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Invesco – Global growth, the French election and the Fed

Please see article below from Invesco received this morning – 29/04/2022

Global growth, the French election, and the Fed

Last week was another busy, momentous one. Below, we discuss three key topics: global growth, the French election, and the Federal Reserve’s hawkish comments.

Growth expectations fall for the globe

Not surprisingly, the International Monetary Fund (IMF) downwardly revised growth expectations due to Russia’s invasion of Ukraine and the consequences. The IMF now expects 2022 global growth of 3.6%, rather than the 4.4% it projected back in January, and it also expects 3.6% global growth in 2023.1 Drilling down into developed and emerging economies, growth expectations for developed economies were lowered to 3.3% in 2022 and 2.4% in 2023, down from January’s forecast of 3.9% in 2022 and 2.6% in 2023.1 Expectations for emerging economies were also downgraded to 3.8% in 2022 and 4.4% in 2023, from 4.8% in 2022 and 4.7% in 2023; however, this suggests a solid re-acceleration in growth in 2023 for emerging economies.

Russia’s invasion of Ukraine also caused the IMF to increase its inflation projections to 5.7% in developed countries and 8.7% in EM countries, which is 1.8 and 2.8 percentage points higher, respectively, than January 2022 inflation projections.1

However, the big news is around China and concerns about its growth. The IMF downgraded its estimate for China’s 2022 growth to 4.4% from 4.8%1 amid fears that Beijing will see lockdowns given a spike in COVID infections. Obviously concerns are growing about China’s ability to deliver anywhere near the official target of around 5.5% given the COVID lockdowns. Recent news of the variant spreading into China’s capital city and the resulting lockdown of an area on the eastern side of the city have led to domestic market jitters. Local residents in the area have been asked to stay at home until April 27, until two mandatory mass COVID tests have been completed.

It is clear that in March, COVID lockdowns impaired consumption, and that situation is only getting worse. In this environment, I wouldn’t be surprised to see China’s second-quarter gross domestic product (GDP) disappoint. However, that does not change my far more positive view of the back half of 2022, when we expect a rebound from COVID and more policy support, which should lead to strong growth in the second half of this year. That may not get us to 5.5% growth for the year, but it is likely to keep growth above 4.5% for the year. Furthermore, a second-half mid-cycle acceleration in China would also point to the potential for stronger growth going into 2023 – which would jive with the IMF’s view of a re-acceleration of broader emerging markets growth in 2023, given strong trade links between China and many other emerging market countries.

Market sentiment in China is understandably weak since the economy is facing many headwinds that have led to weak first-quarter earnings. However, domestic investor sentiment could be nearing a bottom. Looking at the recent trading data, the A-share average daily turnover rate was only 1.2% last week and margin trading is at significantly lower levels now compared to 2018’s rout.2 In addition, valuations are looking increasingly attractive.

Macron secures victory in France

Other big news of the week is not about the economy or markets – it’s about the French elections. Despite market concerns that Marine Le Pen would win in the second and final round of the presidential election, Emmanuel Macron was able to pull off a victory, with a spread that was wider than expected. I expect this to reduce fear and volatility in European markets, although a victory had already become priced in in recent days so there has been no “Macron bounce.” I think the takeaways are significant. This can be viewed as a victory for the European Union and NATO despite real consumer pain due to high inflation.

So for the time being, this election represents the maintenance of the status quo. Where there is more interest (and the potential for change) is the upcoming legislative elections (June 12 and 19). At the moment, Macron’s La Republique en Marche party holds 312 out of 577 National Assembly seats, hence Macron has been working with a friendly Parliament and has been able to appoint a prime minister from his own party, which has enabled him to realize more policy objectives, including economic reforms.

