Team No Comments

Brooks Macdonald – Daily Investment Bulletin

Please see today’s Brooks Macdonald Daily Investment Bulletin received earlier this morning (16/08/2022):

What has happened 

A gloomier economic mood has impacted sovereign bond yields this week with yields falling in both the US and Europe. Against this lower yield backdrop, and despite the poorer economic data, equities rose yesterday in both the US and Europe, building on previous gains.

Economic data

Early on Monday the release of China’s July economic data disappointed the market, showing less momentum than investors had hoped. Industrial production and retail sales both expanded, but by less than expected, and this catalysed another central bank rate cut to help support the economy and financial markets. Over in the US, the Empire State manufacturing survey for August also showed weakness but instead of a positive reading the gauge plunged into negative territory for its worst reading since the financial crisis. The Empire State survey measures business activity in New York State with new orders and shipments both plummeting. Prices paid did fall, and given the fall in new orders, price cutting and discounts are likely to be needed to reduce inventories.

Energy

With lower prices paid set to provide some US inflation relief over the coming months, energy remains a key swing variable. At a headline level, oil prices continue their retreat with WTI below $90 a barrel and Brent falling to levels seen before Russia’s invasion of Ukraine. A fall in demand due to a possible recession is the larger story here however recent moves will also be impacted by the possible return of Iran to global oil supply. The latest developments on the Iran nuclear deal appear to show progress and negotiations between Iran and the EU appear to be gathering momentum. European energy prices remain a standout with prices continuing to rise as heatwaves created issues with fuel transportation and air-conditioning increased energy demand. Should US energy prices continue to decouple from European prices, there could be a very different set of paths for the two economic blocs.

What does Brooks Macdonald think

Financial markets, having been emboldened by the recent weaker-than-expected inflation releases have had a far more risk-on tone in recent weeks. The strong US jobs report also helped sentiment as it raised the prospect that inflation could slow sufficiently to allow central banks to engineer a soft landing from a strong economic starting point. The US jobs report appears to be an exception for the time being however and the weight of poorer economic data is playing through into the bond markets and driving outperformance of growth equity sectors.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

16/08/2022

Team No Comments

Tatton Investment – Monday Digest

Please see below Tatton Investment’s Monday Digest with some interesting analysis of current global market positions. This digest was received this morning (15/08/2022):

Investor FOMO returns

Investors are feeling FOMO: the “fear of missing out” once again. Last week brought a continuation of the trend since early July, with boosts to both bond and equity markets. Curiously, the good feeling among investors seems unaffected by the bad news all around. Inflation is roaring ahead and consumers are struggling to keep up, central banks are intent on crushing price pressures with aggressive monetary policy, and talk of a global recession abounds. The growth slowdown is already being felt by companies. This year’s second quarter earnings showed a downgrade in forward-looking estimates for the next 12 months. And yet, stock markets continue to rally.

Naturally, falling earnings and rising stock prices mean equity valuations – on a price-to-earnings ratio – have climbed higher. This is a reflection of increased risk appetite. Equally important has been the fall in real yields. At the start of August, inflation-adjusted yields on 10-year US Treasuries once again sank to almost zero, and they are still well below their mid-June peak. This is largely down to shifting impressions of US Federal Reserve (Fed) policy. But it also shows investors are confident in the stability of financial assets, and in the Fed’s ability to promote a healthy US economy.

The key question is whether the medium-term macroeconomic backdrop has improved enough to justify this view. Markets are certainly betting it has, but we are not yet convinced, and the fact that markets are so confident is itself a cause for concern. Perfect landings are incredibly hard to achieve, and there are still significant risks to the outlook. Oil prices have fallen back, but any further reduction will be hard to achieve in the short term. China might be weak currently, but is likely to improve towards the end of this year. That will increase global demand for crude oil, which could hit US households just as they are starting to gain confidence. That would force the Fed to continue on its tightening path, dampening hopes of a monetary reversal. Such a situation could cause serious problems in the next couple of months, particularly for businesses required to refinance during that period.

The problem is not that the Fed is unlikely to get things right, but that markets have priced in such a high probability of success that any deviation could be devastating. The summer lull has probably helped prop up market sentiment somewhat. With many traders on holiday, it is much easier for markets to convince themselves everything is rosy. This lull coincides with a two-month break in Fed meetings, with the next one scheduled for the end of September. When that does come around, we should expect the Fed to have a renewed zeal for taming prices, which could provide a wake-up call for markets. We have never agreed with the doomsayers, and we still do not think that a global recession is inevitable (though recessions in the UK and Europe are all but certain). At the same time, we are slightly uncomfortable with the level of optimism implied by current equity values. We should enjoy the sunshine while it lasts, but future market improvements will need to be based on more than just the summer breeze.

