There seems to be little respite as the FTSE-100 has opened heavily down again this morning.
Although there are a million and one things going on right now, the media would have us believe that the value of the UK pound is front and centre of the problems following last week’s mini-budget from our new Chancellor of the Exchequer, Kwasi Kwarteng.
While it is undoubtedly a problem (along with the value of UK gilts), the biggest problem for global financial markets is actually the strength of the US dollar.
In November 1971, the US Treasury Secretary, John Connally famously said, “the dollar is our currency, but it’s your problem” – and that appears to be very true today.
Thanks to geopolitical uncertainties (the dollar is seen as a safe haven and therefore strengthens in times of uncertainty) coupled with the Fed’s monetary policy (which has seen US interest rates rise aggressively – the message from Fed policymakers suggests that this will continue despite signs that the US economy is slowing), the US dollar has strengthened not only against the pound, but relative to all other major global currencies for several months – and unfortunately, this sustained strength has ramifications.
For example, commodities (such as oil and gas) are priced in dollars and therefore a stronger dollar makes these more expensive – which is means the global inflation issue, which started thanks to supply disruptions caused by coronavirus and were then exacerbated by the war in Ukraine, is now, unfortunately, highly likely to be prolonged.
As for the fallout from last week’s mini-budget, financial markets started to speculate that Bank of England policymakers would need to speed-up the pace and size of UK interest rate increases. This resulted in sharply higher gilt yields (meaning prices, which move inversely to the yield, fell sharply). Consequently, yesterday the BoE announced that it would delay the start of its planned quantitative tightening (where gilts they purchased during quantitative easing are sold) and instead temporarily purchase more gilts.
This was a quick and simple win as it relieved the pressure on gilt yields and resulted in the FTSE-100 reversing yesterday’s (Wednesday 28 September 2022) early losses to end the day higher – and by relieving the pressure on gilt yields those banks and building societies that had withdrawn their fixed-rate mortgages (which are priced off gilt yields) should hopefully start to return. These institutions never withdrew because they couldn’t obtain funds, they withdrew because the gilt yield volatility made it difficult for them to know where to price their fixed-rate mortgages – hence why variable rate mortgages were still widely available.
Predicting short-term movements in global equity markets is difficult at best of times and whist we fully understand that the path for equity markets is never smooth or easy, the best way to maximise returns is to maximise the time in the market, rather than by trying to time the market.
As such, and while we appreciate it is easier said than done, we believe it is best not to get too carried away with current fears and resist the urge for any knee-jerk reactions as history has shown us time and again that global equity markets can deal with any eventuality, it simply hates periods of uncertainty such as the current one.
Investment Management Team