Given the presidential election results, with the success of the far-right and the far-left, it is possible that the legislative elections will be less clear cut this time. Recall that in 2017, Macron and his party were surfing a wave of enthusiasm; that is far from the case now, with many electors either abstaining during the second round of votes on Sunday or reluctantly voting for Macron to avoid a Le Pen presidency. Those dissatisfied voters may see the parliamentary elections as a way to deliver a rebuke to Macron without running the risk of an extreme change in leadership at the top.

Hence, the French Parliament could now be more fragmented, with the possibility that Macron has to choose a prime minister from outside his own party. If that is the case, we need to remember that the president controls defense and foreign policy, with the PM controlling domestic policy. For example, Lionel Jospin was a Socialist PM during the presidency of Jacques Chirac, and he’s the one who introduced the 35-hour work-week. A PM from the far-right or far-left could introduce a more expansive budget, in which case bond spreads versus Germany may widen and French equities may underperform. However, the key question of European Union (EU) membership would not be in question, as that is under the president’s control. There is an expectation on the international front that Macron will spearhead the further integration of Europe, stepping into Angela Merkel’s shoes. He already was instrumental in the debt mutualization behind the Recovery Fund and the long-term success of the euro is likely to depend on further fiscal integration of the member states. Macron is also committing to further defense spending and has been a proponent of greater cooperation in the EU on this matter. This should help to maintain market stabilization, in our view.

Taking a step back, we have to recognize that the establishment of En Marche in 2016, Macron’s centrist party, reshaped the political landscape in France. It effectively meant there are three voting blocs: far-left, center, and far-right. The traditional center-left and center-right parties have fallen away, being replaced by En Marche over the past six years. That creates a vacuum of eligible market-friendly candidates for the next election in 2027. Macron cannot run again, but Marine Le Pen can and probably will run (despite her protestations to the contrary). Having just registered a vote of 41%3 (the highest ever for a candidate from the far-right), she must be encouraged to believe that she is just one more push away from the presidency, especially if no other charismatic candidate from the center reveals themselves.

The Fed spooks markets

Also last week, markets were spooked by hawkish comments from the Federal Reserve (Fed). On Thursday, not only did Fed Chair Jerome Powell say that a half-point interest rate increase will be “on the table” when the Fed meets in early May, but he suggested there could be half-point hikes at the next several meetings, explaining “We really are committed to using our tools to get inflation back” to more normal levels.4 He made it clear that, “We are going to be raising rates and getting expeditiously to levels that are more neutral,”4 and then higher if needed. St Louis Fed President Jim Bullard was even more hawkish in his comments last week.

In our view, markets should not fear these aggressive comments but should welcome them; hawkish talk can help do the heavy lifting for the Fed and, in my opinion, shape consumer psychology around inflation. This is how the Fed – and other central banks — can potentially orchestrate a soft landing and avoid a recession.

With contributions from Paul Jackson, Arnab Das, Emma McHugh and David Chao

Please continue to check back for our latest blog posts and updates.

Charlotte Clarke

29/04/2022

Team No Comments

Here are some reasons to be more cheerful about your money

Please see below a positive article received from AJ Bell this afternoon, which reminds us of several things that have improved when it comes to managing our finances.

Whether it’s been tax hikes, the cost of living crisis, or the war in Ukraine, doom and gloom hasn’t exactly been hard to find in April. The downbeat mood around household finances is palpable, and understandably so, with the price of essential items rising so rapidly.

At tough times like these, we find it natural to focus on the problem at hand, and batten down the hatches. But it might also help to cheer ourselves up a bit by remembering the positive developments we have seen in the personal finance arena in recent times.

STRONG STOCKS

Let’s start with the stock market. It’s been a decent period for investors, with £10,000 invested in the average global fund 10 years ago being worth £28,230 today. Even an investment in the spluttering UK stock market would have more than doubled your money, turning £10,000 into £20,360, if you had purchased a typical UK equity fund.

Right now, there are quite legitimate concerns around the valuation of the US tech sector, and the potentially damaging effect interest rate rises and inflation may have on global economic growth.