Fiscal firepower in UK’s inflation fight

The increasingly bitter race to replace Boris Johnson has seen a host of promises from candidates on taxes, energy bills and welfare payments. But rampant inflation will be the main problem facing whoever wins the Tory leadership election. The stakes are high, and so far, the debate has focused on whether tax cuts or government spending are the best means of supporting people. In a recent article, senior figures from the Institute for Fiscal Studies describe how frontrunner Liz Truss’ promised tax cuts are ultimately unsustainable without a reduction in public spending somewhere down the line. All Tory leadership candidates emphasised the need for strong growth and the supposed ‘fiscal headroom’ of £30 billion, but there are serious flaws in these points.

For starters, that £30 billion would be easily eaten up by either a fall in tax revenues or a modest rise in unemployment payments. Considering the UK is set for a lengthy recession, both of those are likely. More generally, promoting short-term growth right now is at odds with taming inflation. The two forces generally keep each other in check, but Britain is now bracing for a recession coupled with persistently high inflation. This essentially means supply is so constrained that even economic contraction – and hence falling demand – is not quite enough to get short-term prices under control.

Faced with these intense pressures, what can any government do? Again, the fundamental problem comes down to the lack of supply. Right now, we are seeing this in energy markets, but the issue is a general one for the UK and has a longer-term characteristic. As both Tory leadership candidates are keen to point out, low productivity has held Britain’s economy back for well over a decade. This is down to a lack of investment, as well as deep-rooted problems in the labour market. Britain’s sluggish labour participation rate has gained attention in this regard, but equally problematic is the shortage of skilled workers.

This is not a short-term issue, though the effects of it are very much being felt now. A simple solution would be to increase immigration, but that seems unlikely in the political environment. Over the longer-term, investment in better education is another solution, but that is at odds with the government’s (even Rishi Sunak’s) desire to cut taxes as soon as practical. Or alternatively, other areas would need cutbacks. One way or another, supply and demand will have to be brought into balance. If that does not mean investing in more supply (particularly of skilled workers) it will have to mean crushing demand. The more the government shies away from this, the more aggressive the Bank of England will have to get.

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

Cyran Dorman

Trainee Paraplanner

15/08/2022

Team No Comments

Brooks Macdonald – Daily Investment Bulletin

Please find below, the Daily Investment Bulletin received from Brooks Macdonald this morning – 11/08/2022

What has happened

 Risk appetite was emboldened by one of the largest downside misses to headline CPI in recent history. The equity gains were broad-based with cyclical sectors and technology shares leading the charge as investors wagered that the Fed would need to be less aggressive on monetary policy.

 US CPI Report

 US headline CPI came in at 8.5% year-on-year against expectations of a 8.7% increase and a 9.1% reading for June. If you zoom into the detail, the monthly change was actually negative at -0.02% which is the first monthly fall in over 2 years. As expected, the main driver of this was decline in energy prices and specifically gasoline which was -7.7% lower over the month alone. Core inflation was expected to rise on a year-on-year basis but actually stayed flat at 5.9%, further helping to boost sentiment. Whilst some of the more volatile components of the CPI readings are showing signs of peaking, broad inflationary pressures undoubtedly remain and will take time to filter through to lower median CPI. The Atlanta Fed divides up CPI into ‘flexible’ and ‘sticky’ elements and whilst the flexible reading fell sharply last month, the sticky reading actually saw gains. Words of slight caution but this is unlikely to deter the market which is very much in risk on mode.

 Fed reaction

Bond markets moved quickly to reduce the probability of a 75bp rate hike at the September Fed meeting, with the futures market pricing in a coin toss between that and a 50bp hike. 10-year Treasury yields also fell initially however more hawkish Fed speak ultimately led to the benchmark yield broadly flat for the day. Chicago Fed President Evans said that inflation remained ‘unacceptably high’ and forecast that ‘we will be increasing rates the rest of this year and into next year’. President Kashkari said that he expected a 4.4% Fed interest rate at the end of next year and stressed the commitment of the Fed to bringing down inflation.

 What does Brooks Macdonald think?

