The Cambridge Weekly – 24th August

Geopolitical developments remained a key market influence last week, as the deadline for a lasting US-Iran peace agreement passed without resolution. Last Wednesday, the US President announced plans to increase the economic pressure against Iran, including measures intended to restrict oil smuggling, cash transfers and the use of overseas companies to bypass existing sanctions. The US President also reiterated that countries and companies that are seen to be supporting Tehran would also face financial consequences. Brent crude gradually ticked up over the week, beginning around the $88 level and ending the period around $93.

Trade tensions were also in focus, as Canadian Prime Minister Mark Carney held last-minute negotiations with the US administration ahead of planned 50% tariffs on $20bn of Canadian exports. It was announced last Thursday morning that a deal had been reached, with both sides touting the outcome as successful. Meanwhile, Malaysia continued to benefit from the global data centre boom, attracting investment through affordable electricity, available land and its proximity to Singapore. It now accounts for around 13% of global back-end semiconductor activity, including packaging, assembly and testing, and has become the world's sixth-largest semiconductor exporter.

US Equity Market:

As investors continue to weigh up geopolitical uncertainty and elevated government borrowing costs, US equities recorded a softer week as the S&P 500 index slipped 1.39% by close on Friday. Despite broader market performance, one American company that had a particularly strong week was biotechnology firm Moderna, which saw its shares rise almost 180% last Wednesday, following encouraging results in skin cancer vaccine trials.

Valuations of technology companies remained a point of scrutiny last week for investors, after economists at the European Central Bank (ECB) warned of a potential market correction, and highlighted the risks this poses to the financial stability of the eurozone - it is estimated that euro area households have around €440bn of exposure to US technology stocks.

The US dollar weakened against sterling during last week, dropping over 0.6%. Sterling currently trades around £1.365 to the US dollar.

UK Equity Market:

Once again, geopolitics was at the centre of attention for UK investors last week, after Russia issued warnings to the UK regarding Ukraine's use of British-made drones in the eastern Europe conflict. The Ministry of Defence responded by saying it stood "shoulder to shoulder" with Kyiv in response.

In UK macroeconomic data, reports released last week revealed encouraging private sector productivity growth over Q2, as analysts attributed the strong growth to technology advancements. In addition to this, the inflation report for July revealed that inflation had increased to 2.9%, in line with market expectations. This data has tempered expectations for a change in the headline policy rate when the Bank of England next meet in September, with the market now pricing in a decision to hold. Other UK jobs data reported last week revealed that UK employers shed more jobs in June than expected, potentially indicating a further weakening in the labour market. This weakening, alongside slowing wage growth, as reported by the Office for National Statistics, and lingering inflation, will all be key data points for the new Chancellor to consider in his Autumn budget on October 28th.

The FTSE100 index closed the week to Friday relatively unchanged off the back of weakness in the consumer sector, which was partially offset by strong performance of mining and oil companies due to rising crude oil prices.

Inflation, Interest Rates and Bond Markets:

In the US, the release of the Federal Reserve Open Market Committee minutes last Wednesday provided investors with additional context behind the committee's decision to hold the federal funds rate at 3.5%-3.75% in the July meeting. The minutes revealed that Fed officials are cautious of lingering inflation, highlighting that rate rises would be considered if inflation continue to run hot. Markets are now pricing in a hold at the upcoming September meeting, rather than the rise in September previously expected.

30-year Treasury yields briefly rose to their highest level in 19 years (5.34%) last Tuesday, reflecting concerns about persistent inflation, elevated government borrowing, and the outlook for interest rates. In response, the US Treasury announced at least $14 billion of buybacks in long-dated bonds, which helped ease market pressures and pushed yields lower.

Meanwhile in the UK, 30-year gilt yields have approached levels last seen in the early weeks of the post-1998 Iran war (5.86%), while 10-year gilt yields jumped almost 6bps since the end of the previous week. These moves continue the upwards trend in yields seen since mid-June, after tensions in the Middle East heightened again following a cooling in late May.

What's on the horizon

Geopolitics will remain top of the agenda for investors this week, with both the Middle East and Russia-Ukraine conflict continuing to be a focus. The annual Jackson Hole meeting of the Federal Reserve, which brings together economists and global central bankers for 3 days to discuss the directions of travel for interest rates and monetary policy, will also be of great interest for investor.

On the macroeconomic front, Q2 GDP data will be prominent, with Germany opening the week, followed by the US, Canada and France. In Europe, the ECB will release its account of its latest monetary policy meeting, giving a read into what drove the decision to hold rates in July. Tokyo will release it's Consumer Price Index (CPI) for August on Thursday.

A big week of earnings is on the horizon, with tech heavy hitter Nvidia set to announce results on Wednesday. Investors will watch closely to see whether the results give any indication into the strength of the AI-powering hardware sector, and the tech sector more broadly.

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.