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02 October 2023

Market Round-Up

The global economy experienced the largest annual contraction in trade volumes for almost three years in July. In a comparison between July 2022 and 2023, trade volumes registered a substantial decline of 3.2%.

This decline mirrors the significant drop observed in the early months of 2020 during the global pandemic. This highlights the magnitude of current economic challenges, many of which have remained unresolved since the pandemic. General sentiment around world trade suggests that it will remain weak over the next few months following the revision of numerous economic factors. High inflation, a lack of credit easing and the escalation of interest rates, which in turn has led to an increase in borrowing costs, have resulted in global demand for consumer and commercial goods and services significantly decreasing.

Additionally, governments have been motivated by the pandemic to shorten supply chains with the severe supply disruption brought about by COVID-19 highlighting the vulnerability of global trade and the risk it generates. Consequently, countries like the United States have been attempting to bring production closer to home, with the Biden administration allocating US$52bn for the expansion of domestic semiconductor manufacturing. As such, global trade has suffered since individuals contend with reduced disposable income and nations feel more inclined to implement more protectionist policies.

In the UK, the British pound hit a six-month low against the US dollar and itself on a trajectory indicative of its weakest monthly performance since the mini budget of 2022. Over the course of this month, the pound has experienced a significant fall of 3.4% against the dollar, compounding a total decline of 7.2% since July. The depreciation of the currency reflects growing concerns within financial markets that the implementation of higher interest rates may propel the United Kingdom into a recession.

The elevated interest rates could have a dampening effect on investor confidence, potentially impeding the emergence of new investments and hindering further economic growth. This situation follows the recent decision of the Bank of England to maintain interest rates at their current level of 5.25% after a streak of 14 consecutive rate hikes stretching back to December 2021. The central bank's unexpected policy stance has introduced a degree of uncertainty into the economic landscape. Subsequently, this could lead to cautious investor behaviour and a reluctance to commit to new ventures or capital investments. This apprehension underscores the balance that central banks must hit when they are managing interest rates to foster both economic stability and growth. As a result, the pound has seen recent downward trends. However, markets are forward-looking so this may soon take a turn, particularly if the markets anticipate that economic conditions will improve.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance.
Market Round-Up

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