Investment Blogs

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday afternoon, which provides a global update on markets.

Most major stock markets rose last week as softer-than[1]expected US economic data raised hopes the Federal Reserve might slow its pace of interest rate hikes.

These hopes were quashed towards the end of the week as signs of labour market strength and a cut to oil production led to renewed inflation fears. After jumping 5.6% on Monday and Tuesday, its biggest two-day gain since 2020, the S&P 500 finished the week up 1.5%. The Dow and Nasdaq added 2.0% and 0.7%, respectively.

UK and European shares also rose, despite a jump in eurozone producer prices and signs of a deepening economic slowdown in Germany. The FTSE 100 gained 1.4% and Germany’s Dax rose 1.3%.

In Asia, Japan’s Nikkei surged 4.6%, although sentiment soured towards the end of the week following hawkish comments from US Federal Reserve officials. China’s stock markets were shut all week for the National Day / Golden Week holiday.

BoE doubles size of bond-buying programme

The Bank of England (BoE) announced on Monday (10 October) that it had doubled the size of its temporary bond-buying programme, which it introduced following the market turmoil created by the government’s mini[1]budget announcements.

The BoE doubled the size of daily auctions to a maximum of £10bn from £5bn previously, in an effort to “support an orderly end” of the scheme, which is due to conclude on 14 October. Chancellor Kwasi Kwarteng also confirmed yesterday that his medium-term fiscal plan would be brought forward from 23 November to 31 October.

The FTSE 100 slipped 0.5% on Monday as Russian attacks on the Ukrainian capital of Kyiv sparked concerns the war could escalate further. Wall Street stocks also declined after JPMorgan chief executive Jamie Dimon warned of a US recession in six to nine months. The downbeat mood continued into Tuesday, with the FTSE 100 down 0.8% at the start of trading.

US labour market remains strong

The release of the closely watched US nonfarm payrolls report last Friday cemented expectations that the Federal Reserve will increase interest rates by another 0.75 percentage points at its next meeting in November. Although the pace of jobs growth cooled in September, the unemployment rate unexpectedly dropped.

According to the Department of Labor, the US economy added 263,000 jobs in September. This was below than the 315,000 positions created in August, but was higher than forecasts for 250,000 new jobs.

The unemployment rate edged down to 3.5% from 3.7% the previous month, while the participation rate – the percentage of people working or actively looking for work – slipped to 62.3% from 62.4%, suggesting competition for workers is likely to remain high. Average hourly earnings increased by 0.3% month-on-month, but the annualised rise slowed slightly to 5.0% from 5.2% in August.

US services activity slows slightly

Economic activity in the US services sector slowed slightly in September, according to the Institute for Supply Management’s (ISM) purchasing managers’ index (PMI). The index measured 56.7 in September, which was 0.2 points lower than August’s reading of 56.9. The new orders index slipped to 60.6 from 61.8, while a gauge of prices paid by services industries for inputs dropped to 68.7, the lowest since January 2021.

It came after separate data from ISM showed US manufacturing activity grew at its slowest pace in nearly two-and-a-half years in September. The manufacturing PMI dropped to 50.9, reflecting “companies adjusting to potential future lower demand”, ISM said. A measure of prices paid by manufacturers dropped to 51.7, the lowest reading since June 2020, largely due to falling commodity prices.

Eurozone producer prices jump

Whereas US economic data showed some signs of easing inflationary pressures, the opposite was true in the eurozone. According to Eurostat, factory gate prices in August rose by 5.0% month-on-month and by 43.3% year-on-year, driven by increasing energy costs. Meanwhile, S&P Global’s eurozone composite PMI showed cost pressures intensified in September for the first time since March, again reflecting sharply rising energy costs as well as higher wages.

S&P Global said output in both the manufacturing and service sectors fell at a quicker rate in September as high inflation, soaring energy costs, rising economic uncertainty and weakening demand drove the euro area economy into a deeper contraction. Total new orders fell at the fastest rate in almost two years, while a considerable drop was seen in export sales.

German economic data worsens

In Germany, there were further signs the country could be heading for a recession. Retail sales fell by 1.3% in August from the previous month, worse than the 1.1% dip forecast by analysts in a Reuters poll. Meanwhile, import prices in August were 162.4% higher than a year ago, and industrial output declined 0.8% month-on[1]month, the sharpest fall since March. The German economy is expected to slide into a recession next year, according to reports by Reuters. Sources told the newswire that the government had cut its growth forecasts to 1.4% for 2022 and -0.4% for 2023, down from 2.2% and 2.5% previously. Official figures are due to be published on Wednesday.

