Market snapshot: currency crash amid budget concerns

Sterling has been under pressure all year, but the decline against the dollar accelerated last week. Our head of markets discusses latest movements in global asset classes.

As investors flock to the safety of the US dollar, the reverberations have impacted across a number of asset classes.

Other currencies, oil and gold are all shouldering dollar strength by themselves weakening. In addition to the ongoing flight of the dollar, overarching concerns around the possibility of a global recession are weighing on equity markets generally. The risk of a hard landing for economies following a period of over-tightening are becoming elevated. Not only has the Federal Reserve stated that its aggressive interest rate hiking policy is still in play, but similar moves by other central banks could yet come home to roost, with the result of stifling global growth.

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US markets ended a bruising week in the red as the Federal Reserve raised interest rates by a further 0.75%, as expected, with the possibility of a similar rise in November now being priced in by markets.

While the major indices made a slight recovery towards the end of session, it was far from enough to reverse earlier declines. Sectors likely to suffer most damage from a recession have been under particular pressure, with consumer discretionary and higher growth stocks such as big tech in the firing line.

The monetary maelstrom has played out across equity markets generally, led by losses in the major US indices. In the year to date, the Dow Jones is down by 19%, the S&P500 by 22% and the Nasdaq by 30%.

While remaining ahead by 10% so far this year, the oil price has receded significantly from the highs seen over the last few months. A combination of the stronger dollar and perceived lack of demand in the face of recessionary concerns, have combined to depress the price, although in a rare example of good news, the decline also reduces an element of inflationary pressure.

Asian markets were also drawn lower, as some weak factory activity numbers coming out of Japan added to the recent woes in the region, which have been highlighted by China’s own economic issues. The possibility of intervention to offset some of the recent yen and the renminbi weakness was neither enough to stem further currency declines, nor to override generally deteriorating sentiment.

Meanwhile, the effects of the so-called “mini” budget, alongside dollar strength pushed sterling to briefly touch an all-time low. Concerns that the budget will pile further pressure on an already heavily indebted economy has led to accusations of fiscal indiscipline, and has also resulted in speculation that the Bank of England may have to make an emergency announcement in response.

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Sterling weakness has provided something of a floor for the FTSE100, where the majority of earnings come from overseas and are therefore more valuable in repatriation. Even so, and despite a modestly positive open, the FTSE100 has now given up its previous gains over recent months and is down by 5% in the year to date.

Gains in early exchanges are mainly, and unsurprisingly, spread across defensive stocks, although the rises are unconvincing and may be short-lived. The FTSE250 on the other hand, a more accurate indicator of the UK economy, has continued its decline and has now fallen by 24% this year.