Written by Cormac Nevin.

Last week was another challenging one for markets as the MSCI All Country World Index fell -0.3% in GBP terms. The same index was down -4.2% in local currency terms, which illustrates the continued fall in Sterling vs the US Dollar. The US Federal Reserve’s efforts to combat inflation have led it to tighten interest rates aggressively, which has led to a sharp rise in the dollar vs other major currencies. One of the worst affected currencies has been the Yen, which is now at multi-decade lows. The Pound Sterling and Euro have also been heavily impacted, with the Euro falling to below parity with the US Dollar. As of this Monday morning, 1 US Dollar buys roughly 0.96 Euros and 1.08 Pounds. The Federal Reserve’s reversal of quantitative easing, aptly named quantitative tightening, has also put pressure on the US Treasury market where liquidity conditions have deteriorated significantly.

Other events driving markets have been the “mini” budget announced by  Kwasi Kwarteng, the new Chancellor of the Exchequer. In his address to parliament, Kwarteng announced a series of measures aimed at supply-side reform of the economy with tax cuts aimed at incentivising employment and investment. The fact that these tax cuts will be funded by borrowing led to a sell-off in the UK Gilt market and additional Sterling weakness. Only time will tell if these pro-growth measures have the desired impact of raising trend GDP growth.

On the continent, the weekend saw the election of Italy’s first female Prime Minister since the Risorgimento led to the creation of a unified Italy in 1861.  Giorgia Meloni’s Fratelli D’Italia party will lead a right-wing coalition with a comfortable parliamentary majority. The prospect of Italy being governed by the most right-wing government since the end of the second world war will likely set the scene for further confrontation within the European Union, at a time when the block faces significant economic and energy security challenges.

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