Written by Ashwin Gurung
Tensions between the US and Iran returned to the headlines last week as the two sides traded strikes near the Strait of Hormuz, the narrow sea route that carries around a fifth of the world’s oil. Against that backdrop, the latest US jobs data, a key measure of the health of the US economy, was the next big piece of news for markets to digest.
The US Bureau of Labor Statistics (BLS) reported an initial estimate of 162,000 jobs added in August, almost three times as many as expected. The headline looks strong, but much of the increase came from two areas: restaurants and bars added around 59,000, and local government education added another 42,000. Interestingly, much of the restaurant and bar increase only appeared after seasonal adjustments, which may have been distorted this year by the World Cup. The separate ADP report, which tracks private sector jobs only, showed just 38,000 added. The two reports measure employment differently, but the gap shows how mixed the picture is, and frequent BLS revisions mean initial estimates deserve some caution.
The August figure and an upward revision to July, alongside renewed inflation concerns from rising oil prices, increased expectations of a US interest rate rise later this month. Global bonds, which are loans to governments and large companies, declined -0.1% in hedged sterling terms, as measured by the Bloomberg Global Aggregate Index. Global shares, measured by the MSCI All Country World Index, also fell -0.1% in local currency terms, although a weaker pound lifted the return to +0.5% for UK-based investors. Stronger energy prices helped commodities, with the Bloomberg Commodity Index, a basket of commodities, rising +2.0% and gaining +33.6% this year, both in hedged sterling terms.
In the UK, the cost of 10-year government borrowing reached 5.2%, its highest since 2008, amid concerns about the public finances ahead of the October Budget and inflation pressure from higher oil prices. Despite some expectations of a Bank of England rate rise in November, the pound weakened, which supported the FTSE 100 (+0.1%), made up mostly of large companies earning much of their money overseas (a weaker pound makes overseas profits worth more). The FTSE 250, with greater exposure to the domestic economy (and Sterling-based profits), fell 1.4%.
Similarly, in Japan, 10-year government borrowing costs reached 3% for the first time in 30 years as the Bank of Japan signalled a possible rate rise this month and investors questioned how the government will fund heavy investment in semiconductors and AI. Nonetheless, the MSCI Japan Index returned +1.9%, driven entirely by the yen, which rose +2.5% against the pound.
With so many forces at play, no one can reliably predict what markets will do next. Whatever direction markets take, some parts of our globally diversified, multi-asset portfolios should be positioned to benefit.
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