After an inauspicious start it was, in the end, another positive week for markets. Here’s our Head of Investments, Andrew Prosser, with the stories moving markets this week.
Things started quietly on Monday, with little reaction even after President Trump extended the pause on tariffs for Chinese goods by another 90 days. By Tuesday and Wednesday, however, optimism took over as encouraging US inflation data pushed markets up.
US inflation fuels hopes of rate cuts
Consumer prices in the US rose 2.7% year-on-year in line with forecasts, easing fears of a surprise uptick. Investors took this as a sign that the Federal Reserve could cut interest rates in September, particularly as risks in the labour market continue to build.
All major US equity indices gained more than 1% on Tuesday, with the S&P 500 hitting its 16th all-time high of the year. The thinking is that the Fed may tolerate slightly higher inflation for now if it helps support employment — especially if the broader trend in prices remains downward.
Dollar weakness weighs on sterling investors
There was a downside to the rate-cut optimism: a weaker US dollar. Currency markets often move in response to expected differences in interest rates between countries, so the prospect of lower US rates pushed the dollar down.
For UK-based investors, this meant that some of the US stock market gains were eroded when converted back into sterling.
Emerging markets enjoy a boost
The softer dollar had an upside elsewhere. Many governments and companies in emerging markets borrow in US dollars but earn revenue in local currency.
A weaker dollar reduces their debt servicing costs, which helped emerging market assets perform strongly this week – a welcome boost for globally diversified investors.
Hopes for progress in Ukraine lift European stocks
Towards the end of the week, European equities finished on a high. This was partly driven by hopes that Friday’s US-Russia summit might mark an early step towards a peace deal in Ukraine, although it’s far too early to know if this optimism will prove justified.
The bottom line for investors
Even with the currency headwinds for sterling-based portfolios, it was still a broadly positive week for markets. The rally in US equities, strength in emerging markets, and a lift in European stocks combined to offset much of the impact of a weaker dollar.
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