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Brewin Dolphin – Markets in a Minute

Please see the below article from Brewin Dolphin providing their insight on global markets. Received yesterday.

There is a well-known proverb that all roads lead to Rome. In the context of current market psychology, most market worries ultimately stem from uncertainty around inflation. The strong equity rally of the first quarter of the year has so far been met with a flurry of challenges in the second.

The “good” thing to worry about is the ongoing strength of the U.S. economy, which may keep inflation sticky, and in turn restrain the ability of the Federal Reserve (the Fed) to cut interest rates this year.

The “bad” thing to worry about is the direct confrontation between Israel and Iran, which keeps geopolitical tensions elevated, impacting oil prices, which are important variables affecting the outlook for inflation.

Iran-Israel conflict intensifies

The market has been arguably sanguine since the October 7 attack by Hamas on Israel. The Organization of the Petroleum Exporting Countries (OPEC+) even extended supply cuts to keep oil prices relatively high. However, things took a sharp turn the weekend before last, when Iran directed hundreds of drones and missiles at Israel. The attack was calibrated to cause minimal damage and there have been no casualties, but Israel has vowed to respond despite the U.S. urging restraint.

Overnight on Friday, Israel reportedly struck at Iran, causing a near 5% spike in oil prices to take it over $90 per barrel. However, as of Monday, oil prices have retreated to about $86 per barrel.

Overall, Israel’s retaliation is perceived to be restrained in nature. Markets have, for the time being, assessed that both sides were trying to show strength in a way that is not intended to cause harm. Importantly, Iran has apparently already indicated that it will not respond to this attack. There is hope for a potential path of de-escalation.

There is little room for complacency, though, as tensions will remain high in the Middle East. The recent conflict has opened a new stage of direct warfare between Israel and Iran and the possibility of a cycle of retaliation is enough to keep markets on their toes.

Hence, oil prices will continue to trade with a high geopolitical risk premium, especially when global demand remains resilient. However, we don’t see oil prices spiralling out of control. OPEC+ has the spare capacity to increase production, and it’s in its interest to not let oil prices get too restrictive.

The U.S. is now a reliable energy exporter, too. The uncertain dynamics of the ongoing geopolitical situation and inflation supports our positive view on global energy majors, which can act as a portfolio hedge.

Hope for rate cuts in the U.S. diminishes

The rise in geopolitical tensions and the uncertain outlook on energy prices further complicates the job of the Federal Reserve. There is more evidence that inflation in the U.S. is heating up again, and the Fed can no longer afford to lean on its dovish pivot.

In a week rather light in terms of U.S. data, a number of Fed speakers sounded more cautious on inflation. Fed chair, Jay Powell, pointed out it will likely take more time for officials to gain the necessary confidence that price growth is headedtoward target before cutting rates. Fed vice chair, Philip Jefferson, said he expects inflation to continue to moderate, but persistent price pressures would warrant holding borrowing costs higher for longer.

There seems to be a sense of reckoning at the Fed that inflation is more stubborn than thought, and the risk of heating up is real. The likely outcome of this is the number of rate cuts signalled by the Fed’s next Summary of Economic Projections, will be revised down. There is also a question of whether the current Fed funds rate level is indeed restrictive, which will impact the Fed’s stance on the long-term Fed funds rate (the neutral rate, which is neither stimulative nor restrictive for the economy).

Bond markets have dialled back the number of rate cuts expected for 2024 to just one and a half, compared to about six at the start of 2024. U.S. benchmark ten-year treasury yields reached a 2024 high of 4.67% last week, whereas two[1]year treasury yields briefly touched 5%.

Global equity markets have navigated higher bond yields in Q1 this year but are currently hitting some resistance. There is only so much patience from investors on the disinflation and Fed cuts narrative. Add to the mix geopolitical tensions, stretched positionings, and disappointment from a few closely watched companies amid Q1 earnings season, and it’s not surprising that risk assets took a hit last week.

Against this backdrop, safe havens such as the U.S. dollar and gold are well bid – a reminder of the importance of diversification in portfolios.

IMF growth upgrade highlights U.S. exceptionalism

We mentioned at the beginning that the “good” thing to worry about is the ongoing strength in the U.S. economy, which risks keeping inflation sticky. Last week, the latest quarterly forecasts from the International Monetary Fund (IMF) shed a light on how mind-blowing the relative strength of the U.S. economy is compared to its peers.

The IMF revised up U.S. 2024 gross domestic product (GDP) growth forecasts from 2.1% to 2.7%, after 2023 GDP growth of 2.5%. Meanwhile, UK and eurozone 2024 GDP growth forecasts were both revised down by 0.1% to 0.5% and 0.8%, respectively. Think about that for a second – these forecasts mean the U.S. economy is expected to grow at more than five times that of the UK and three times that of the eurozone in 2024. As such, it is reasonable to expect some differences in their respective pace of monetary policy adjustments.