 The Fed reaction, warning against inflation complacency, makes absolute sense. The Fed cannot afford for market or consumer inflation expectations to start to rise again after the recent falls. For the time being, investors are happy to look through the more hawkish messaging, expecting this to reversed as we enter 2023 and recessionary risks rear their heads. With central bank forward guidance seemingly dead for the rest of 2022 at the very least, inflation data remains the key determinant of market sentiment, on that basis yesterday is undoubtedly a strong positive for risk assets.

Bloomberg as at 11/08/2022. TR denotes Net Total Return

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

David Purcell

11th August 2022

Team No Comments

Markets bet on a perfect landing

Please see below article received from Tatton this morning, which reports a surprisingly positive outlook on markets despite high inflation rates, global energy supply struggles and a rising tension between the US and China in relation to Taiwan.

Bad news filled the airwaves last week. Faltering global growth, higher inflation forecasts and rising interest rates set a dour tone – capped off by a geopolitical crisis in Taiwan. UK investors were struck by the Bank of England’s dire warnings: a 13% inflation peak and a protracted recession are now in store for Britons, according to Governor Andrew Bailey. Predicted to last for five quarters, the looming UK recession is set to outlast the one following the global financial crisis in 2008/09. 

Yet despite all that gloom, capital markets have been in surprisingly good spirits. Equities have rallied since the start of July, and bond yields have fallen. As a result, markets have more or less recovered all of their June losses. So, why are investors so unfazed by the current bad news? Judging from bond markets, the feeling is that we have reached peak global inflation. Oil prices have started falling and the actions of oil producers themselves point to a belief that current prices are unsustainable. Supply chain bottlenecks clogged by the pandemic are also improving, while consumer demand has clearly taken a hit from the cost-of-living crisis. The thought is that this will cause a reversal of central bank policy sooner than previously expected, with implied US rates peaking by the end of this year. Investors have essentially given central banks – particularly the US Federal Reserve (Fed) – a vote of confidence. Its policies are expected to prevent a dangerous wage-price spiral while maintaining the economy at a decent level. What’s more, middle-class consumers still have savings to fall back on, while jobs remain plentiful and businesses are more financially sound than in previous downturns. Recessions in most regions are expected to be shallow and brief, while the US might avoid one altogether. 

Monetary policy works on a very long lag, meaning that tweaks to interest rates now will only have an effect a year or so down the line. But if bond markets are to be believed, inflation will already be largely under control by then – meaning further tightening would be overkill. Central bankers want to tame inflation right now, and the only way they can think to do that is by affecting consumer and business behaviour. They will hope that pessimism will stop employees pushing for higher wages, bringing down cost pressures. That is the best-case scenario, and the one markets are currently betting on. Such optimism in bond markets was the main reason for July’s uptick in equity prices – as falling yields made stocks comparatively more attractive. But that positivity is itself a little concerning, as it makes asset prices vulnerable to worse-than-expected news.

There are still many risks to the overall outlook, which are arguably not properly priced-in. Europe is particularly at risk, facing energy shortages and sharply higher costs this winter. This should bring consumer demand down further and eventually cool inflation, but that could take some time. The main source of Europe’s woes is gas supplies, which are very hard to adjust in the short-term, and are highly susceptible to Russia’s war in Ukraine. European businesses could be the hardest hit, as they have less sway over electoral outcomes and are therefore lower down on politician priority lists. 

Markets nevertheless seem to think the inflation battle is already won, and there is a clear path to economic recovery. But none of that is certain, and there are many political obstacles that could get in the way. Governmental paralysis in Britain and Italy could prevent decisive policy action (Conservative MPs have already questioned the Bank of England’s independence in response to its dire forecasts), while US-China tensions over Taiwan are a serious and perhaps under-appreciated risk to global growth. Negative news flow, particularly around energy supplies, could severely dampen market sentiment from here.

Energy profits: here for a good time, not a long time

Oil and gas prices, buoyed by pandemic supply issues and then catapulted skyward by Russia’s invasion of Ukraine, have generated truly astonishing results for the world’s biggest energy companies. Centrica, the owner of British Gas, recently reported profit growth of 500% year-on-year for the first half of 2022. Meanwhile, Shell posted its best ever quarterly profits for Q2 and BP its highest profits in 14 years for the same period. All of this comes while Britons face eye-watering rises in energy and fuel costs. Naturally, the disparity has led to a great deal of negative media coverage.

