Written by Chris Ayton.

After a robust start to the year, global equity markets paused for breath last week with the MSCI All Country World Index down -0.2% in local currency terms. Sterling’s continued strength reduced that to -1.5% for GBP based investors. In fixed income, the Barclays Global Aggregate Index was up +0.2% for the week in GBP Hedged terms.

The FTSE All Share Index dropped -0.9% over the week but remains up over 4% in January so far.  UK retail sales volumes were down for a second consecutive month as the increased cost of living continued to take hold on consumers.  Forecasts had been for a small rise. However, UK inflation remained sticky at 10.5% in December 2022 which, although down from the 11.1% October high, remains elevated and way above target. It was also notable that UK food inflation increased by 16.9% over the month, the largest rise since records began in 1977.  This data is unlikely to ease the pressure on the Bank of England to raise interest rates when it meets again on 2nd February.

In the US, the S&P 500 Index was down -1.9% for the week in Sterling terms.  The market reacted negatively to US retail sales and industrial production both declining in December by more than expected, prompting fears of a US recession to rise.  At the same time, prominent US companies such as Microsoft and Google’s parent, Alphabet, joined other tech firms by announcing they will be laying off tens of thousands of workers.  Whether this will push the Federal Reserve to slow rate rises remains to be seen.

In Europe, the European Central Bank (ECB) president, Christine Lagarde, warned that rate rises in Europe still had much further to go in order to tackle inflation.  She encouraged financial markets to “revise their position” that the ECB would soon slow down.  MSCI Europe ex-UK finished the week down -1.4% although this index is still up +5.5% for January so far.  Bank of America data suggests this is partially down to investors cutting allocations to the US stock market to their lowest level for 17 years, instead of favouring perceived cheaper opportunities in Europe.  Assets have also been flowing into Emerging Market equities, which are also collectively up over 5% this year.

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