The reasons why the U.S. economy is expected to do so much better than its peers are multi-faceted. When you think about growth, it is about labour, investment, and productivity. The U.S. has enjoyed better developments in all key drivers of growth due to high immigration and the CHIPS Act, which is stimulating a buildup of semiconductor infrastructure and superior tech innovation.

The U.S. has also weathered the higher interest rate environment better thanks to the dominance of 30-year fixed mortgages, rendering its economy relatively less interest rate sensitive. All these factors suggest the bar for the Fed to ease policy is high.

Yes, it is true that U.S. rate cuts will be pushed back to later in the year, and rates will likely remain higher for longer. From a positioning perspective, the significant repricing of the path of U.S. interest rates suggests the room for disappointment has reduced.

Our core view is that high-quality companies with a strong competitive advantage and sustainable earnings growth are less sensitive to fluctuations in rates and the economic cycle, so they can still do well in the long term. These stocks will still be subject to volatility depending on market mood and news flow, but the investment thesis is intact.

We think a resilient U.S. economy is a positive thing and should not be talked down as something dreadful. A stronger economy means higher nominal GDP growth, which is a macro driver for corporate profits.

Obviously, the earnings season will provide fresh catalysts on market direction. On that, lower inflation should help with corporate margins and resilient consumer and business investment should support the top line. The earnings recession should be over with more recovery in sight.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare


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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update as tensions appear to settle in the Middle East.

What has happened

Monday saw a modest recovery in markets in aggregate – it was enough for US equities to end their back-to-back run of 6 daily declines in a row, with the US S&P 500 equity index ending the day up +0.87%. With hopes that Middle East tensions were easing back a little for now at least, oil prices edged lower with Brent crude dropping back -0.33% to US$87 a barrel, its lowest level so far this month. Bucking the improved sentiment however are Chinese stocks, with both China’s CSI and Shanghai Composite equity indices trading lower currently. In bond markets, government 10-year bond yields edged lower (bond prices rose) in both the US and Europe on Monday.

Japan’s flash PMIs land

Today sees the latest preliminary, so-called ‘flash’ Purchasing Manager Index (PMI) surveys land for the month of April for a number of countries globally, across Asia Pacific, Europe, and the US. Over in Japan, manufacturing and service activity improved in April to its highest levels in nearly a year, with the April flash manufacturing PMI up to 49.9 (from 48.2 in March), and just below the 50 mark which marks the dividing line between month-on-month (MoM) contraction versus expansion in activity levels. Meanwhile, Japan services PMI rose MoM, to 54.6 in April (up from 54.1 in March), so the economy is still being services-led relative to manufacturing currently, a not-unfamiliar theme in other developed economies around the world.

Middle East tensions ease a little

Middle East tensions appear to have continued to ease so far this week. Yesterday, Iran’s foreign ministry spokesman said that Israel had received the “necessary response at this stage”. This proved enough for oil prices to drop, as well as a pull back in the gold price which fell -2.59% on the day and which is down again this morning at the time of writing.

What does Brooks Macdonald think

US megacap technology stocks narrowly led the market yesterday, but it was a mixed affair with Tesla weaker. All eyes now turn to the 4 of the so-called ‘Magnificent 7’ which report this week, starting with Tesla due after the US close later today.

Please check in again with us soon for further relevant content and market news.



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Tatton Investment Management: Monday Digest

Please see below, Tatton Investment Management’s ‘Monday Digest’ which summarises all the key factors currently affecting global markets and economies:

Market quiet on the Middle Eastern front

Israel and Iran’s escalating conflict presents huge risks for the world, but at the moment we can take comfort that the respective aerial bombardments seem to be more about showing force than hurting each other. Israel’s allies don’t want a full-scale conflict and the Iranian regime is weak in its domestic support. Hopefully, this should mean each country’s hawks are satiated by bold but ultimately ineffective long-range shots.

Our job is to think about investment implications. Capital markets weakened last week, but surprisingly this was only partly about the Middle East and global oil fears. Falling stocks and a stronger dollar show falling risk appetite. Investors are booking profits, which is why last week’s worst performers – like Japan – were the best performers year-to-date.

The Mexican peso fell against the dollar, having been on a stellar run (we cover below). But major developed currencies were only slightly weaker and were stable through Israel’s retaliatory strike. Bond yields spiked but, with the exception of the US, real (inflation-adjusted) yields were stable, indicating higher inflation expectations (which we also cover below). We might have thought oil would surge, but Brent crude prices were stop-start – hitting a high of $92 per barrel on Friday morning before slipping back to $87, a pattern it held every day last week.

Growth expectations have been hit by delayed interest rate cuts. Fed chair Powell admitted last week that we will have to wait longer than expected for a cut, but BoE governor Bailey was more dovish, downplaying the UK’s recent inflation surprise and saying the BoE need not wait for the Fed to act.

Investors are having to discount the possibility of tighter short-term policy, which could challenge growth. But analyst expectations for corporate earnings are high – and markets’ implied expectations are even higher. This means stocks valuations are expensive, making them vulnerable – especially as risks grow and volatility rises.

