The Cambridge Weekly – 21st September

The price of Brent crude oil reached $109 per barrel last Monday following an announcement from Saudi Arabia that it would be shutting its vital east-west pipeline due to significant damage. Saudi Arabia, the world’s top exporter of oil, then pulled out of diplomatic talks with Iranian ministers that were set to take place on Monday. Trade intelligence firm Kpler estimated that the pipeline’s closure could supress global oil supplies by over 3.5mn more barrels per day – just under 4% of global demand. Though estimates vary, experts have initially approximated that repairs could take as long as 5 to 6 weeks but noted that the pipeline may be able to resume partial action while repairs are underway. Oil prices eased over the week to around the $104 level off the back of US Energy Secretary Chris Wright reassuring markets that flow should be restored within days.

Trade developments remained a theme, with the European Union asking China to voluntarily limit hybrid vehicle exports to around 15% of the European market. The request came as officials sought to protect domestic manufacturers and avoid a broader trade dispute, amid concerns that higher Chinese production is contributing to the Union’s widening trade deficit with China. Brussels indicated it may consider formal restrictions if no agreement is reached.

US Equity Market:

US technology shares came under pressure at the start of last week after several industry leaders called for the development of advanced artificial intelligence models to slow. Nvidia fell 3% last Monday, while Broadcom and AMD declined more than 4% amid concerns that a more cautious approach could weigh on future investment and earnings growth across the sector. This weakness, alongside higher oil prices and government bond yields, contributed to the S&P 500 falling last Monday. US equities declined again following the Federal Reserve’s interest rate increase on Wednesday, before recovering into Thursday as technology shares regained some ground. The S&P 500 finished the week to Friday marginally down.

US manufacturing companies continue to face increased supply chain costs amidst the Middle East conflict and trade disruptions. Businesses are already paying sharply more for energy, raw materials and transport – prices charged by producers for finished goods rose 6.6% in the year to August, while the price for intermediate processed goods jumped 11.5%.

Artificial Intelligence remained prominent after OpenAI, the maker of ChatGPT, entered early-stage discussions with large investors regarding another private funding round. The company is believed to be seeking funding at a $1.2tn valuation, which would represent a c.40% increase on its $852bn valuation secured during its previous funding round in March.

UK Equity Market:

The Office for National Statistics’ (ONS) data releases dominated the headlines last week, with news coming through that UK rents rose at the fastest rate this year in August, whilst house price inflation cooled in July compared to June. The ONS also shared news around productivity, with underlying economic growth appearing to be slightly stronger than previously estimated. Data released by the Institute of Grocery Distribution also estimated that food price inflation could reach up to 3.9% this year, and nearly 7% in 2027 off the back of Middle East disruption.

Fiscal policy remains a key focus for UK and global investors as we move closer to the October budget on the 28th. Current market commentary suggests that the Chancellor, John Healey, is considering raising taxes on the gambling industry, and that further consideration will be given to the UK state pension, which is set to surpass the lowest income tax threshold, after recent wage rises under the triple lock system. Andy Burnham continues to weigh up plans to give mayors greater oversight of water companies as part of his proposal to address the problems with the sector over the past few years.

The FTSE100 closed the week to Friday marginally up, off the back of the Bank of England’s “hold” rate decision – which reassured investors on borrowing costs remaining steady – and the higher-than-expected, energy-cost-driven inflation number, sending oil stocks up over the period. Sterling fell slightly against the US dollar over the week to around $1.34.

Inflation, Interest Rates and Bond Markets:

Last Wednesday the US Federal Reserve voted to raise rates for the first time since 2023. The committee voted to increase the new benchmark federal funds range by a quarter-point to 3.75%-4.00% to tackle soaring inflation, which is currently at 3.7% vs. the 2% target. This move was widely expected by markets, but still triggered a marginal uptick in bond yields in what was already a volatile week for bonds. The US 10-year Treasury bond yields soared to their highest level since 2007 last Tuesday, reaching 5.04%, indicating that investors continue to require greater return for the risk they attribute to lending to the government.

Last Thursday, the Monetary Policy Committee made the decision to hold UK rates at 3.75%, as was expected by markets. Governor Andrew Bailey warned of potential rises in the near future – this comes after inflation rose to 3.1% in August, in line with expectations. Additionally, the Bank of England paused sales of British Government bonds for the next six months, and stated it will conduct £20bn of active gilt sales each year until 2034 to reduce upwards pressure on gilt yields. Gilt yields immediately dropped upon the announcement, easing some upward pressure.

The Bank of Japan’s (BoJ) decision last Friday to raise interests rates by 25bps to 1.25% represents the highest base rate for 31 years. Some commentators suggest that Japan is facing stagflation, with inflation above the BoJ’s 2% target, but with weak domestic demand and subdued wage growth. These commentators are concerned that further interest rate rises could add to these economic pressures.

What’s on the horizon

This week will bring the much-awaited US-China summit on Thursday. Investors will hope will that the meeting will bring clarity to the direction of economic and political relationships between the two nations. The Middle East will remain a point of focus.

On the macroeconomic front, a slew of Purchasing Managers Index (PMI) data will be set for release, with September’s print due for the US, France, Germany, the Eurozone, Japan, and the UK. As a reminder, the PMI is an economic gauge on whether the specific economy is growing or contracting based off the strength of the constituent companies of that economy.

This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.

Past performance is not a guide to future performance.

The value of your investments can go down as well as up and you may get back less than you originally invested.

Source of financial market data: MorningstarDirect.