Spiralling upwards

What is going on markets at the moment? Brian Tora discusses below.


As Wimbledon takes over the headlines, concerns over inflation, the economy and markets seem to have been consigned to the inside pages. This is despite interest rate hikes around the world as central banks endeavour to combat the rise in the cost of living. The US has been amongst the most aggressive, raising rates by 75 basis points, while our own Bank of England took a more dovish approach, lifting rates by a modest quarter of one per cent.

Clearly the concern here is more with a weakening economic backdrop than rising inflation. The real worry is that wage demands are gathering pace which can only add to the upward pressure on prices. Given the tightness of the labour market and a government racked with divisions, a more militant approach to pay demands is looking ever more likely. The talk of a summer of discontent is not as fanciful as one might hope.

The fear that is clearly exercising the minds of those in the Bank of England and the Treasury is the development of a wage/price spiral. Already wage growth is at a ten year high. In April the year on year rise was not far short of 7%. While this is distorted by the ending of the furlough scheme and by changes in the nature of employment between sectors, it still paints a picture of continuing upward pressure on the cost of living. Above average inflation could persist for a little while yet.

But markets appear to be holding up relatively well in these continuing difficult circumstances. Overall, share values are little changed over recent weeks, so far as our benchmark FTSE 100 Share Index is concerned. They have been higher – and lower, with the Footsie flirting with 7000 at one stage – but despite some fairly sharp moves on occasion, the general direction has been sideways. And this is despite some very bearish comments from some market watchers.

As to the future, inflation is likely to continue to dominate investor sentiment. On balance this is more likely to favour equities, which at least retain some measure of protection against rising prices, unlike cash or bonds. While we are entering the holiday season when many professional investors will be away from their desks, the news flow will start to intensify as companies report their half year earnings and economic statistics for the second quarter of the year emerge. There will be plenty for us to get our teeth into.

Brian Tora, Associate

Understanding Finance

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