We shouldn’t give up on medium-to-long-term optimism, though. Recession risks are minimal, so if valuations fall it will likely mean buying opportunities. Less exuberant markets could help inflation expectations too, meaning rates can finally fall and the growth cycle start anew.

Real yields, real growth?

Sticky inflation and delayed interest rate cuts are pushing up bond yields. 10-year US Treasury yields have gone from 4.2% to over 4.6% this month, while UK gilt yields have shot from under 4% to nearly 4.3%. One might think this is down to higher-than-expected inflation figures in both regions – which would also explain why the less inflationary Europe has seen smaller bond moves.

However, UK and US bonds differ greatly when it comes to real yields. We work these out from inflation-adjusted bonds. They pay interest on the amount borrowed – but that amount rises each year in line with the official inflation index. Like any bond, changes in the traded price are inverse to changes in yield. So, the difference between the inflation-adjusted face value and the current market price tells you the ‘real’ yield.
US real yields have risen sharply through the latest bond sell off, but UK real yields have stayed fairly stable. Real yields are supposed to reflect markets’ growth expectations, so basically they are saying US growth prospects have improved while Britain’s have stalled. That shouldn’t surprise anyone; the US economy continues to outdo expectations while the UK is at best stagnant.

The more interesting thing is what it says about inflation. Since UK real yields have stayed put, the move up in nominal yields suggests markets expect higher inflation. But US real yields have moved up basically in line with nominals, meaning inflation expectations have not gone up in the US. That is incredible when you consider how strong recent US inflation data has been.

Something has to give. Either inflation has to fall rapidly, growth expectations must weaken of nominal US yields must adjust higher. The first two look unlikely, but the latter could be painful for risk assets. Markets have taken the bond sell-off well so far – but might not be able to take much more. 

Mexican peso going strong

The Mexican peso is the only major Emerging Market (EM) currency to gain against the US dollar during this latest rate rise cycle – jumping 20%. President Andrés Manuel López Obrador (nicknamed AMLO) has played a big part. International investors were concerned about the leftist president when he took office six years ago, but as we approach the end of his administration, AMLO will almost certainly be the only Mexican leader in modern history to leave office with a stronger peso than he inherited.

Mexico’s central bank helped him by raising interest rates hard and fast in 2021 – long before developed nations joined in. The Bank of Mexico’s total cumulative rate rise was higher than the Federal Reserve’s too – 7.25 percentage points compared to 5.25 in the US. That made the ‘carry trade’ – borrowing money where it’s cheap (US) and keeping it where rates are higher (Mexico) – more attractive. Capital flowed from the US to Mexico, bolstering the peso.

These flows were only possible because of Mexico’s strong trade links with the US. Mexico officially became the US’ largest trading partner last year, overtaking China. US-China trade has taken a huge hit from the nations’ sour relations, and manufacturers are keen to produce closer to the US – benefitting Mexico.

This structural force pushing up the peso was bolstered by cyclical flows, but those might be ending. Mexico is now cutting rates, and the next president (elections in June) might well want a weaker peso to boost exports – considering the recent drop in activity.

In purchasing power parity terms, the peso is stronger against the dollar than it has been in years. This might mean there is little room to go higher, or it could mean a deep structural change in US-Mexico economic ties. In any case, global trade is clearly shifting – which should shift how investors think about global growth, and EMs in particular.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Carl Mitchell – DipPFS

Independent Financial Adviser


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Brooks Macdonald: Daily Investment Bulletin

Please see today’s Daily Investment Bulletin from Brooks Macdonald, received this morning:

What has happened

Overnight, there are reports of explosions in the Iranian city of Isfahan, which is home to some significant centres of Iran’s nuclear program. According to The New York Times, two Israeli officials have said that Israel was behind the attack. The fear has been that the Middle East conflict might escalate further still, particularly since Iran had previously said they would respond to any attack. However, according to The Times this morning, Tehran has said that it does not plan an immediate military retaliation. As a result, while risk-aversion initially moved through markets in the wake of the news of the attack, some of these market moves have subsequently been pared back in the last few hours. As a case in point, the oil price initially surged to over US$90 per barrel before easing back a little, but it is still higher on the day currently.

Reaction to latest Middle East events

While details are still unfolding, it appears that the Israeli retaliation for Iran’s strike last weekend has so far been limited in its impact. The United Nations nuclear watchdog the International Atomic Energy Agency (IAEA) said in a post following the attack to confirm that there had been “no damage to Iran’s nuclear sites” but called for “extreme restraint” from both sides going forwards.

Fed speakers push-back on rate cut urgency

Before the latest Middle East escalation, markets on Thursday were focused on the latest US Federal Reserve (Fed) speakers to weigh in with their views as to the likely path for interest rates. Collectively, it appeared there was something of a push-back on the urgency to cut interest rates. New York Fed President Williams said, “I definitely don’t feel urgency to cut interest rates”, while Atlanta Fed President Bostic said, “I’m comfortable being patient”.

