Written by Chris Ayton

It was a tough week for global equity markets with the MSCI All Country World Index -2.7% in Sterling terms. Bonds also declined with the Bloomberg Global Aggregate Index -0.3% in GBP hedged terms. Credit and high yield indices were down even more.

Expectations of a huge post COVID bounce in China’s economy have proved fruitless with it instead showing increasing signs of strain and, within China’s property market in particular, clear signs of distress.  On the back of large property developer, Country Garden, recently missing coupon payments on two US Dollar denominated bonds, last week saw further news of some retail wealth management products that are exposed to the Chinese property market failing to make scheduled payouts. Youth unemployment (16-24 year olds) also reached such a worryingly high level (over 20%) that authorities concluded the data “needed improving” and the National Bureau of Statistics decided to stop reporting it.  Clearly nothing to see here! This challenging backdrop led to the People’s Bank of China unexpectedly cutting a benchmark interest rate by the biggest margin since the start of the COVID pandemic and further stimulus is expected to be needed to get China back on track to hit its GDP growth targets.

In the UK, inflation came down from an annual rate of 7.9% in June to 6.8% in July aided by lower gas and electricity prices. However, inflation stripping out food and energy was unchanged and combined with the news that UK wage growth hit approximately 8% is maintaining pressure on the Bank of England to continue on its path of increasing interest rates to cool the economy.  This is despite retail sales in the UK declining by a higher than expected 1.2% in July, suggesting the past rate rises are already starting to take effect.

The UK housing market was also a hot topic of discussion last week.  Pressured by a lack of rental supply and landlords facing higher mortgage repayments, UK residential rents rose by an annual rate of 5.3% in the year to July, the highest rise on record.  House prices, however, have been faring less well as the Nationwide Building Society reported that UK house prices fell at an annual rate of 3.8 per cent in July, the largest decline since 2009.  However, in a small piece of brighter news it was reported that for the fourth week in a row, UK banks and building societies were set to reduce interest rates for fixed rate mortgages, potentially signalling that the slowdown in mortgage applications is starting to lead to some competition for the business that remains.


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