These issues raise the question of whether a stock market correction is waiting in the wings. This is actually always a possibility, and simply part and parcel of stock market investing. But the good news is that even if share prices take a big tumble, many investors would still be sitting on a healthy profit, thanks to the returns made by the global stock market over the last decade.

FALLING COSTS

The cost of investing has also fallen significantly over the years. 1% used to be a fairly competitive dealing commission for stockbrokers to charge twenty years ago. So on a £10,000 trade, you might pay £100 in dealing fees. Now you’re more likely to pay a flat fee somewhere in the region of £10.

Indeed, some platforms don’t charge any commission for share deals. Annual fund charges have come down significantly over the years too. It’s now possible to invest in a plain vanilla index tracker fund for as little as 0.2% a year, including platform charges.

By way of contrast, consider that when the government introduced stakeholder pensions as a ‘cheap’ option for savers in 2001, the annual charges were capped at what was then a competitive 1% a year, and the funds on offer were largely passive.

PENSION FREEDOMS

Pensions themselves have also made great progress. The pension freedoms introduced in 2015 mean that savers have much more control over how they draw on their pensions, rather than being shunted into an annuity.

As interest rates have tracked lower, and taken annuity rates with them, the pension freedoms have undoubtedly helped many people avoid locking into a low income stream for life. It’s also almost ten years since automatic enrolment was introduced, which requires employers to set up, and pay into a pension for their staff.

Since the reforms were introduced in 2012, the proportion of private sector workers saving in a workplace pension scheme has more than doubled from 32% to 75%.

Critics will say that the 8% total contribution rate doesn’t go far enough to replace the final salary schemes of yesteryear. That may be so, but the cost of final salary schemes simply became unaffordable as life expectancy shot up. That was a good thing of course, but with financial consequences.

Detractors can also point to the fact that automatic enrolment doesn’t do anything for the self-employed, who have to fend for themselves on the pensions front. Again, that’s true, but the numbers show that automatic enrolment has still been a success story, and offers a good foundation from which it can be expanded.

That’s particularly the case when you consider that at the launch of the scheme, naysayers predicted automatic enrolment would simply flop, because workers would just opt out in their droves.

A MENTION FOR ISAS

The humble ISA is also worthy of an honourable mention. It’s a tax shelter that can all too easily be taken for granted. The £20,000 allowance is now extremely generous, and is supplemented by a £9,000 allowance for Junior ISAs too.

That compares to an annual allowance of £7,000 when ISAs were introduced in 1999. We often expect tax allowances to be uprated in line with inflation. Well, if that had been the case for ISAs, the annual allowance would now be just £11,350.

None of this is to whitewash the genuine financial pain that is being felt by people up and down the country, but if you want to read about that you have plenty of options right now. Hopefully some of the positive developments listed above might make you feel a bit more upbeat about the current state of personal finances, if only for a while.

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

Chloe

28/04/2022

Team No Comments

Brewin Dolphin: Markets in a Minute

Please see this weeks Markets in a Minute update from Brewin Dolphin:

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

27/04/2022

Team No Comments

Brooks Macdonald – Weekly Market Commentary

Please see below last week’s Market Summary from Brooks Macdonald, which was published and received yesterday afternoon:

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

26/04/2022

Team No Comments

Blackfinch Group Monday Market Update

Please find below, an update on markets, received this afternoon from Blackfinch – 25/04/2022