What does Brooks Macdonald think

The events overnight have put the geopolitical conflict ‘ball’ back in Iran’s court – what Iran chooses to do next will likely determine the broader regional and global impact – in particular, it will be key as to whether, if at all, Iran seeks to conduct another direct attack on Israel, or whether they revert to their previous playbook of using proxy forces instead. For markets, we appear to be entering a heightened phase of uncertainty and likely volatility, which is clearly not helpful. That said, the early assessment on the latest Middle East events overnight is that they appear to have been limited in scale, which explains why some of the risk-aversion market moves following the attack have seen some paring back at the time of writing.

Please continue to check our blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Andrew Lloyd DipPFS


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EPIC Investment Partners: The Daily Update | IMF Upgrades Growth

Please see below, an update from EPIC Investment Partners analysing the latest global growth forecasts from the International Monetary Fund. Received this morning – 18/04/2024

On Tuesday, the International Monetary Fund (IMF) modestly raised its forecast for global economic growth, describing the world economy as “surprisingly resilient” in the face of inflationary pressures and changes in monetary policy. The IMF now anticipates a global growth rate of 3.2% for 2024, 0.1% higher than its January prediction, with growth in 2025 the same.  

Pierre-Olivier Gourinchas, the IMF’s chief economist, said that despite a string of economic crises, the data pointed towards a soft landing for the global economy, adding that the risks to the outlook remained broadly balanced. “Contrary to pessimistic forecasts, the global economy has demonstrated remarkable resilience, maintaining steady growth with inflation receding almost as rapidly as it escalated”, he noted.  

Leading the growth are advanced economies, notably the U.S., which has surpassed its economic activity from before the Covid-19 pandemic, along with the euro zone, which is showing robust signs of recovery. However, less optimistic prospects in China and other major emerging markets could pose challenges to global trade partners. 

China remains a significant concern due to its faltering property market, along with other potential risks such as geopolitical tensions leading to price surges, trade disputes, varying rates of disinflation among its key sectors, along with high interest rates. 

However, on the upside, looser fiscal policy, falling inflation and advancements in artificial intelligence were cited as potential growth drivers. 

As for inflation, the IMF projects a decrease in global headline inflation from an annual average of 6.8% in 2023 to 5.9% in 2024, and a further fall to 4.5% in 2025. Advanced economies are expected to reach their inflation targets ahead of emerging markets and developing economies. 

“As the global economy approaches a soft landing, the near-term priority for central banks is to ensure that inflation touches down smoothly, by neither easing policies prematurely nor delaying too long and causing target undershoots,” Gourinchas said. 

“At the same time, as central banks take a less restrictive stance, a renewed focus on implementing medium-term fiscal consolidation to rebuild room for budgetary manoeuvre and priority investments, and to ensure debt sustainability, is in order,” he added.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

18th April 2024

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Brewin Dolphin – Markets in a Minute

Please see the below article from Brewin Dolphin detailing their key takeaways from global markets. Received yesterday 16/04/2024.

The week before last saw stocks giving up some of their recent gains despite a late flourish following the U.S. employment report. The report showed strong jobs growth, substantially driven by increased immigration, which seems to be facilitating a renaissance in non-inflationary growth (what economists call a supply-side expansion).

Last week, however, they held their ground, lingering near their heights, but considering some of the news markets had to digest, that could be seen as a sign of strength.

U.S. inflation is high (again)

U.S. inflation data for March was released last week and was well above the rate consistent with hitting the inflation target. Sometimes, the inflation data is distorted by volatile food and energy prices, so we can look at core inflation instead, and if we are concerned about the distorting impact of shelter inflation then we can strip that out, too. The problem is that in all the various ways in which consumer price index (CPI) statistics are modified to make them seem more representative of underlying price pressures, they still seem to conclude that inflation during March was too high to be consistent with hitting the inflation target.

How has this impacted the markets? Well, over many weeks, we have been commentating on the market’s slowly evolving views on the number and timing of interest rate cuts this year. Readers may recall there was a time when markets were discounting seven interest rate cuts by December 2024. This was difficult to comprehend and implied that a majority of investors foresaw a significant recession and a material undershoot in inflation. Instead, the economy has continued to grow, and inflation has proven stubborn. As of the week before last, the implied interest rate cuts by the end of this year have reduced to one or two.

Unlike the fickle market, the Federal Reserve members have remained consistent in their forecast of three interest rate cuts during the year. So, whilst the magnitude of the change in market expectations is significant, so is the fact that the markets saw the Fed as too hawkish and now see it as too dovish.

Various members of the Federal Reserve have spoken since the last Fed meeting, and most have acknowledged the persistence of inflationary data is a challenge to the current expected trajectory of rates. Some still believe they will happen while others are more circumspect. Fed chair Jay Powell seems more convinced than most that the Fed’s economic projections make sense. Should he be?

How should the Fed set interest rates?

Broadly, the Fed is assumed to set its policy in either a restrictive or an expansive setting depending on whether the economy is operating above or below its potential capacity. A restrictive policy would mean interest rates above a neutral level, whereas an expansive policy would mean rates below neutral. The challenge, however, is that the neutral rate is uncertain and changes over time.

