley Bank (SVB) in the US. The bank was caught out after investing client deposits in assets that fell in value due to rising interest rates. When clients came to take their money out, the bank found it did not have enough invested to meet the withdrawals. The bank collapsed, although savers – mostly technology start-ups and venture capital investors – were bailed out by the Fed.

The collapse of SVB put other banks in the spotlight. This sparked a banking crisis as depositors acted to get their money out of banks that looked stretched. The effects spread to Europe as Credit Suisse was taken over by UBS group in a deal sponsored by the Swiss government. Swift action from regulators, politicians, and central bankers eased markets fears] that a revival of the 2008 crisis had started and markets rallied towards the quarter end.

The crisis left central bankers pondering their next move. The Fed had to balance the need to tame inflation with a desire to avoid any further financial instability; policymakers in the UK and Europe, meanwhile, remained committed to rate rises while GDP growth was positive.

Global government bonds continued their longest stretch of sustained volatility since the onset of the global financial crisis. The conflicting pressures on central banks meant that the direction of rates was hard to predict, leading to big moves in yields, both up and down (signalling changes in the price of the underlying bonds) as investors factored in the conflicting news flow.

The oil market had a tumultuous quarter. The price rallied at the start of the year as the Chinese economy reopened and further sanctions were placed on Russian imports. There was then a major sell-off in March in the wake of the banking crisis, with the price per barrel crashing to multi-year lows, but prices were then boosted by the easing of banking fears and production cuts in Kurdistan. 

Investors remained focused on economic data over the three months from 1 July to 30 September 2023. Inflation has been falling and this has led many analysts to conclude that central banks – such as the US Federal Reserve, the Bank of England and the European Central Bank – won’t need to raise interest rates any further to control it. This is good news for share markets because high interest rates make it more difficult for companies to borrow money to expand their business and increase profits.

Since the start of the year, equity markets have been rising on the basis that a change in direction on interest rates was imminent. However, markets stalled in the third quarter, as economic data suggested that rate cuts might be coming later rather than sooner.

An important factor that investors are watching is economic growth. This is generally measured by changes in the gross domestic product (GDP), which totals up the value of all the goods and services that a country produces. When GDP is going up, economic activity is increasing, which is a good thing, but it also means there is greater demand for goods and services, which puts upward pressure on prices. If it starts to fall then economic activity is shrinking, and while this can help reduce inflation by reducing demand it can also lead to job losses, business closures and lower investment. When GDP falls for two or more quarters in a row, an economy is said to be in a recession.

Central banks are trying to thread the needle of reducing economic activity enough to help reduce inflation while not going so far that it causes real damage to the economy. This is proving quite difficult.

At the start of the summer there was a debate about whether the US could avoid a recession and how quickly the US Federal Reserve was going to cut rates to reduce the chances of this happening. However, in Q3 the US had a remarkably strong economy, with GDP growing by 4.9%. In the meantime, annual Consumer Prices Index (CPI) inflation was on the rise: in June it was 3%, then 3.2% in July before ending the quarter on 3.7%. This is much lower than the 6.4% it was in January but still quite far away from the US Federal Reserve’s 2% inflation target.

The USA is the world’s biggest economy and what happens there has a major impact around the globe: an old investor saying is ‘when America sneezes the rest of the world catches a cold’, and so investors pay particular attention to the USA. But the situation is similar in the Eurozone and the UK, although economic growth hasn’t been as strong in the third quarter.

It is generally accepted that interest rates are at their peak and cuts will happen at some point, but no one knows for sure when that will be. The major central banks all held rates steady at the end of the quarter and some economists are talking about a ‘Table Mountain’ effect where there are no more rises but rates remain high while inflation slowly declines. This uncertainty has led to unstable bond markets, where the direction of interest rates is a vital concern to performance, a situation that could continue until there is a clear indication that interest rates are falling.