Investors grapple with rising rates

One scoop to start: Chancellor Jeremy Hunt will use his Mansion House speech next month to outline wide-ranging plans for channelling UK pension investments worth billions of pounds into fast-growing British companies.

Investors navigate higher interest rates

Central banks have come under the spotlight as policymakers increased rates last week in an attempt to rein in surging inflation, presenting challenges for many investors.

The Bank of England defied expectations on Thursday when it increased interest rates to 5 per cent. The higher-than-expected boost comes after UK inflation remained stuck at 8.7 per cent in May according to figures published last week, above the 8.4 per cent anticipated by economists.

After an initial jump, Sterling edged lower in a move that investors said reflected concerns over economic growth, writes Mary McDougall.

“The market is implying that this hike will kill growth, and reduce inflation, and I think the market is right,” said Mike Riddell, a bond portfolio manager at Allianz Global Investors.

Shares in UK-listed banks also dropped, as investors warned higher rates could lead to bad loans, increasing costs of attracting deposits, and a recession.

Richard Buxton, UK equity fund manager at Jupiter, said the banks’ share price moves reflect “a view that higher rates from here will see squeezed mortgage margins and greater competition for deposits, offsetting the benefits of higher rates.”

But David Cumming, head of UK equities at Newton Investment Management, also warned that anti-bank rhetoric from politicians against a backdrop of rising mortgage payments “doesn’t help consumers or the economy.”

Elsewhere, Turkey’s central bank drew a line under its low-rate era with a 6.5 percentage point rise on Thursday, while Norway and Switzerland also raised rates.

The moves come after the European Central Bank made a quarter-point increase earlier this month. Although the US Federal Reserve skipped a rate rise at its last meeting, chair Jay Powell warned on Thursday that interest rates will need to rise further to bring inflation closer to its 2 per cent target.

As Chris Giles, Colby Smith, and Martin Arnold write, global central banks are entering a new phase in their battle with inflation.

Crispin Odey: the fallout continues

Companies connected with Crispin Odey have come under pressure from investors after sexual misconduct allegations were made against the hedge fund manager.

Odey Wealth told clients last week that it was “considering several options” for the firm, noting that the fallout from the allegations, which Odey strenuously denies, has “had a serious impact on our business”.

The Financial Conduct Authority last week imposed restrictions upon Odey Wealth and Odey Asset Management relating to certain money transfers. Crispin Odey’s regulatory approval to work in financial services was also dropped.

OAM’s funds have suffered as investors have sought to withdraw their money. Last week, it told clients that its flagship European and MAC funds were monitoring the level of redemptions being received, after five of the firm’s other funds were suspended.

Other companies with links to Odey are also facing scrutiny. Clients of investment boutique Ruffer have raised questions about its relationship with the hedge fund manager.

Ruffer, co-founded by multimillionaire philanthropist Jonathan Ruffer in 1994, counted Crispin Odey among its early backers and started out in OAM’s original offices in Upper Grosvenor Street in London’s Mayfair. Jonathan Ruffer also sat on Odey Asset Management’s board between 1995 and 2002.

Odey’s family also has exposure to Ruffer. His children own a company called Eastbach, which has a stake in Fellbarn, a company that has a financial interest in the Ruffer partnership, linked to 4.9 per cent of its revenues. Ruffer said: “There is no connection between Crispin Odey and the running of or oversight of Ruffer LLP.”

Chart of the week

Investors are betting that the Federal Reserve’s interest rate rises will tip the US into a recession.

As Kate Duguid explains, an inverted yield curve has preceded every recession in the past five decades.

This situation occurs when short-term US government costs exceed longer-term costs. The gap reached its widest margin in three months on Wednesday and is close to the 42-year record set in March during the regional banking crisis.

“Bad things happen when the yield curve is inverted,” said Mike Cudzil, a portfolio manager at Pimco. “With very inverted yield curves, you tend to see a slowdown in credit creation. This is one reason why a shallow recession by the end of this year, or beginning of next year, is our base case scenario.”

Although the yield curve became inverted last year, the inversion has deepened as the Fed has enacted a series of interest rate increases in quick succession. The chart suggests markets are expecting the central bank to continue tightening which will help stymie inflation but also curtail economic growth.

The Fed paused rate increases at its last meeting earlier this month, but the central bank chair Jay Powell told congress this week that it still had further to go to rein in inflation.

Jurrien Timmer, director of global macro at Fidelity Investments, said it would be “foolish to bet against a recession”, adding that “when the yield curve gets inverted to this degree for this long, a recession has basically always happened”.

Read the full article here.

Five unmissable stories this week

Abu Dhabi’s sovereign wealth fund ADQ held detailed talks to take Wall Street investment bank Lazard private, in a move that underlined the oil-rich emirate’s ambitions to acquire a western financial services company. Negotiations fell apart after both sides walked away from a deal.

The anonymous Wall Streeter known as Litquidity on social media tells Madison Darbyshire why he traded a banking career for comedy and discusses the finance industry’s tough work culture.

Abrdn sold its stake in India-based HDFC Asset Management for £337mn in a long-anticipated deal that will provide more capital for the UK-listed fund group to return to shareholders. The investment manager’s US subsidiary, Abrdn Inc, also struck a deal with Tekla Capital Management to acquire four US-listed healthcare and biotech trusts, with $3bn of assets.

Large institutional investors are increasing pressure on technology companies to take responsibility for the potential misuse of artificial intelligence as they become concerned about the liability for human rights issues linked to the software. Aviva Investors, Fidelity International and HSBC Asset Management are among those leading the push to influence technology businesses to commit to ethical AI.

Politicians in the UK are calling for better pension scheme safeguards after former prime minister Liz Truss’s “mini” Budget last year. Pension schemes sold multibillion-pound holdings of UK government bonds in just a few days during September, creating a self-reinforcing doom loop that threatened to crash the gilt market.

And finally

Anselm Kiefer’s latest exhibition, Finnegans Wake, is the German artist’s response to James Joyce’s novel of the same title. Kiefer’s sculptures, paintings, and installations feature fields of rubble and wire, the DNA helix, and Joycean inscriptions. The exhibition is on show at the White Cube gallery in Bermondsey, London.