These profits have naturally benefitted share prices. On a net total return basis, unsurprisingly, Energy is the best performing sector over the last year, by some distance. Bloomberg’s energy index is 28.4% up from a year ago. Utilities, the only other sector to post positive growth over that time, are up just 5.3% by comparison. These moves are made all the more impressive by the negative equity market backdrop in that time. The rise in ‘risk-free’ rates has dampened equity valuations across virtually all industries, and energy is no exception. In fact, on a forward price-to-earnings ratio, energy company valuations have come down more than any other sector. The fact that energy companies have posted the best returns while dropping to the lowest valuations is astonishing, and shows how sharp the recent energy price shock has been. But it also shows investors are much less optimistic about the long-term prospects for energy companies than current results might suggest. Some of this is down to the likely political response: the UK government has already announced a windfall tax on oil and gas companies, and the sharper the contrast between struggling households and booming energy giants gets, the more likely we are to see further taxes – and not just in the UK.

The deeper reason for falling energy valuations, though, are likely to be structural. Russia’s war and the ensuing sanctions delivered the biggest price shock to global energy markets since the 1970s OPEC embargo. Oil and gas supply lines between Russia and the West have been battered and may not ever recover, leading to a sharp squeeze in prices. But over the longer-term, prices are less about what goes where and more about the balance of aggregate supply and demand. That balance has not been fundamentally changed by Russia’s invasion. Russia has a short-term interest in squeezing its European customers – particularly Germany, which has been one of the hardest hit by constrained gas supplies – but has no interest in reducing its oil and gas production over the long term. It has already found many willing buyers in Asia, and will inevitably want to get back to full production and export volumes when it can. Then there is the demand side. The pandemic recovery saw a sharp burst of pent-up energy demand, but this has since cooled off significantly. With looming recession fears, this trend is set to continue. What’s more, the incredible rise in energy prices is already destroying end demand. Come winter, this is likely to mean intense energy saving efforts – with communal heating and power-cuts already being discussed in Germany.

The current price shock will also have implications for the future. Fossil fuel investment measures have been drawn up for the UK and US – which will increase supply some years into the future. More importantly, there is a clear political drive toward increasing renewable or even nuclear energy production. This is part of a much longer-term move away from oil and gas, and the cost-of-living crisis that is rooted in our fossil fuel dependency goes back, has significantly heightened the sense of urgency that already existed from the global warming CO2 side of things. Inevitably, this dampens the long-term outlook for oil and gas demand.

Fossil fuel producers are well aware of this. At their most recent meeting, OPEC+ countries agreed a minimal increase in production despite a seemingly huge price incentive to pump more. This suggests a recognition that current price levels are unsustainable in the face of rising interest rates and a slowing global economy. On the current trajectory, oil supply is likely to outstrip demand within the next four years. As producers see it, increasing production now will just make them more vulnerable to lower prices in the future. With this in mind, lowly valuations for booming energy companies are to be expected. Record oil and gas profits are here for a good time, but not a long time. 

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

Chloe

08/08/2022

Team No Comments

Brooks MacDonald Daily Investment Bulletin

Please see below Brooks MacDonald Daily Investment Bulletin, received yesterday afternoon, 03/08/2022:

What has happened

Market movements closely tracked the take-off and landing of Speaker Pelosi’s plane as she travelled to Taiwan amidst strong condemnation from Beijing. With Pelosi’s plane safely landed, US Treasury yields ended sharply higher on the day, reversing Monday’s declines. Against this backdrop US equities struggled, posting modest losses on the day.

Taiwan

The safe landing of Pelosi’s aircraft led to a surge of optimism within bond markets however there are still some economic and political consequences to be fully priced in. China has announced a series of military drills over the coming days in what is seen as one of the strongest shows of force this century. China has also imposed targeted sanctions on Taiwan including exports of natural sand and food imports. The military exercises, and missile tests, are expected to keep both the US and China on edge over the coming days but markets took comfort from the relatively subdued Chinese response.

Corporate earnings

A series of strong earnings results helped market sentiment early on in the trading session yesterday. Uber and Lyft both saw strong earnings as did Maersk that is a beneficiary from the recent supply-chain disruption. Caterpillar, widely seen as a cyclical bellwether, produced downbeat forecasts, citing inflation and supply led constraints. Caterpillar does seem to have a bit of a reputation for downbeat economic forecasts however inflation and supply-side issues are undoubtedly weighing on industrial names. BP meanwhile raised its dividend and increased its buyback programme in response to strong earnings. These earnings have spurred another call for increased windfall taxes however until the Conservative leadership contest is settled, the windfall tax remains on hold.