Jay Powell said a couple of weeks ago that the neutral rate “doesn’t really matter” for policy today. Bloomberg ambushed former treasury secretary Larry Summers with this statement, and he pushed back against it, saying it was like driving a car by feel without looking at the speedometer. He didn’t have the context of Powell’s remark, which was that the neutral rate is unknowable, but the Fed is confident it is below the current rate. So, he just meant knowing exactly what the neutral rate was doesn’t matter for policy today.

But to continue Summers’ analogy, should the Fed be driving based upon a speedometer they believe is faulty (a neutral rate estimate they know is wrong) or by feel (taking other evidence that the economy is speeding up or slowing down)? Driving by feel can sound a lot like being data-dependent, and despite the enormous resources that go into trying to forecast the economy, given the well-known inexactness of economic forecasts, it could be wrong to place too much faith in the models and ignore other evidence that the economy might be operating above capacity.

Persistence in inflation would be one factor. Strong jobs growth

is another, alongside the strength in consumer spending. There is evidence of banks loosening lending standards (slightly). Nothing is definitive but there seems to be enough to at least challenge the assumption that policy is restrictive.

So, are U.S. interest rates restrictive?

For what it’s worth, there is a variety of estimates of the level of the neutral rate, with most being around 1%, but some are as high as 3%. At the same time, inflation itself is really an expectation rather than a known fact, and so this too could probably vary between say 1% and 3%. This may indicate that policy is restrictive, but it’s certainly quite possible that it’s not. The empirical evidence of a strong economy with high inflation might top the scale a bit in favour of the latter.

The counterargument is that policy is restrictive but operates with what economist Milton Friedman called long and variable lags, so even though the economy is strong now, it’s likely to slow down in response to tightening that took place last year. This means what a central bank should do is change policy in anticipation of changes in the economy. Fortunately, most central bankers are self-aware enough to recognise their forecasts are not accurate enough to do this.

Bernanke and the Bank

Ironically, on Friday, former chair of the Federal Reserve Ben Bernanke’s recommendations to the Bank of England were published. The Bank had asked him to review its forecasting approach. He has recommended abandoning fan charts, which show the range of possible outcomes for a variety of economic metrics. Fan charts can convey the inexactness of forecasts in a helpful way. They would highlight that while you expect the economy to weaken, there is a chance that it strengthens, and vice versa. It likely discourages central bankers from setting policy in anticipation of changes in the economy because very often, those forecasts are wrong.

To be fair, his suggested alternative is to have a central forecast and some alternative scenarios. This may work as well, but equally, may be open to criticism for being vague and inexact. The other specific change would be the nature of the forecasts, which are currently based upon the market’s expectations of how policy will evolve. This can be confusing because sometimes, the central bank seems to be forecasting how the economy will evolve based upon interest rate changes it doesn’t intend to make!

Enough eco-waffle – why does this matter?

Changes in expected interest rates drive changes in bond yields and prices. The U.S. CPI and strong data out of the UK have seen UK bonds underperform.

According to textbooks, they should also drive equity valuations, but often they don’t. The textbooks would suggest that investors buy stocks based upon a valuation model that includes bond yields as an input – thus when yields go up, stock prices should come down. This should particularly affect stocks with longer-term growth prospects, as these are long duration assets (as discussed last week).

This relationship is not very reliable though, as investors generally buy stocks because they have excess savings, and those savings contribute to a pool of global liquidity, which drives financial markets.

But interest rates will influence the returns earned by investing in certain industries. Banks earn more when interest rates are higher. It should add to their net interest margins (the difference between what they earn on loans and what they pay on deposits).

Another inflation hawk

Friday marked the real start of the first quarter earnings season, with a host of banks kicking things off. Focus as ever was on the sage words of Jamie Dimon of JPMorgan Chase. He cited inflation 21 times in his chairman’s letter and named required investments in climate transition, restructured supply chains, more military spending, and higher healthcare costs as reasons to fear inflation will be “sticky” (persistent) and interest rates may stay higher than expected.

Another sector that is interest rate sensitive is real estate, which is likely to underperform if interest rates stay higher for longer because the sector is leveraged and will suffer an increased cost of debt.

Short duration assets are less impacted by changes in interest rates. Energy would be an example of a short duration asset (again discussed last week). That’s not the reason it’s performing well at the moment (which is of course the strength in the oil price), but it helps.

Changes in interest rates affect exchange rates too, and the dollar rose on the strength of the CPI report. In response, the Japanese Ministry of Finance employed vague threats of intervention to try and support the yen. These may not have been idle threats as the yen was rallying sharply at the time of writing on Friday.

