Last week, investors took a long look at the crazy quilt of information and events around the world and decided they didn’t like what they were seeing.
Geopolitical tensions puckered a lot of seams: Conflict in Ukraine was embroidered with additional sanctions against Russia, difficulty investigating the downed commercial airliner in Ukraine, and escalating anti-American rhetoric in Russia. Violence continued to roil through the Middle East and North Africa. In Libya, hostilities escalated, causing many western countries to withdraw diplomats and leading Tunisia to close its border with Libya.
Financial and economic issues overseas, including ongoing issues with one of Portugal’s largest banks, and worries that European companies will be negatively affected by sanctions against Russia, marred investors’ views too. In addition, controversy swirled around Argentinian bonds. In the midst of a legal battle over bond repayment, the country missed a June interest payment. The ‘credit event’ triggers a payout of about $1 billion for investors who hold insured Argentine debt.
Positive news in the U.S. offered some padding. The U.S. economy continued to recover and gross domestic product increased by 4 percent (annualised) during the second quarter which was a remarkable improvement after first quarter’s contraction. Reuters reported, “Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 percent pace… Despite the pick-up in consumer spending, Americans saved more in the second quarter… which bodes well for future spending.”
The U.S. Federal Reserve issued a midweek statement confirming economic recovery was continuing apace. It caused some investors to throw what one expert called a ‘taper’ tantrum. Barron’s said, “As the Fed’s easy money policies reverse, people are forced to focus more on what they’re paying for investments. If last week is any indication, investors didn’t like what they saw in their portfolios.”
By Friday, U.S. markets had experienced their worst week in two years. As investors adjust to the idea of rising interest rates, markets may experience additional volatility.
In the U.K., the Bank of England could raise interest rates as soon as February, a leading thinktank has predicted, but it must send clearer signals in the run up to such a move or risk stock market upheaval.
Next week’s quarterly inflation report, where Mark Carney will present the Bank’s latest forecasts, will be ‘crucial’ in giving clearer guidance around the outlook for interest rates.