What does Brooks Macdonald think

Amidst the earnings and geopolitical risks yesterday, a series of Fed speakers also threw cold water on expectations of an imminent pivot in Federal Reserve policy. The movements in both the bond and equity markets were quite remarkable in July given the lack of a clear change in policy from the US central bank. President Bullard said that the US economy could avoid a recession even if the Fed continues to raise rates and President Daly said that the Fed was ‘nowhere near’ complete on tackling inflation. Such words helped the rise in bond yields yesterday even if investors were mainly focused on tracking the path of Pelosi’s flight.

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

Cyran Dorman

4th August 2022

Team No Comments

Brewin Dolphin – Markets in a Minute

Please find below, a market update received from Brewin Dolphin yesterday evening – 02/08/2022

Strong tech earnings boost investor sentiment

Equities rose last week as strong second quarter earnings from technology giants Amazon, Apple and Alphabet boosted investor sentiment.

US indices managed to shrug off news of a contraction in US gross domestic product (GDP) and another 75-basis point (bps) interest rate hike. The S&P 500 gained 4.3%, the Dow rose 3.0% and the Nasdaq surged 4.7%.

The pan-European STOXX 600 and the FTSE 100 advanced 3.0% and 2.0%, respectively, after data showed the eurozone economy expanded by more than expected in the second quarter.

In contrast, Japan’s Nikkei slipped 0.4% after the government downgraded its forecast for economic growth in the fiscal year ending March 2023 from 3.2% to 2.0%, citing slowing overseas demand and rising consumer inflation.

China’s Shanghai Composite eased 0.5% as a high-level meeting of the Communist Party omitted mention of its GDP growth goal and instead said China should “strive to achieve the best possible results”.

 Last week’s market performance*

• FTSE 100: +2.02%

• S&P 500: +4.26%

• Dow: +2.97%

• Nasdaq: +4.70%

• Dax: +1.74%

• Hang Seng: -2.20%

• Shanghai Composite: -0.51%

• Nikkei: -0.40%

*Data from close on Friday 22 July to close of business on Friday 29 July.

US indices fall after best month since 2020

After July proved to be their best month since 2020, US indices fell on Monday (1 August) as investors feared US House speaker Nancy Pelosi’s potential visit to Taiwan could worsen tensions between China and the US. The S&P 500 slipped 0.3%, the Nasdaq lost 0.2% and the Dow shed 0.1%. Asian stocks suffered on Tuesday, with the Shanghai Composite and Hang Seng down 2.3% and 2.4%, respectively, after Beijing reportedly said it would retaliate with “forceful measures” if the trip goes ahead.

In economic news, data from S&P Global showed UK manufacturing output contracted for the first time in over two years in July because of reduced intakes of new work, weaker market demand, difficulties in sourcing components and transport delays.

The FTSE 100 was up 0.1% at the start of trading on Tuesday, while the Dax opened 0.6% lower.

US slips into a technical recession

Figures released last week showed the US economy shrank for a second consecutive quarter, meeting one of the most common criteria for a technical recession. GDP shrank by an annualised 0.9% in the second quarter, following a 1.6% contraction in the first quarter, according to the Commerce Department. Economists polled by Reuters had forecast GDP would rebound at a rate of 0.5% in the second quarter.

While back-to-back quarterly GDP contractions meet one definition of a recession, the National Bureau of Economic Research is responsible for making the official call on whether the economy is in a recession. One of the factors it looks at is employment, which remains strong.

Treasury secretary Janet Yellen stated last week: “Most economists and most Americans have a similar definition of recession: substantial job losses and mass lay-offs, businesses shutting down, private-sector activity slowing considerably, family budgets under immense strain. In sum, a broad-based weakening of our economy. That is not what we’re seeing right now.”

Fed hikes rates by another 75bps

The US Federal Reserve approved its second consecutive 75bps interest rate hike last week, taking its benchmark rate to a range of 2.25-2.5%. Investors were largely expecting the move and were cheered by relatively dovish comments by Fed chair Jerome Powell that future rate increases would depend on the data.

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” he said.

Tourism boosts eurozone economy

In the eurozone, a surge in tourism helped the economy expand by more than expected in the second quarter. According to Eurostat’s preliminary flash estimate, GDP grew by 0.7% when compared with the previous quarter, much higher than the 0.1% growth forecast by economists. France, Italy and Spain all saw an expansion in GDP, whereas Germany’s economy stagnated.