  • Retail sales fell 1.4% in March, following a 0.5% drop in February, according to the Office for National Statistics, as people cut back on fuel and food spending amid soaring prices. Overall, sales volumes were 2.2% above pre-pandemic levels in February 2020.
  • 2,114 UK businesses became insolvent in March, more than double the figure in March 2021 (999), and 34% higher than the pre-pandemic figure of 1,582 in March 2019.
  • In April, the Purchasing Managers’ Index (PMI) for the UK services sector dropped materially from March’s 10-month high, while the new orders index plunged to 54.6, down from 60.4 in February. The slowdown also caused firms to slow their pace of hiring; the employment index fell to 55.8 – its lowest level since April 2021 –  from 58.4 in March.
  • The UK government set out 26 new sanctions against Russia over its invasion of Ukraine, including sanctions on military figures and defence companies.
  • The European Commission’s confidence indicator rose by 1.8 points to -16.9 in the eurozone, and by two points to -17.6 in the wider European Union (EU).
  • Consumer prices rose at an annual rate of 7.4% in March, rather than 7.5% as previously estimated, according to the EU’s statistics office Eurostat. Energy prices surged 44.4% in March, while unprocessed food cost 7.8% more. Even after stripping out these volatile components, annual inflation reached 3.2% in March, well above the European Central Bank’s 2% target.
  • Production in the 19 eurozone countries rose 0.7% in February from January, according to Eurostat. The biggest monthly increases were in Italy (up 4%), Croatia (up 2.7%) and Ireland (up 2.4%).
  • The International Monetary Fund (IMF) downgraded global growth forecasts with 2022 gross domestic product (GDP) growth revised to 3.6%, down from January’s prediction of 4.4%.
  • The IMF said UK economic growth was expected to match growth in US during 2022, but will slump in 2023, taking the UK to the bottom of the league table of comparable economies in the G7 group of countries. The UK is also expected to face the highest inflation.

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

25th April 2022

Team No Comments

Brooks Macdonald – Daily Investment Bulletin

Please see investment bulletin below from Brooks Macdonald received this morning – 22/04/2022.

What has happened

US equities came under pressure late in the US session as further incremental tightening of monetary policy was priced into the bond market. Given its rate sensitivity, growth equities underperformed with the US technology market posting another loss yesterday after the Netflix earnings soured Wednesday’s trading session.

Central banks

Fed Chair Powell stuck to the Fed’s recent script, saying that the Fed was considering 50bp rate hikes to front end load the monetary policy tightening required to get inflation under control. Yesterday also saw President Daly and President Bullard both describe the need for 50bp rate hikes at upcoming meetings given the economic backdrop. The market is now expecting 50bp hikes at each of the next three Fed rate setting meetings. President Lagarde of the ECB also spoke on the same panel as Powell yesterday and whilst she stressed that the US and European economies were in very different places, Lagarde would not rule out an ECB rate hike as early as July which is the meeting hinted at by other ECB speakers this week. This backdrop catalysed a selloff in sovereign debt with the US 10-year Treasury yield closing above 2.9%, reversing the falls seen on Wednesday. It is increasingly clear that the Fed is keen to normalise rates sooner rather than later, before the Fed or the market truly knows what the post pandemic pace of economic growth and inflation is. This brings with it significant policy risk.

French election

This weekend sees the French presidential election run-off vote between President Macron and Marine Le Pen. Over the last week or so the gap between the candidates has increased with President Macron holding a polling lead of c. 10 points, outside the margin of error. The polling success for the incumbent has settled some of the fears earlier in the month that there could be a political upset spurred by the cost of living crisis in France. French government bonds and equities outperformed as yesterday’s polls reconfirmed the lead.

What does Brooks Macdonald think

Whilst polling suggests that a French electoral upset will be avoided, yesterday saw reports that the UK government is preparing legislation to give ministers the power to switch off key parts of the Northern Ireland protocol. Such legislation, if enacted, would lead to further confrontation between the EU and UK even as NATO allies pose a united front in the face of the Ukraine war.

Please continue to check back for our latest blog posts and updates.

Charlotte Clarke

22/04/2022

Team No Comments

Markets in a Minute – Stocks fall as US earnings season begins

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday afternoon, which provides current market updates on a global scale.

The release last week of the first major US corporate earnings reports of 2022 was accompanied by a lacklustre few days for global equities.

In Europe, the STOXX 600 and the Dax ended their holiday-shortened trading week down 0.3% and 0.8%, respectively, as data from the US and UK showed a further spike in inflation. The FTSE 100 fell 0.7% as energy stocks declined and the pound strengthened against the dollar.

