Weekly Market Update: Fed hikes rates as oil hits year highs

Read our Full Market Update Week 39

Market Update

US stocks dropped -0.2% in Sterling terms last week, as the Federal Reserve raised interest rates by 0.25%, with investors concerned about the elimination of the word “accommodative” from the Fed’s policy statement. UK stocks were up +0.3% and UK 10 Year Gilts were up +2.0 bps. Global stocks were down -0.6% in local terms and -0.3% in GBP. European, EM and Japanese equities returned -1.5%, +0.1% and +1.0% respectively in Sterling terms. Italian bond yields reached a five-year high after the Italian government unveiled its plans for a 2.4% budget deficit. Sterling gained +0.6% vs JPY, dropped -0.3% vs USD and gained +0.8% vs the Euro, with concerns about Italy’s growing debt also weighing on the single currency. Oil rose +2.0% in USD, and is up +21.2% year-to-date, with Brent trading around its 4-year high at $82. Gold and Metals fell, down -0.2% and -0.5% respectively.

CIO Analysis

Last week saw a fresh trade approach from Donald Trump with regards to Japan and Canada, a low-inflation outlook from the Fed which flattened the yield curve and fuelled a US Dollar rebound, and Italian wrangling with Brussels over the country’s budget. Yet financial media was captivated with Elon Musk’s punishment by the SEC, where his tweets came at a cost of $20mln, and the introduction of independent directors to Tesla’s board. The story here is not Mr. Musk, however. It is the tech industry’s difficulty in adjusting to a regulated environment. Tech is all about breaking norms. But applying that same notion to the stock market can be tricky. The $420 price target tweet cost investors over $20bln in market cap, a little less than the combined top line revenue for the last two years in a company that has never made a positive operating income. The tech sector could find itself challenged as the regulatory framework begins to catch up with technology. Low tax rates, low product regulation and lax governance may well be increasingly challenged by not only governments, but markets as well. Every generation of investors has at some point cried out “This time is different”, only to be faced with the same problems as their predecessors.

David Baker, CIO