Inflation in the eurozone is expected to hit a new high of 8.9% in July, up from 8.6% in June, driven by price rises in energy and food. There are concerns this could lead to interest rate rises and weigh on growth during the second half of the year. There are also fears that a reduction in gas flows through the Nord Stream 1 pipeline from Russia to Germany could spark a recession.

Elsewhere, the European Commission’s economic sentiment indicator for the euro area fell from 103.5 in June to 99.0 in July, below its long-term average. Industrial confidence fell by 3.5 points, while sentiment in the services sector declined by 3.4 points.

UK consumer borrowing doubles

Here in the UK, data from the Bank of England showed consumers borrowed a net £1.8bn in June, double the £0.9bn in May, most of which was on credit cards. The annual growth rate for consumer credit rose to 6.5%, the highest level since before the pandemic.

The figures have raised concerns that people are resorting to borrowing to fund the rising cost of living. Gas and electricity bills for some of the most vulnerable households could reach an average of £500 a month in January, according to BFY Group, an energy management consultancy.

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

David Purcell

3rd August 2022

Team No Comments

Brooks Macdonald Daily Investment Bulletin

Please see yesterdays Brooks Macdonald Daily Investment Bulletin received late yesterday:

What has happened

Risk appetite was hit yesterday by the upcoming visit by US House Speaker Pelosi to Taiwan as part of her tour of Asia.

Bond markets

With geopolitical tensions adding to fears over a global recession, bond yields fell yet again yesterday with the US 10-year Treasury yield now trading at 2.55%, almost 15bps lower than it was at the start of Monday. With economic growth risks still front and centre, the yield curve remains inverted with the 2-year yield around 30bps higher than the 10-year yield. European bond yields also saw declines yesterday as weaker German retail sales and Italian manufacturing PMIs worsened sentiment and caused investors to dial back their expectations of ECB tightening.

Commodities and Supply

With yesterday’s risk off tone, energy prices fell substantially, with the Brent international oil benchmark moving below $100 per barrel. These growth concerns were spurred not only by the recent weaker western data, but also Monday’s data releases from China. Few commodities were spared with industrial metals and agricultural goods both declining. There was some good news in the commodities arena as the first grain shipment from Ukraine since the war began departed a Ukrainian port amidst hopes that a partial return of Ukrainian exports will help boost global supply. Yesterday’s US ISM index contained some interesting reading, but perhaps of most importance to a market looking for signs of inflationary pressures easing, the prices paid measure fell dramatically from last month’s measure. This chimes with recent earnings results that suggested supply chain pressures were easing in certain areas. It may be too early for this to have filtered into the July CPI data released next week in the US but there are increasing signs that some of the post-pandemic distortions are being removed.

What does Brooks Macdonald think

Pelosi will be the highest-ranking US official to visit the island in 25 years and is likely to raise tensions between the US and China even with the US reassuring Beijing that the official US position remained one of strategic ambiguity. Recent rhetoric from Biden has suggested that the US would defend Taiwan in the event of an invasion though the White House has been at pains to stress that the official policy has not changed.

Please continue to check back for further updates.

Andrew Lloyd DipPFS

03/08/2022

Team No Comments

Tatton Investment – Monday Market Update

Please see below Tatton’s update on recent market events which was received this morning (01/08/2022):

Overview: positive market returns amid negative sentiment

For a second consecutive quarter, the US economy shrank in real terms. Yet the US Federal Reserve (Fed) raised interest rates by another 0.75% last Wednesday because the US economy is too strong. Yet, despite all of the bearishness, markets put in a stonking performance last week. Pretty much all equity and bond markets ended with asset prices at higher levels. In particular, corporate bonds did well, even in Europe. Given that much of the fear in markets revolves around a potential credit crunch through Europe’s winter, many commentators have seen this as probably only a temporary respite. 

Europe is currently facing a worse outlook than other areas and much of the news worsened last week. Eurozone inflation for June was higher (marginally) than expected at 8.9% year-on-year. It will be even worse next month because energy prices just keep rising. After Gazprom came up with an excuse to not deliver as much natural gas to Germany as was promised, gas prices went up to new records. We are undoubtedly in a ‘cold’ war again. Europe’s plan to cut gas use by 15% until 2023 is important. But as of now, no concrete plans have been proposed by any country. We only know energy caps will focus the reduction on industry, and that households will not face cuts, even if they are not shielded from price rises. Until we see how businesses can be protected for this winter, investors will stay worried about the potential for unbearable costs. 