The S&P 500 tumbled 2.1% as disappointing retail sales figures and concerns about inflation weighed on investor sentiment. The financials sector underperformed after first quarter results from banking giant JPMorgan Chase missed analysts’ estimates.

In Asia, Japan’s Nikkei 225 added 0.4% after Bank of Japan governor Haruhiko Kuroda said the economy would continue to recover despite surging commodity prices. China’s Shanghai Composite declined 1.3% as cases of Covid-19 continued to climb in Shanghai, fuelling concerns about supply chain disruptions.

IMF cuts global growth forecast

Stocks were mixed on Tuesday (19 April) as traders returned from the Easter long weekend. The FTSE 100 ended the trading session down 0.2% after the International Monetary Fund (IMF) slashed its forecasts for global gross domestic product (GDP) growth to 3.6% for 2022 and 2023, down from 4.4% and 3.8% previously. The IMF said global economic prospects had been severely set back, largely because of Russia’s invasion of Ukraine. The UK is set to be the worst performing G7 economy year, with GDP increasing by just 1.2% amid the rising cost of living and tax increases.

The STOXX 600 also declined on Tuesday, whereas Wall Street stocks made solid gains as investors digested a slew of corporate earnings. The FTSE 100 took its cue from Wall Street to start Wednesday’s trading session up 0.1%.

US retail sales miss forecasts

Last week saw the release of the latest US retail sales figures, which revealed sales in March rose by just 0.5% month-on-month. This was the slowest pace in 2022 so far and lower than the 0.6% increase forecast in a Reuters poll.

The bulk of the increase was driven by sales at service stations, which surged by 8.9%. This came after prices at the pump soared to an all-time high amid Russia’s war against Ukraine (US retail sales are not adjusted for inflation). Excluding gasoline, retail sales fell by 0.3%.

The report from the Commerce Department also showed online store sales fell by 6.4% after declining 3.5% in February, the first back-to-back fall since the last two months of 2020.

US import prices accelerate

US import prices rose by the most in over a decade in March as the Russia-Ukraine war increased petroleum prices. Import prices rose by 2.6% from the previous month, the largest rise since April 2011, according to the Labor Department. On an annual basis, prices surged by 12.5% after advancing 11.3% in February.

This came after data showed consumer prices rose at their fastest rate for 41 years in March, increasing by 8.5% year-on-year. Meanwhile, producer prices rose by 1.0% in March from the previous month, roughly double estimates, and by a record 9.2% year-on-year.

With inflationary pressures persisting, investors will be keeping a close eye on this week’s speeches from Federal Reserve officials for any further guidance on how aggressively policymakers will raise interest rates this year.

UK inflation hits 7%

Here in the UK, inflation hit a fresh 30-year high in March as fuel prices surged. Consumer prices rose by 7.0% year-on-year, up from 6.2% in February and ten times the 0.7% increase seen in March 2021, according to the Office for National Statistics. Transport fuel prices surged by 30.7% from a year ago, and prices of other items such as furniture, cooking oil, clothing, second-hand cars and hotels all rose at a double-digit annual rate. Core inflation, which excludes energy, food, alcohol and tobacco, rose by 5.7% year-on-year.

The figures could add further pressure on the Bank of England to accelerate the pace of interest rate increases. The Bank has increased the base rate three times since December from 0.1% to 0.75%. Its next monetary policy decision is scheduled for 5 May.

China’s economy slows in March

China’s economy slowed in March after a strong start to 2022. Data from the National Bureau of Statistics revealed GDP grew by 4.8% in the first quarter from a year ago, beating expectations for a 4.4% gain and above the 4.0% growth seen in the fourth quarter of 2021. However, figures for March showed annual retail sales fell by the most since April 2020, down 3.5%, as coronavirus restrictions were imposed across the country. The jobless rate rose to 5.8%, the highest since May 2020.