The pound has been overshadowed by the inflation-boosted dollar and short-squeezed yen. Despite this, there was more evidence of a cyclical upturn in UK economic activity. The British Retail Consortium (BRC)’s retail sales survey suggests that March will see retail sales volumes expanding. The Royal Institution of Chartered Surveyors (RICS) house price balance suggests that house prices will continue to rise over the coming months. Friday’s UK gross domestic product (GDP) report showed modest expansion, enough to confirm the recession (such as it was) is firmly behind us and that once March’s data are confirmed, the first quarter of growth this year should be ahead of the Bank of England’s forecasts.

The important rule when using forecasts is summed up in a brilliant piece of wisdom attributed to economist John Maynard Keynes:

“It’s better to be roughly right than precisely wrong.”

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare


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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update following the recent attacks by Iran on Israel.

What has happened

Following the unprecedented direct attacks by Iran on Israel over the past weekend, Middle East tensions continue to run high. There are still concerns around what Israel’s response is going to be, despite ongoing efforts by the US and allies to try to deescalate things. In equity markets, the US S&P500 index posted its weakest 2-day run on Monday since the US regional banking hiatus last March (falling -1.20% yesterday after -1.46% on Friday).  The so-called ‘fear gauge’, the VIX volatility index (which is based off the S&P 500 equity index), rose +1.9 percentage points to 19.2 yesterday, seeing its sharpest two-day rise also since March last year. Corresponding with the risk-off mood, US 10-year Treasury government bond yields rose 8 basis points (bps) to their highest level in five months on Monday to 4.60%, and oil prices (Brent crude June futures) have edged higher this morning, trading back up above US$90 per barrel currently.

A mixed data bag from China

Overnight investors have received a rather mixed bag of economic data out from China, where it seems the economy’s strong start to 2024 is already losing steam. On the surface, China’s Gross Domestic Product (GDP) climbed +5.3% in Q1 2024 in year-on-year (YoY) terms, accelerating slightly from the previous quarter, where Q4 2023 was up 5.2% YoY, and ahead of expectations of 4.8%. However, much of the bounce came in the first two months of the year. In March, growth in retail sales slumped (growing +3.1% YoY, down from +5.5% YoY in February and below estimates looking for +4.8%), and industrial output decelerated below forecasts (+4.5% YoY in March, down from +7.0% in February and below estimates looking for +6.0%). Finally, in the all-important property sector, Chinese house prices continued to fall in March, dropping -2.7% YoY, and worse than the -1.9% drop in February, suggesting China’s property market is struggling to find a floor.

Allies try to deescalate Middle East tensions

All eyes are on the Middle East at the moment. Yesterday, a number of Western allies cautioned Israel against an escalation following Iran’s attacks at the weekend: French President Emmanuel Macron said, “we’re going to do everything we can to avoid flare-ups, and try to convince Israel that we shouldn’t respond by escalating, but rather by isolating Iran”; UK Foreign Secretary David Cameron said that “we’re saying very strongly that we don’t support a retaliatory strike”; and US President Joe Biden said the US “is committed to Israel’s security” and “to a ceasefire that will bring the hostages home and prevent the conflict from spreading beyond what it already has”. Against this, news website Axios reported yesterday that Israel’s defence minister Yoav Gallant told US Defence Secretary Lloyd Austin that Israel couldn’t allow ballistic missiles to be launched against it without a response – further it was reported by news channel CNN that Israel’s war cabinet reviewed military plans for a potential response in a meeting on Monday, without clarity on whether a decision had been taken.

What does Brooks Macdonald think China’s recovery has been somewhat unbalanced since pandemic restrictions were lifted at the tail-end of 2022 coming into the start of last year. While manufacturing is holding up, there is a continued real estate downturn which is weighing on confidence. Further, the hope that China can rely on adding to manufacturing, arguably adding to overcapacity there, in order to try to export itself out of its economic challenges is meeting somewhat protectionist resistance from other countries – the European Union having only recently initiated a raft of investigations against China, including an investigation into Chinese subsidies for electric vehicles. For China, it is simply down to the composite weights of the various sum of the parts of China’s economy. The pickup in the Q1 GDP numbers was almost entirely driven by public investment – in contrast, underperformance in production and private demand suggest China’s recovery is still on thin ice. Ultimately, such is the weight of China’s property sector as a share of GDP (some market estimates put property-related activities having in the past contributed as much as a c.30% share of China’s economy, roughly that for the US by comparison), that without significant intervention here, something China’s policy makers still appear loath to do, there is arguably not enough impetus elsewhere to give broader economic growth in China the so-called ‘escape velocity’ it really needs.

Please check in again with us shortly for further relevant content and market news.



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Tatton Investment Management: Monday Digest

Please see below, Tatton Investment Management’s ‘Monday Digest’ received this morning, 15/04/2024.  

What the return of volatility tells us

Equities were fairly stable in the US and UK last week, despite bond yields moving higher. Europe was the opposite: stocks fell despite falling yields. We might have thought bond volatility would hurt risk assets more than it did.

American investors still seem to be in “buy-the-dip” mode. Stronger growth and inflation signals have been hitting equity prices (since inflation holds back interest rate cuts) and core US CPI rose to 3.8% year-on-year last week. US Treasury yields broke above 4.5% for the first time since November, and the probability of a June rate cut fell to just 30%. But markets are happy enough about growth that they don’t seem to mind rates staying high – hence equities keeping pace.

