The Cambridge Weekly – 14th September

Energy markets remained centre of attention last week, as Brent crude rose above $100 per barrel for the first time since July. Renewed US-Iran tensions raised concerns regarding oil supplies from the Gulf and Strait of Hormuz, pushing the price up from c.$95 to almost $105 at the time of writing. Higher oil prices continue to fuel inflation concerns, applying pressure to government bonds and interest-rate-sensitive stocks.

Trade discussions developed between the US and Canada, as the US administration announced that imports of some Canadian dairy products, motorcycles and alcoholic beverages would be embargoed from late September. This announcement followed retaliatory measures implemented by Canada on $20bn of US goods, after the breakdown of talks in August. These measures have added further uncertainty for businesses operating across the closely integrated North American market.

Elsewhere, US envoys held talks with the Ukrainian President in Kyiv, one day after meeting the Russian President in Moscow. Both meetings were reported as constructive, though no major breakthrough has been announced.

US Equity Market:

It was a softer week for US equities, as rising oil prices and government bond yields offset optimism surrounding corporate developments. Investors assessed an unexpectedly strong August employment report, released recently, which showed 162,000 jobs were added for the month against the forecast 53,000. Earlier June and July figures were also revised upwards. The report indicated a labour market that remains resilient, and paved the way for increased investor expectations that the Federal Reserve could hike interest rates when they meet later this month.

Apple dominated company news after new chief executive John Ternus led his first major product launch. The tech giant unveiled the iPhone Duo, its first foldable handset, which opens into a 7.6-inch display and will retail from $1,999 – a significant hike from classic Apple models. The iPhone 18 Pro, a new watch and AirPods models were also introduced.

Technology shares were particularly sensitive, over a week where markets considered the implications of renewed energy inflation, and stronger employment on the direction of travel for interest rates. The S&P 500 index closed Friday down 0.8% for the week.

UK Equity Market:

Employment indicators in the UK also offered some encouragement, as KPMG and the Recruitment and Employment Confederation reported that permanent staff placements increased slightly in August, for the first time since September 2022. Meanwhile, automotive manufacturer McLaren announced plans to create around 1,000 UK jobs as part of a £450mn investment in its Woking technology sector, as part of a broader product overhaul. This positive job news was somewhat offset by Jaguar Land Rover announcing plans to cut as many as 4,000 jobs over the next two years, following pressure from cheaper Chinese rivals.

In financial services, JPMorgan chief executive Jamie Dimon met the Prime Minister and Chancellor John Healey, amid suggestions of potential windfall taxes for banks in the October budget. Banks have argued that such taxes could discourage investment, while those in favour believe the sector should be tapped as a potential source of additional government revenue to ease the cost of living pressures facing households.

The FTSE 100 declined 1.65% over the week, while sterling fell modestly 0.3% against the US dollar to $1.35.

Inflation, Interest Rates and Bond Markets:

Government bonds continue to reflect energy-driven inflation concerns, fiscal pressures and the broader economic outlook. UK 30-year gilt yields rose to 5.82% last Monday, their highest level since the Debt Management Office was established in 1998, before increasing further to almost 5.96% by Thursday. Meanwhile, in the US 30-year Treasury yields have fluctuated within the 5.25% to 5.35% range. Despite a second wave of the Treasury’s recent bond buyback programme, yields continued to remain elevated over the week. This suggests that investors had priced in greater than the $6bn worth of announced buybacks and were surprised the action was not larger.

The European Central Bank hiked interest rates last Thursday. Its headline rate increased from 2.25% to 2.50% – accompanied by upward revisions to the region’s inflation forecasts for 2027 and 2028. The Bank of Japan is expected to follow suit this week when it meets, with markets expecting a 25bps rise to 1.25%, to support the yen and tackle inflation. Meanwhile, markets currently expect the Bank of England to hold steady at 3.75%.

What’s on the horizon

The Middle East conflict will continue to be the dominant narrative that investors are most receptive to this week.

A week of big interest rate announcements is on the horizon, with the Federal reserve reporting its latest decision on Wednesday, followed by the Bank of England and Bank of Japan on Thursday. Consumer Price Index data will also be on the agenda, as both the UK and Eurozone will be releasing their August figures, a further insight into the status of inflation and the potential direction of travel for rates. The US will also release its retail sales figures for August and this will give investors a gauge on the strength of consumer demand.

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.