The Chinese government is sticking to its zero-Covid policy despite growing fears about the hit to the economy. Fu Linghui, a spokesperson for the National Bureau of Statistics, warned of “frequent outbreaks” of Covid-19 in China and an “increasingly grave and complex international environment”. On Monday, China’s central bank said the country would step up financial support for industries, firms and people affected by coronavirus outbreaks. It has published a list of 23 measures that include lending guidance for banks, general pledges for more credit or other financial support, and making it easier for companies to expand the crossborder use of the yuan.

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

Chloe

21/04/2022

Team No Comments

Blackfinch Weekly Market Update

Please see this weeks Weekly Market Update from Blackfinch:

UK COMMENTARY

  • According to consumer price index data reported by the Office for National Statistics (ONS), UK inflation rose to 7% in March, up from 6.2% in February, as living standards continued to be squeezed. March’s reading was the highest in three decades. 
  • The ONS also announced the UK unemployment rate dropped to 3.8% in the three months to February, according to its latest labour force survey. This was the lowest rate since October-December 2019, just before COVID-19 hit the economy.
  • The ONS also confirmed UK house prices have continued to surge. The average house price increased by 10.9% over the year to February 2022, up from 10.2% in January 2022. Private rental prices paid by UK tenants increased by 2.4% in the 12 months to March 2022, the highest annual growth rate since July 2016.
  • UK factories have been hit by surging raw material costs, and continued to lift their own prices. The ONS reported that input costs paid by producers rose 19.2% in the year to March,  the highest rate since records began in January 1997.
  • The cost-of-living squeeze on UK workers continued as wages failed to keep pace with prices. Regular pay shrank in the three months to February, with basic earnings up only 4%, significantly below February’s inflation reading of 6.2%.

 NORTH AMERICA COMMENTARY

  • In the US, CPI inflation Index rose 8.5% over the year to the end of March, the highest rate since 1981.
  • There were 185,000 new claims for US unemployment support, a rise of 18,000 on the previous week when initial claims hit their lowest since 1968.
  • According to the US Mortgage Bankers Association, mortgage applications to purchase a home rose 1% last week, but were 6% lower than the same week a year ago. With borrowing costs up, applications to refinance a home loan fell 5% week-on-week, and were 62% lower than a year ago.
  • The Bank of Canada (BoC) increased its overnight interest rate by 50 basis points, from 0.5% to 1%, after citing price spikes in oil, natural gas and other commodities, as well as supply chain disruptions. The BoC said it expects the annual inflation rate to average almost 6% in the first half of this year, well above its 1%-3% annual target.

GLOBAL COMMENTARY

  • Annual inflation in Russia accelerated to 17.49% as of 8th April, its highest since February 2002 and up from 16.70% a week earlier, according to its economy ministry.

The ever-changing world we live in reinforces the importance of regular up-to-date communication. This weekly news update from the multi-asset portfolio managers at Blackfinch provides you with a summary of global events.

Andrew Lloyd DipPFS

20/04/2022

Team No Comments

Brooks Macdonald Daily Investment Bulletin

Please find below, a daily update on markets, received this morning from Brooks Macdonald – 14/04/2022

What has happened?

US bond prices continued the recent rally on Wednesday as markets pared back expectations for an aggressive series of interest rate rises from the US Federal Reserve. Following the latest US Consumer Price Index data for March published on Tuesday, which showed a weaker than expected core month-on-month rise in prices, hopes have risen that the near-term inflationary pressures might be at or near a peak. US 2 year bonds, which are more sensitive to monetary policy decisions, have seen yields fall more than 10 year yields this week, with the 10 year-less-2 year yield curve having risen around 40bps since the nadir at the start of the month. In equity markets, the principle of regional proximity to the Ukraine conflict weighed again on Wednesday; while equities were mixed in Europe, US equities were stronger, while across sectors, technology shares outperformed wider equity benchmarks. Overnight, Asia equity markets are broadly higher on reports that China’s policy makers may look to make further cuts in banks’ reserve requirement ratios alongside other policy tools to support the economy. Looking ahead to today the European Central Bank (ECB) holds its latest monetary policy meeting decision, though markets are not expecting much change to the ECB’s recently more hawkish messaging.

