Global stock markets saw incremental gains this week as the minutes from the latest Federal Reserve meeting revealed that a majority of officials believe the pace of interest rate rises could slow going forward.
Improved market sentiment and the expected reduction in the pace of further interest rate rises have seen the US dollar fall against most major currencies over the past few weeks. In the UK, the pound continues to regain credibility and now trades at a level not seen since August, at roughly 1.21$/£; a far cry from the period of financial instability experienced at the end of September when the pound looked destined for parity.
The strength in sterling, combined with the fall in oil prices seen recently, will help bring down the energy component within the inflation figures. Oil (brent) now trades at around $85 a barrel, a level last seen in January this year before the war in Ukraine started. We might also finally see the price at the pump start to fall back. This will be welcomed by motorists, having endured a significant rise in travel costs during this year.
It was a short trading week for our friends across the pond as they celebrated Thanksgiving on Thursday. Despite the market re-opening on Friday, volumes remain low with many market participants there taking a long weekend break. As we approach the final month of 2022, it seems likely that market direction over the coming weeks will be driven by new inflation data and the subsequent central bank response. If inflation continues to show signs of reversing, the market will be happy to lift its field of vision from the floor and focus more on the medium to long-term prospects. If, however, inflation proves stickier than expected, we would expect sentiment towards risk assets to weaken.John Naylor, Chartered FCSI – Head of Investment Committee