US growth is still lopsided, though. The outlook for small business profits is reportedly the worst it has been in 10 years, and firms are worried about returning inflation. Manufacturers are thankfully feeling better, and overall profits are on the rise thanks to strong pricing power.

Analysts have been raising their forward profit estimates for the S&P 500 at a 10% annualised rate for most of this year, compared to a 6% historical average. Much of that is concentrated on the Mag-7 – US tech behemoths – whose profits are expected to jump 38% year, compared to a 2% fall for the rest of the index. That being said, the also-rans’ profit estimates have risen 6% since last May. Uneven distributions aside, growth is broad enough to worry the Fed. No one thinks they will raise rates, but if CPI keeps rising idea might be tested.

Europe has the opposite problem, which is why the ECB has finally promised rate cuts in June. Labour markets are tight either side of the Atlantic, but European companies are hurting, as shown in stock markets. Manufacturers are still battling energy costs and – according to a European Commission report – are suffering from Chinese ‘dumping’.

Europe might have to impose tariffs, like the US, but will struggle considering how much it exports to China. Then again, China is struggling with domestic demand too – not a surprise considering President Xi’s philosophy frowns upon individual consumption.

Thames Water investable, but badly priced

Thames Water is in a standoff. It says it needs investment, but the pension funds that own the company say they cannot give it unless regulations that limit prices and payouts are changed. The stakes were raised two weeks ago when its parent company, Kemble Water Finance, defaulted on £1.4bn worth of debt. Shareholders say the utility company is “uninvestable” in the current environment. We disagree. It is investable; they just paid the wrong price when they bought it from Macquarie in 2017.

Kemble cannot pay its debts because the regulator, Ofwat, has blocked dividend payouts from Thames Water. But the default might push Thames Water into Special Administration, meaning a write-down of the operating company’s £15.6bn net debt. Shareholders recently rejected a planned £500mn equity injection, demanding Ofwat approve a 56% real price increase by 2030 and allow dividend payouts again.

A Financial Times article last week argued that Thames Water’s nosediving equity value – from a £5bn purchase in 2017 to practically zero now – shows that the Capital Assets Pricing Model (CAPM) pension plans used to value the utilities company is faulty. But focus on CAPM’s failings is misleading. The problem is that key information about the asset was misrepresented or ignored. Models give conclusions based on the information you input. No model can give you the right conclusions if you input the wrong information.

Macquarie deserves some blame, taking £2.7bn worth of dividends when it owned Thames Water from 2006 to 2017, loading it with debt and underfunding infrastructure updates in the process. But the pension funds should have done their due diligence too.

They assumed prices would scale with inflation – when in reality people don’t like paying more for water when other prices are spiralling. Low-returning assets like utilities can only compete with other investments if they are highly leveraged. But for public services, leverage and shareholder payouts are always political.

If pension funds had appreciated this and known what they were buying, they wouldn’t have paid anything near what they did. Nationalisation or tight regulation are always likely for crucial public utilities with little private investment value. Asset values should reflect that.

Gold as a currency alternative?

Gold has been one of the best performing assets of 2024. This is strange for a so-called safe haven asset. Returns on cash – interest rates – are high, and the stock market rally proves investors aren’t running scared.

That is in the West at least, but gold’s reputation as a cash alternative is arguably stronger in emerging markets. Zimbabwe just announced a gold backed currency, and the central banks of India and China are buying bullion reserves to protect against Russian-style sanctions. Chinese and Indian middle classes are a big source of demand.

Wealthy Chinese in particular are increasingly buying bullion as a means of shielding assets from an overzealous government. Economic malaise, stock market volatility and the dire state of China’s property market are driving more citizens toward physical gold.

The People’s Bank of China is indirectly (and directly) supporting demand. It has been maintaining a stable exchange rate against the US dollar despite selling pressures on the renminbi. The PBoC holds a loose dollar peg by setting a target exchange rate every day and allowing a 2% trading band around it.

Keeping a stable rate against the dollar helps Chinese citizens buy gold because the precious metal is priced in dollars. But that could be about to change. The PBoC has consistently been letting the renminbi get closer to the upper bound of its 2% range. The last time that happened was before the sharp renminbi devaluation of 2015. A devaluation against the dollar now would make sense too: it would boost Chinese exports and maybe spur some life into a deflationary economy.

For now, Chinese savers worried about a devaluation will be even more likely to buy physical gold. So, the longer the PBoC maintains its current exchange rate, the longer gold’s rally has left to run. If it does devalue, gold prices would struggle to climb higher.

Please continue to check our blog content for the latest advice and planning issues from us and leading investment managers.