US calendar Q1 2022 company results season gets underway

The US bank JP Morgan kicked off the latest calendar Q1 2022 company results season on Wednesday. Seen as a bellwether for the broader US economy, JP Morgan reported profits which fell 42% in Q1 2022 compared to the same quarter period a year ago, and missing analyst EPS estimates amid a more cautious outlook generally. Aside the market impact from Russia’s invasion of Ukraine, investment banking revenue was lower as companies looked to have delayed deal activity in recent months. The US bank also increased reserves saying the possibility of an economic downturn had moved from ‘low’ to ‘slightly less low’. JP Morgan CEO Dimon warned of twin economic uncertainties arising from Ukraine as well as near-term inflationary headwinds. Putting pressure on policy makers, Dimon said “we remain optimistic on the economy, at least for the short term … consumer and business balance sheets as well as consumer spending remain at healthy levels … but see significant geopolitical and economic challenges ahead”. He added that “the Fed needs to try to manage this economy and try to get to a soft landing, if possible.” Asked whether the US could face a recession, Dimon said that “I am not predicting a recession. Is it possible? Absolutely.”

Brooks Macdonald’s Asset Allocation Committee weighs up the investment outlook

Brooks Macdonald’s Asset Allocation Committee held its latest monthly meeting on Wednesday, and as part of discussions, weighed up the latest investment outlook in terms of the twin market drivers of economic growth and inflation. While the broader economic growth outlook remains constructive and above longer-term trend rates of growth, the Committee are mindful that there has been a downward revision of estimates in aggregate. The Committee views a lower economic growth backdrop as likely given the impact that near-term inflationary pressures may have on the cost-of-living squeeze and corporate margins. Whilst it is too early to say whether inflation will slow meaningfully by the end of the year, the base effects mean that headline inflation is likely to slow even if inflationary pressures remain a theme into 2023.

What does Brooks Macdonald think?

Our Asset Allocation Committee is, in aggregate, presently somewhere between a so-called ‘Soft-Landing’ scenario (describing a low inflation, low economic growth outlook) and a ‘Stagflation’ scenario (high inflation, low growth). Whilst both of these scenarios might favour more growth/defensive investment styles, the Committee is maintaining its equity barbell balance at the current time. There is likely to be continued volatility in markets in the near-term as central banks in particular look to try to thread the policy needle against post-pandemic distortions and the war in Ukraine, and as such, we are keen not to be drawn prematurely in favour of either a growth/defensive or value/cyclical narrative.

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

14th April 2022

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see below this week’s Markets in a Minute article from Brewin Dolphin received yesterday afternoon – 12/04/2022

US markets dip as taper talk returns

US markets dipped last week as Federal Reserve meeting minutes showed rate hikes are again likely, with officials confirming the central bank had to quell inflation.

In the week, the Nasdaq lost 3.86% with the S&P 500 also slipping 1.27% – though the latter was able to recover some of its midweek losses due to consumer staples and tech names which held up.

Across the Atlantic, the picture was more mixed in the UK and Europe. Over the week, the pan-European STOXX Europe 600 index rose 0.57%, with concerns over inflation and the ongoing Ukraine conflict continuing to suppress sentiment. On a country-specific basis, several markets recorded losses – such as the French CAC 40 index, which fell 2.04% due to political uncertainty. The FTSE 100 rose 1.75%, though the more domesticfocused FTSE 250 index better reflected inflationary concerns in the country, falling 0.52%.

