Written by Chris Ayton.

It was a positive week for global equity markets with the MSCI All Country World Index rising +1.3%  in Sterling terms.  Global bonds collectively declined with the Bloomberg Global Aggregate Index -0.3% in GBP hedged terms although credit and high yield fixed income indices ground out small gains.

UK economic data released over the week provided the Bank of England with a bit of a headache for its upcoming interest rate decision.  Average pay increased 8.5% year-over-year, which was higher than expected, and will be considered quite inflationary. Although this is partly due to one-off payments to public sector workers, the data excluding such bonuses was also higher than expected.  However, UK GDP data released last week was worse than expected, contracting 0.5% between June and July. The services sector was particularly weak, although notably this was impacted by strikes by NHS staff.  Markets read this as a positive sign that any incremental rise in interest rates from the Bank of England this week is likely to be the last in this cycle and helped the FTSE All Share Index to a +2.9% weekly gain.

Similarly in Europe, the European Central Bank raised interest rates to an all-time high although, with growth stalling and inflation starting to fall, it also signalled that its cycle of rate increases was likely nearing an end.  After a strong start to the year, growing concerns about the growth outlook in Europe has seen sentiment towards European equities start to wane and Europe ex-UK is one of the few regional equity markets to be down over the third quarter so far.

Japan was the standout performer over the week, with MSCI Japan up +3.8% in Sterling terms as both the equity market and currency strengthened.  The rise came on the back of the Bank of Japan’s Governor, Kazou Ueda, signalling Japan could end its negative interest rate policy when achievement of its 2% inflation target is in sight, citing year-end as a potential point for them to have sufficient data to make this determination.

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