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Market Report: Inflation worries bubble back up, G20 in focus while Bitcoin rises

Written by Susannah Streeter, senior investment and markets analyst Hargreaves Lansdown

The burst of euphoria which erupted over US markets and spread more widely at the end of last week is ebbing away after fresh warnings that the fight against inflation is still a hard slog yet to be won.

This latest reminder comes from US Federal Reserve Governor Christopher Waller, who said at a conference in Sydney that the endpoint to rate increases is likely ‘ways off’.

The message is coming loud and clear from the Fed  – investors should hold their horses when it comes to expectations of looser monetary policy. These words, reiterating the message of Chair Jerome Powell, helped spark some choppy trading in Asia and are likely to limit gains as trading resumes around the world on Monday. The FTSE 100 has opened marginally higher but investors are likely to stay cautious.

The G20 summit is in focus this week, and although hopes of any dramatic improvements in relations between the US and China are low, there will be a close eye kept on the meeting between Xi Jinping and Joe Biden.  Any signs of a further deterioration in the relationship is likely to rattle markets and investors will be clinging onto hopes that there could be communication re-boot.

The White House has indicated Joe Biden hopes to ‘build a floor’ for the relationship, and with ambitions set so low, there is highly unlikely to be any agreements reached. Strategies to help the world cope as countries recover from Covid economies slow down, and the planet heats up, should be front and centre of debate at the summit but the invasion of Ukraine will cast a long shadow and Putin’s absence demonstrates Russia’s isolation and how far away an end to the war still appears.

The pound has been clinging onto gains and is trading above $1.17. This is a level not seen since August and comes amid signs the economy is proving more resilient than expected despite the cost-of-living headwinds and the market turmoil of early Autumn. The UK government is still on a report card, being closely monitored after the perceived economic bad behaviour of the short-lived Truss administration. That’s why Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt have been priming the nation this weekend to expect widespread tax increases, and a cut back of spending in the Autumn Statement. Exploiting fiscal drag is set to be a big part of the plan, with the Treasury planning to recoup a big chunk of money by extending a freeze to tax brackets.

Bringing more stealth taxes out of the red box, rather than wielding an even bigger axe to public spending would be more politically palatable. Increases to inheritance tax and Capital Gains tax will be particularly difficult for a Conservative government to put on the table but even so the expectation is that they will feature in the plan. It also looks increasingly likely that the Government will uprate benefits and pensions in line with inflation. This isn’t unsurprising given that news feeds are filling with stories of pensioners forced to huddle under blankets, fearful of turning on the heat, and of desperate families stripping the shelves of food banks bare.

Bitcoin has climbed sharply this morning, amid hopes the crypto meltdown has been put on ice for now. Although the immediate storm following the collapse of the huge exchange FTX, has subsided, the destruction left in its wake has been considerable and crypto speculators hit hard by these recent losses, will be licking some painful wounds. This is a painful reminder that the crypto wild west is still a fragile niche in the larger financial system, where money is being bet on highly speculative assets. In this opaque world, fraud is rife and although the clamour for greater regulation will mount, this whole debacle also comes with a sense of relief that the deep scepticism among regulators about crypto’s stability has ringfenced larger more established financial institutions from contagion.

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