“A dream you dream alone is only a dream. A dream you dream together is reality.” John Lennon

Monday’s blog painted a gloomy picture for equities, and with good reason, headlines continue to point to a slowing global economy as central banks look to tame inflation. The Bank of Australia is the latest to raise interest rates by 50 basis points. According to one report, equity market sentiment is back to the lows of 2020 as almost 90% of stocks in the S&P 500 are oversold, according to a set of Factset technical indicators. It is at these points we often get a bounce in stocks. The Vix index has risen recently but remains below the average for the year. Throughout the year, the level of the Vix index would suggest option hedging has not provided the protection it usually does in volatile times.

The European economy is suffering. As Europe tries to stockpile gas preparing for winter, driving prices higher, their main supply has been cut. As gas prices remain close to highs, cracks are appearing within Europe as Italy’s right-wing leader calls for a rethink on Russian sanctions to allow gas imports to resume. So far, the spread between German and Italian government bonds has not broken 2.5% but should it do so, fears for the outlook for the euro will intensify. Pressure for a solution will increase.

There may come the point when the pain gets too great, and Europe starts to put pressure on Ukraine, probably behind closed doors, to find a way for Ukraine and Russia to negotiate a form of peace. How long will Europe continue to support Ukraine at the cost of its economy? As much as the public position for governments to stand the entire square behind Ukraine, one feels that as inflation rates are set to soar on higher gas prices, domestic issues will become a more significant concern. Fears of sanctions harming their home economies more than Russia are growing.

Liz Truss’s election to replace Boris has been greeted with a modest bounce in the pound. Rishi Sunak got lit closer to the top job than the bookies predicted. His inability to see how the economic landscape had changed since his proposed tax increases were his ultimate downfall. Higher tax rates do not always lead to higher revenues if companies do not survive to pay them.

Gilt yields have been rising; two-year gilt yields are trading above 3%. Not great when inflation is running at 10%, but at least now, a viable alternative to stocks for the first time in many a year. A two-year gilt trading at 95.75 gets repaid at par in 15 months. There are no capital gains to be paid on gilts, capital growth and no capital gains tax, worth considering.