Markets have been in an uncertain frame of mind recently. It is the surge in the price of gas that has caused the greatest upset to investor confidence. Russia’s decision to cut off supplies for three days has had a serious effect on sentiment, unsurprisingly. The news that Cineworld was on the brink of bankruptcy will not have helped either. It seems that ticket sales had not recovered sufficiently from the effects of the pandemic to allow the company to service the vast debt it had accumulated. This is just another indicator of the tricky times that lie ahead.
Consumer confidence is now at rock bottom as the fears of the likely consequences of the cost of living crisis increase. Some economic forecasters are predicting that inflation could reach as high as 18% by early next year. Even if this turns out to be an alarmist take on likely outcomes, further hikes in the interest rate set by the Bank of England look inevitable. With the cost of servicing the debt accumulated to fight off the problems created by the pandemic rising sharply, thanks in part to the large proportion of index linked bonds in issue, tough action on inflation will be needed.
In these circumstances, the relatively modest pull back in our benchmark FTSE 100 Share Index looks almost encouraging. Of course, in the longer term, inflation can help the value of real assets, as well as devaluing debt, which will have its advantages, given how much extra borrowing has been taken on. But the real concern is that a dip into a recession is now looking unavoidable. Indeed, it could be argued we are already there.
In different circumstances this might have lead the Bank of England to take a slightly less robust approach towards monetary policy. The truth is that we appear to be in a more vulnerable position than other major economies, so it is hard to see the Monetary Policy Committee reining back on rate rises. It all adds up to something of a headache for our new Prime Minister when he or she takes office next month. At least investors can take some comfort from the truly international nature of our share market.
