The Week In Review: Sept. 25 – Oct 1

Markets kept sliding downward last week, as Hurricane Ian battered Florida and the Nord Stream pipelines sprung leaks. The human and economic impact from the hurricane on Florida will be significant, but we don’t know the full effects. Suffice it to say that it will take a while for the state to recover. The Nord Stream mess is another negative story that filled the news. (For those who don’t know, the Nord Stream pipeline is used to ferry gas between Europe and Russia. A series of explosions hit the pipeline last week.) The conversation about who is responsible for the explosions has dwarfed the discussion about the potential environmental impact. The upside was that Russia had already shut off gas shipments to Western Europe in response to sanctions, so the immediate effects were negligible. The remaining gas is leaking into the ocean, which is a bad thing, but it’s difficult to understand how the Russians are responsible. All they have to do is turn on or shut off the spigot on their end. Why go to the trouble of blowing up your own pipeline? Hopefully, we will get an answer soon as to how this happened and who is responsible, but the longer-term impact is that if the conflict in Ukraine ends soon, the pipelines will not be available to deliver energy to Western Europe. That will make bringing industries back online that much slower and hamper the recovery in Europe, especially in Germany. The other major development last week: Bank of England (BOE) announced it would suspend its quantitative tightening scheme (rate hiking) to support the falling pound. On the surface, the explanation didn’t make sense. Why signal that you aren’t going to raise rates further when you are already behind the U.S., and the higher rates in the U.S. are driving foreign asset flows in the U.S., which strengthens the dollar at the expense of the pound and other local currencies? Why would you buy a British bond (called a gilt) if you can get a better yield in the U.S.? The BOE official bank rate is currently 2.25%; this is their version of our fed funds rate, which is currently 3%. The U.S. equity markets took the BOE’s actions as a sign that our Federal Reserve would consider a similar move and stop raising rates sooner than current expectations, which isn’t until 2024. As a result, last Wednesday was our best day in the markets since July.

What a difference a day made. On Thursday, it was brought to light that British pension funds had expressed distress that their bond holdings would be severely devalued if the BOE continued to tighten. This information made much more sense. As you can imagine, the same old concerns of a global economic slowdown returned, and markets reversed their gains from the day before. Initial unemployment numbers were the final nail in the coffin, as they once again failed to deliver the higher jobless claims that would show our Fed’s rate increases are having the desired effect of cooling the red-hot jobs market.

All these negatives have been hanging over the market, leaving it in a sour mood. There has been no sign that inflation is declining and no indication the Fed will take its foot off the brakes. The market got a little hopeful on Wednesday, but that quickly evaporated on Thursday. Markets ended a miserable month and quarter on a violent note. Selling accelerated into the final hour of trading on Friday, with the S&P 500 ending the month down over 9%.