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Capital Markets Update: September 2022

NOVA Wealth3 October 2022

Market updates from September

In a Nutshell

September has been a busy month. In the UK, the new government unveiled one of the largest tax cut proposals seen in years; while the pound hit its lowest level in decades. The Fed and other developed country central banks continue to raise interest rates amidst fears of looming recession. Across the EU, the coming winter has bolstered calls for governments to implement energy price caps as short-term relief for rising cost of living.

“Trussonomics” takes the stage

September saw the death of Queen Elizabeth II, but this was by no means the only significant development in the UK this month. In the new (and somewhat misleadingly-named) “mini-budget”, Kwasi Kwarteng announced a dramatic overhaul to tax policy. The base rate will be cut from 20% to 19%; and the 45% additional rate was to be completely abolished (although this plan has since been abandoned in response to nationwide backlash). At the same time, he also announced the much-anticipated energy price freeze which will cap annual bills at £2,500. This plan is expected to cost roughly £90 billion.

The combination of tax cuts and increased spending has led to some worry among investors, as it remains unclear how the government will fund the energy bill cap if not through taxation. While the additional rate will remain in place, Truss has doubled down on her commitment to a low-tax regime, referring to further cuts as “the right thing to do morally and economically”. She has also previously ruled out further windfall taxes on energy companies.

This concern was particularly apparent in the days following the budget announcement, with the pound falling to its lowest point since the mid-1980s. As to be expected, this declining confidence in sterling has been accompanied by a hike in gilt yields (following trends seen in the previous month). On the day of the announcement itself, both two- and five-year yields rose to roughly 4.5%; while ten-year yields hit their highest level in 12 years at 4.2%.

Fed raises interest rates again

Over in the US the dollar has continued to climb to unprecedented heights, reaching a two-decade high towards the end of the month. At the same time, inflation has continued to rise and share markets to fall. Powell, the head of the Federal Reserve, has restated the central bank’s commitment to reducing inflation amidst another round of interest rate hikes (another 0.75 percentage points over the month). However, this had led to some pushback from the UN, who have urged the Fed and other central banks to avoid raising interest rates too dramatically without adequate “multilateral support”. In a report published by the UNCTAD, they expressed fears that doing so “could turn a slowdown into recession".

Energy crisis looms in Europe

Back in Europe, concerns over the energy crisis have mounted. Gas prices have hit new highs as the Russian invasion of Ukraine continues to significantly reduce the gas supply. While European governments have tried to mitigate some of the upward pressure on prices by diversifying supply, as we move into the winter months many are turning their focus to more short-term solutions.

For example, European Commission President von der Leyen has pushed for the introduction of a temporary energy price cap to ensure lower-income households can afford their energy bills across the winter. However, EU governments are yet to reach an agreement on the matter. In particular, Germany, Denmark and the Netherlands have criticised the plan, arguing that countries could struggle to secure supply in the international market with such a cap in place.

Looking Ahead

September has seen a continuation of global market volatility, as many countries face recession and spiking inflation. In the last week of September alone, US shares fell by 2.9%; Eurozone by 1%; Japanese by 4.5%; and Chinese by 1.3%. However, while the current circumstances are seemingly unique, it’s vital that we maintain a long-term perspective on such trends. There have always been temporary periods of market volatility in the face of economic and political uncertainty, and this time is no different. Best practice is to create and stick to a robust financial plan, as doing so will not only ensure you benefit from long-term market growth; but may help to reduce stress while we weather the storm. For more tips on how to cope with the stresses of market fluctuation, see here.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.

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