In Asia, the Nikkei 225 fell 2.46% with Japan also being impacted by inflationary concerns and US Federal Reserve movements. In China, markets fell as well, with the Shanghai Composite Index slipping 0.94%. Lingering Covid-19 lockdowns across several cities partly caused these falls, as well as investors taking note of monetary policy and inflationary trends around the world.

UK growth stalls

Stocks started the week in the red, with investors around the world starting to price in expected rate hikes from central banks as well as more negative inflation news in the US. By the time markets closed in the US, the S&P 500 and Nasdaq were down 1.69% and 2.18% respectively.

The most notable economic news came from the UK, where growth has stalled. In February, economic growth slowed to just 0.1% which was dragged down by sluggish numbers in production and construction. This was down from the 0.8% GDP growth seen in January. This impacted investor sentiment, causing the FTSE 100 to lose 0.67% by close on Monday, with the FTSE 250 losing 0.28%.

The picture was the same in European and Asian markets. The pan-European Stoxx 600 index closed 0.59% lower, with nearly all regional markets lower as disappointing UK GDP figures were digested. In Asia, the Nikkei closed at 0.61% lower while the Shanghai Composite fell 2.61%.

Fed signals new rate hikes…

Last week, the Federal Reserve published the minutes from its monthly Federal Open Market Committee (FOMC) meeting, which revealed how policymakers are planning to reduce the central bank’s balance sheet. The plan is to reduce the balance sheet by $95bn a month, with officials also preparing to raise rates by 0.50% in May.

FOMC members are focusing on quelling inflation, which hit a 40-year high in March, when US CPI reached 7.9%. Policymakers will feel more confident in raising rates after improving employment statistics were revealed last week. According to the US Bureau of Labor, the US added 431,000 jobs in March, which reduced the country’s unemployment rate from 3.8% to 3.6%. Within this data, the weekly jobless claims tally fell to 166,000, which is the lowest since 1968.

This pushed bond yields higher in the week. By Friday, the US 10-year yield closed the week at 2.7% which is the highest level in three years.

…with ECB also setting hawkish tone

Last week the European Central Bank (ECB) also published minutes of its own meeting in March, ahead of its crucial meeting on Thursday. Policymakers were revealed to be divided, but overall were more hawkish, with many calling for rate hikes to prevent a wage-price spiral.

Though policymakers were split in how to proceed, with some preferring to see how the Russia-Ukraine conflict continues to unfold, inflation has risen since the ECB’s last meeting. Annual inflation in the eurozone is currently 7.5%, a record for the region.

Last week, the EU also imposed more sanctions on Russia off the back of reports of war crimes in Ukraine. These included a proposal to ban imports of Russian coal, and the assets of more Russian oligarchs to be targeted.

France set for close election

French President Emmanuel Macron will now face farright candidate Marine Le Pen in presidential elections, after they both made it through the first round. With 27% and 23% of the vote secured respectively, the race between the two looks tight before voters return to the polls on 24 April.

A few weeks ago, many commentators expected Macron to comfortably secure a second term. However, Le Pen’s early success has now made some investors wary about a potential change of political leadership in the country.

The prospect of a Le Pen presidency has caused concern among some investors, as she has shown sympathies for Russian President Vladimir Putin in the past and been openly sceptical about the European Union. Over the week, the CAC 40 index fell 2.04% in light of these political developments, with French bonds also sliding with 10-year yields hitting their highest peak since 2015.

IMF downgrades Japanese growth

Last week, the International Monetary Fund (IMF) downgraded its forecast for Japanese growth this year, from 3.3% to 2.4%. Uncertainty stemming from Russia’s war with Ukraine was cited as one of the main reasons, with Japan vulnerable to shocks across supply chains, trade networks and commodities.

Japan’s close trade-ties with China were also cited as a risk, with the latter coming under international scrutiny for failing to publicly criticise Russia over its actions in Ukraine. US government spokesmen recently stated if China was found to be supporting Russia, Beijing would also become the target of economic sanctions.

Please continue to check back for our latest blog posts and updates.

Charlotte Clarke

13/04/2022