Charlotte Clarke


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EPIC Investment Partners: The Daily Update | ECB’s Dovish Hold

Please see below, an update from EPIC Investment Partners following the European Central Bank’s recent policy decision to hold interest rates at 4%. Received this morning – 12/04/2024

Yesterday, as the vast majority of the market had expected, the European Central Bank (ECB) held interest rates at 4% for the fifth consecutive meeting. However, in a more dovish tone, the central bank indicated that as inflation cools, rate cuts could come as soon as June. In the accompanying statement, the council, for the first time, said that while the ECB would remain data dependent, cuts are dependent on economic projections, confirming that inflation is steadily returning to the 2% target. 

While the ECB clarified that its decisions are not “pre-committing to a particular rate path,” President Christine Lagarde also highlighted the likelihood of revising rates in the upcoming months. “In April we will get more information and data,” she said. Adding that “a few” members of the Governing Council are already confident about the inflation trajectory.  “But in June, we know that we will get a lot more data and a lot more information” she continued. 

She went on to say that: “Inflation is expected to fluctuate around current levels in the coming months and to then decline to our target next year. We’re not going to wait until everything goes back to 2% to make the decisions that will be necessary in order to make sure that inflation returns to 2% sustainably at target in a timely manner.” 

Lagarde was also at pains to emphasis that the ECB’s rate decisions are independent of the Fed policies, despite the significant economic interactions between Europe and the United States. “The United States is a very large market, a very sizable economy, and a major financial centre, all of which naturally impact our deliberations” Lagarde said. She went on to say that while “multiple channels through which influence can be exercised” the ECB was “not Fed-dependent”.  

Ahead of yesterday’s announcement, markets had already been predicting that the first EU rate cut could come in June, at around 75%. At the time of writing that is now priced at 90%.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

12th April 2024

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Evelyn Partners Update – March US CPI Inflation

Please see article below from Evelyn Partners detailing their thoughts on the US CPI inflation announcement for March 2024, received yesterday afternoon 10/04/2024.

What happened?

US March annual headline CPI inflation rose at 3.5% (consensus +3.4%) and compares with +3.2% in February. On a monthly basis, CPI rose 0.4% (consensus +0.3%), compared to an increase of 0.4% in January.

Turning our attention to the core figure, which excludes volatile food and energy prices, the annual number came in at 3.8% (consensus 3.7%), compared to 3.8% in February.  In monthly terms, core CPI increased 0.4% (consensus 0.3%), which compares to 0.3% in February.

What does it mean?

March’s inflation report came in slightly above forecasters expectations with headline CPI re-accelerating slightly to 3.5%. However, core inflation remained unchanged, with today’s figure of 3.8%. Base effects proved a slight headwind to today’s release with March 2023’s headline monthly print of 0.1% falling out of the annual comparison. However, these base effects become more favourable next month and could help to reverse some of March’s acceleration in the annual inflation rate.

The index for shelter continued to remain resilient rising by 0.4% on the month. However, on an annual basis shelter inflation has slowed to 5.7% from its peak of 8.2% in March 2023. The monthly index for energy remained positive for the second consecutive month, having been falling for the previous four months as rising oil prices fed through to gasoline. However, on an annual basis energy inflation is running at an acceptable 2.1%.

There was some encouragement for households in the data, when it came to food prices, with the index increasing on the month by just 0.1%. On an annual basis the food inflation basket is now running at just 2.2%. Additionally, core goods shrank by 0.2% on the month, with both used and new cars driving this deceleration.

Turning to the labour market, March’s non-farm payroll figure of 303k looks solid when compared to the 10-year average of ~180k, taken from up to the end of 2019 before the pandemic distorted the data. Other measures of hiring outside of the payroll report also corroborate a healthy labour market. For instance, the latest February job openings (from the JOLTS survey) reported earlier this week came in at 8.8m, down from a peak of 12.0m in March 2022, but it is still significantly up from a pre-covid level of around 7.0m at the end of 2019. Essentially, the demand for available workers (employed plus job openings) is running around 2m higher than the supply of workers (employed plus unemployed). This labour supply gap supports wage growth which is currently growing at an annual rate of 4.1%. The risk is that while wage growth remains strong, the US economic resilience we’ve seen over the last year will continue, making it more challenging to return inflation back to the Fed’s 2% target.

Market interest rate expectations have moved substantially over the last three months. At the start of the year, futures markets anticipated the Fed would start cutting rates in March and make at least six 25 basis point rate cuts this year. Since then, optimism has been reined in, with markets now expecting the base rate to end 2024 at 4.85% with the first of these cuts now expected to materialise in July. This means markets are now pricing in less rate cuts than the Federal Open Market Committee who forecasted three cuts for 2024.

Immediately following the report US equity futures gained fell 1% while 10-year treasury yields rose 15 basis points.

Bottom Line

Although today’s inflation report was slightly warmer than expected, it is unlikely hot enough to warrant the FOMC to shift away from cutting rates later this year, which markets currently expect to start occurring during the summer. However, as recent inflation prints have pointed to a slowing path back to the Fed’s target of 2% we could see fewer rate cuts this year than the three currently forecasted by the FOMC at their latest meeting.

Please continue to check our blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Charlotte Clarke