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

Chloe

12/10/2022

Please see below ‘Monday Digest’ article received from Tatton this morning, which provides a market update and details the repercussions of Kwasi Kwarteng’s initial plan to scrap the 45% higher rate income tax.  

Last week provided evidence for the fragility of capital markets, which have been grappling with the strain of transitioning from an ultra-low interest rate environment back to the one we knew before the global financial crisis of 2008. A policy mistake from a new government trying to fend off a looming recession rattled international capital markets to such an extent that it prompted a melt-down in the fundamentals of the UK’s capital market, which was only alleviated after the Bank of England (BoE) intervened in its capacity as lender of last resort.
 
The BoE’s swift and decisive action saved the UK government from presiding over more extensive damage in the short-term, but a fair amount of damage to the reliability of British political institutions, not to mention the damage to international trust levels, has been done. This means that the cost of capital for the UK, its businesses and consumers, is very likely to be higher than it would otherwise have been, which in turn will further reduce consumers’ ability to spend on non-essential goods and services.

Where things go from here is deeply uncertain. The International Monetary Fund’s rebuke – as well as worrying comments expressed by central bankers in the US – demonstrated the depth of the global concern. Given the UK these days relies on international investors rather than domestic savers to buy up newly issued government debt (gilts), and that the sterling gilt market cannot at all rely on being as big and systematically unavoidable as the US government bond market, any politician changing the perception of risk-free lending to the UK government does so at their own peril – as this very young government subsequently learned very quickly.

Our perspective on the bond market rout

Bond traders are still reeling from events over the last week. While UK-based investors will clearly be worried about the weakness in sterling and gilts, globally diversified portfolios – like the ones we manage on behalf of our clients – have a relatively low exposure to UK assets, and are therefore less sensitive to Britain’s specific issues. For markets more generally, the real danger lies in financial collapse and contagion, although given the BoE’s emergency intervention in longer-dated bond markets last week, that scenario now looks unlikely. Even so, it is an unwelcome additional complication, particularly given the already-fragile state of global bond markets.

After more than a decade of easy money, the world’s major capital markets are feeling the squeeze of rising yields caused by surprisingly strong and persistent US growth. As a result, bond values have fallen and risk assets like equities look relatively less attractive. Meanwhile, the tighter financial conditions and higher input costs from the energy price shock are casting a shadow over the near-term outlook for corporate profitability. In the US, where the post-pandemic economic recovery is going better than elsewhere, these pressures are much less pronounced. American companies do not appear burdened with unmanageable debts, nor have they been particularly affected by weak global demand, as the energy price crisis has affected the US much less. Despite some negative signals, US businesses are still motoring along, and employment remains strong. This tight labour market means the US Federal Reserve (Fed) has had to push real rates high enough to squeeze inflationary growth. But that has meant higher real returns on US debt, which has substantially pushed up the value of the dollar. This has led to currency weakness elsewhere, increasing inflation and putting pressure on other central banks to follow suit. To add to that, non-US growth has clearly deteriorated substantially – the UK being a prime example.

In this environment, it is hard to see dollar strength ending or reversing any time soon. But if the world’s reserve currency does stabilise, other supply-side inflation pressures would lessen. We have already seen signs that oil and other commodities (outside of European natural gas) have lost steam. Many emerging markets – having tightened earlier and harder than developed market counterparts – are already looking toward easing financial conditions. Asian countries, despite not going through that same tightening cycle, face nothing like the inflation pressures elsewhere, and yields are stable or falling. That said, current real yields are attractive and, if they are seen as stable at these levels, there will be plenty of willing buyers. When looking at lower yields and worse growth outlooks elsewhere – like in the UK – it is easy to see why. Those in shorter maturity bonds might soon be tempted into longer maturity assets. Yields still have the potential to rise – but the peak may be in sight.

For investors who have seen more painful losses from the government bond proportion of their diversified portfolios than the equity part, and wonder whether bond values have entered a long-term secular downtrend, it is important to recognise that fixed interest bonds have very different underlying characteristics than equities. Most importantly, western governments do not tend to default as companies sometimes do. The excessive volatility seen over the past 12 months is not a reflection of weakening governments’ solvency, but rather this asset class’s ability to protect and grow investors’ purchasing power in differing inflationary environments. When yields stop rising as growth and inflation pressure recede – and we indeed get close to the peak – the 2022 pains for bond holders should wane. But it is hard to see bond prices turning around until US earnings are on a clear downward trend, which would signal to the Fed that it can finally start to loosen its grip. 

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

Chloe Speed

03/10/2022