Investors have been both bearish and uncertain for a long time, even though valuations on many assets have become substantially cheaper. When investor sentiment is poor, it can be quite difficult for markets to fall further without the news getting much worse. So, while there were stories which worried us, much of it told us essentially what we already knew (like the inflation data and the US GDP data) or had good reason to expect (such as the slow Russia gas supply). On the positive side, Jerome Powell sounded less hawkish than expected after the US interest rate rise. Meanwhile China’s politburo pressed for more support for their economy. A bull market isn’t likely to set in anytime soon and, almost certainly, not until the energy price squeeze dissipates. Nevertheless, at least last week, it felt like it wasn’t getting worse.

Reasons to trust in the Fed’s tinkering 

As mentioned, last Wednesday the Fed furthered its monetary tightening agenda, pushing interest rates up another 0.75%, following the 0.5% rise in May and the first 0.75% bump in June. Capital markets expected as much, but the big news came from the post-meeting press conference, where Fed chair Jay Powell hinted at a change of tack. As the Fed continues to tighten policy, “it will likely become appropriate to slow the pace of increases”, he said. 

That comment buoyed markets. Short-term bonds rallied and the S&P 500 gained 2.6% in Wednesday trading. The Nasdaq – dominated by America’s big tech companies highly sensitive to interest rates – gained 4.1%. Judging from these moves, the market consensus seems to be that the Fed will reaching ‘peak’ interest rates soon and likely cut them in less than a year. The Fed has good reason to do so, judging by the latest economic data. Demand has clearly slowed, and US GDP contracted in inflation-adjusted (‘real’) terms in the first half of this year, which would meet some people’s definition of a recession. Admittedly, Powell pre-emptively noted that, even if the US economy had been in a technical recession for the first half of this year, it would not be a contraction in any normal sense of the word. Even so, the economy is clearly slowing down. The big question for the Fed, and indeed all of us, is what this means for inflation.

In normal circumstances, it would be a no-brainer that slowing growth – let alone potential recession – would translate into slower price rises. But the current global stagflation is no normal circumstance. Sharp supply shortages need to be met with equally sharp demand contractions for prices to stay stable. And, with unemployment still at historically low levels, the Fed is concerned with stopping the damaging wage-price spiral above all else.

Even here though, signs look good. Inventory data on US retailers and wholesalers show a significant uptick in inventories. While retailers have a bit to go before their stock levels match pre-pandemic levels, wholesalers have higher inventory levels relative to trend than at any point in the last 30 years. On the flipside, retail inventories are significantly lower – the latter having come down from high points earlier in the year. This suggests that final consumer demand has fallen more sharply than expected, causing retailers to reduce their orders and leaving wholesalers with unwanted supply. That is bad news for them, but it points to a sharp reversal of the supply-demand imbalance seen last year. 

One of the biggest sources of US inflation over the past couple of years has been the housing market, particularly outside of the big cities. This drove a strong period for residential construction, adding to the 2021 growth spurt and driving up lumber prices (an indicator of housing construction). In the past couple of weeks, lumber prices have taken a downturn. This suggests slowing activity which, considering the construction sector is a huge employer, will likely have big knock-on effects for overall inflation. Mortgage providers have been upping their borrowing rates and tightening lending standards for fear of recession and the dearth of payments that might bring. This suggests lenders think house prices are unsustainable in the current environment. Mortgage rates have fallen quite sharply in the past month but are still well above 5%. Residential construction will likely struggle to rally from here, putting downward pressure on both growth and inflation.

The Fed’s actions have undoubtedly contributed to these trends and will continue to do so. The problem is that monetary policy works on a long lag. Further tightening from this point will not bring down growth and inflation in the next couple of months but rather next year and beyond. If the futures markets are right, inflation is already set to come down quite sharply to a much more normal level by then. Any extra tightening the Fed does in that time will likely bring down future growth more than it will tame short-term price rises. Powell and his team are aware of this, and this is probably one of the main reasons their rhetoric is now moderating. This is not to say the Fed is done with rate rises, but that its aggressive stance has likely peaked. 

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

Please keep safe and healthy.

Carl Mitchell – Dip PFS

Independent Financial Adviser

01/08/2022

Team No Comments

Weekly Market Commentary – Market shifts focus to Europe

Please see below, a weekly market commentary received from Brooks Macdonald yesterday afternoon – 25/07/2022

  • Europe was in focus last week with Nord Stream 1’s reopening, Italian elections and the European Central Bank’s (ECB) hike all competing for attention
  • This week the US Federal Reserves’ (Fed) meeting and US Q2 Gross Domestic Product (GDP) will set the tone as we close out a volatile July
  • US and European earnings ramp up this week with the majority of companies beating expectations so far

Europe was in focus last week with Nord Stream1’s reopening, Italian elections and the ECB’s hike all competing for attention

Economic growth expectations remained a key driver of market moves last week with weaker data continuing to paint a picture of a slowdown in the US and the rest of the world. As a result bond yields fell, helping growth focused equities outperform already strong gains within the European and US stock markets.

Last week was dominated by European headlines, be those around the resignation of Italy’s Prime Minister, the restarting of the Nord Stream 1 pipeline or the ECB which scrapped its forward guidance in favour of a 50bp hike1 . This week the US will be in focus with the Federal Reserve concluding its rate setting meeting on Wednesday where it is widely expected to hike rates by 75bps2. Investors will be looking at how Fed Chair Powell balances the inflation risks with economic growth risks particularly given the weaker initial jobless claims of recent weeks which suggests a deterioration in the employment outlook. With the market now pricing in a change in tone at the Fed at the start of next year, with subsequent interest rate cuts, how the Fed addresses this elephant in the room is arguably more important than the size of Wednesday’s hike.

This week the US Fed’s meeting and US Q2 GDP will set the tone as we close out a volatile July

With recession fears remaining central to market moves, investors will also be watching the US GDP number on Thursday, which if negative means the US has entered a technical recession after contracting in Q1 of this year. It is worth stressing the technical nature of this recession, should it occur, given Q1 US GDP was driven lower by global factors rather than US factors. Equity markets are likely to look through such an outcome however it may have second order impacts on consumer demand should it solidify consumer negativity about future economic growth.

US and European earnings ramp up this week with the majority of companies beating expectations so far

All of this alongside a bumper week for US and European earnings means that the week will be a fitting end to a volatile July. So far in the earnings season, around 20% of US companies have reported with the majority beating earnings expectations. Many companies have painted a more cautious picture of 2023 however this largely chimes with the market’s broader macroeconomic thinking and therefore has been accepted by investors without too much concern.

Economic indicators (week beginning 18 July)

Economic indicators (week beginning 25 July)

Asset Market Performance

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

David Purcell

26th July 2022

Team No Comments

Blackfinch Group Monday Market Update

Please see below the latest Blackfinch Group – Monday Market Update, which was received this morning (25/07/2022):

UK COMMENTARY

  • UK inflation hit a fresh 40-year peak of 9.4% in June, according to the Office for National Statistics (ONS). This was the ninth consecutive month-on-month rise for the consumer prices index, as the cost-of-living crisis worsened.
     
  • Purchasing Managers Index (PMI) survey data for the manufacturing sector – which measures manufacturing output – fell to 49.7 in July, below the 50 mark that indicates an expansion. This was the first time the measure has fallen since the first pandemic lockdown in May 2020.
     
  • The ONS reported a record surge in Britain’s borrowing costs in June, pushed up by soaring inflation. This put the government’s budget deficit on course to exceed £100bn this year, almost double its pre-pandemic level.
     
  • House prices across the UK rose at an annual rate of 12.8% in May, up from 11.9% in April, according to the ONS. This pushed the average UK house price to £283,000 in May, £32,000 higher than the same time last year.
     

NORTH AMERICA COMMENTARY

  • US existing home sales were weaker than expected in June, falling 5.4%. This was the slowest pace of sales since June 2020, when sales plunged at the start of the pandemic.

EUROPE COMMENTARY

  • The European Central Bank (ECB) raised interest rates by a bigger-than-expected 0.5%. This was the central bank’s first rate hike in 11 years and was prompted after inflation for the eurozone reached 8.6% in June, far above the ECB’s 2% target.
     
  • The European Commission proposed a major gas demand reduction plan to prepare the European Union (EU) for supply cuts from Russia. It urged EU member states to cut gas use in Europe by 15% until next spring.
     
  • Eurozone’s PMI data signalled a contraction in business activity in July, adding to a string of poor economic results. S&P Global’s interim composite PMI fell from 52.0 in June to 49.4 in July, significantly below economist’s forecasts.

RUSSIA COMMENTARY

  • Russia resumed critical gas supplies to Europe through Germany, reopening the Nord Stream gas pipeline. However, uncertainty over whether Europe could avert a winter energy crisis persisted.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

25/07/2022