Team No Comments

Stocks soar on Russia-Ukraine peace talks

Please see below Markets in a Minute article received from Brewin Dolphin yesterday evening, which provides a positive update on markets despite the continuing Russian invasion of Ukraine.

Stock markets surged last week on hopes of a positive outcome from Russia-Ukraine peace negotiations.

The pan-European STOXX 600 rose 5.4%, Germany’s Dax added 5.8% and the UK’s FTSE 100 gained 3.5%. Fighting continued throughout the week, but ongoing talks to end the conflict boosted investor sentiment.

Stock markets in the US ended their two-week losing streak as oil prices declined and the Federal Reserve increased interest rates in line with expectations. The S&P 500 rose 6.2% and the Nasdaq soared 8.2%.

The positive sentiment fed through to Japan, where the Nikkei 225 added 6.6% after the government said it would lift all remaining domestic coronavirus restrictions from 21 March. Hong Kong’s Hang Seng also rose 4.2%, whereas the Shanghai Composite eased 1.8%.

Key port of Mariupol under siege

Stocks started this week on a more subdued note amid news Ukraine’s key port, Mariupol, was under siege by Russian military. The STOXX 600 was flat on Monday (21 March), whereas the Dax and CAC 40 both lost 0.6% on concerns the conflict might not end as soon as hoped. The commodity-heavy FTSE 100 managed a 0.5% gain, boosted by a rise in oil and metal prices, while the Dow shed 0.6% to end its four-day rally.

In economic news, asking prices for UK homes rose by 1.7% in March, the biggest monthly rise for this time of year in 18 years. Rightmove said the jump was partly driven by a mismatch between supply and demand, with more than twice as many buyers as sellers. On an annual basis, asking prices were up 10.4% and have topped £350,000 for the first time.

UK and European indices started Tuesday in the green, with the FTSE 100 and STOXX 600 both up 0.5% at the start of trading.

Fed approves first rate hike in three years

Last week saw the Federal Reserve approve its first interest rate hike in more than three years. After keeping the benchmark interest rate at near zero during the pandemic, the US central bank said it would raise rates by 25 basis points. It also pencilled in increases at each of the six remaining meetings this year, pointing to a rate of 1.9% by the end of 2022 – a whole percentage point higher than indicated in December.

The Fed increased its inflation estimates, forecasting a 4.1% increase in the core personal consumption expenditures (PCE) price index this year, up from the previous projection of 2.7% in December. Core PCE is expected to ease to 2.7% and 2.3% in 2023 and 2024, respectively. The Fed reduced its gross domestic product (GDP) growth forecast for 2022 from 4.0% to 2.8%, citing the potential implications of the Ukraine war.

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the statement said. “The implications for the US economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

US retail sales disappoint

US retail sales rose by just 0.3% month-on-month in February, less than the 0.4% increase forecast by economists in a Reuters poll. The figures were held back by a 3.7% drop in receipts at online retailers. Sales at furniture stores and health and personal care stores also declined by 1.0% and 1.8%, respectively, according to the Commerce Department.

The smaller-than-expected increase in retail sales in February has been partly attributed to an upwardly revised 4.9% surge the previous month, the largest gain in ten months, as well as households cutting spending on goods as gasoline and food prices soar. Core retail sales (excluding gasoline, building materials and food services) fell by 1.2% in February following an upwardly revised 6.7% gain in January. On an annual basis, overall retail sales increased by 17.6%.

UK base rate lifted for third month in a row

Here in the UK, the Bank of England (BoE) announced an increase in the base interest rate for the third month in a row. The BoE’s monetary policy committee voted 8-1 in favour of an additional 0.25% increase in the main bank rate, taking it to 0.75%.

It comes after UK inflation surged to a 30-year high and a warning that it could increase further following Russia’s invasion of Ukraine. The BoE said the war has led to large increases in energy and other commodity prices and is likely to exacerbate global supply chain disruptions. “Global inflationary pressures will strengthen considerably further over coming months, while growth in economies that are net energy importers, including the UK, is likely to slow,” it stated.

China pledges support for economy

Over in China, the country’s vice premier Lui He said last week that Beijing would roll out support for the Chinese economy and introduce more market-friendly policies. The announcement last Wednesday helped Hong Kong’s Hang Seng record its best trading session in over 13 years, closing 9.1% higher.

According to the Xinhua news agency, China’s Financial Stability and Development Committee said the government should roll out policies favourable to capital markets, while being cautious in introducing contractionary measures. The committee said China’s monetary policy should “actively respond” to support the economy and new credit should help maintain “appropriate growth”. It claimed the Chinese government continues to support companies’ listing of shares overseas and has maintained “good communications” with US regulators on Chinese companies’ listings in the US. Beijing has also paused plans to expand trials of the property tax announced at the end of last year, Xinhua reported.

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

Chloe

23/03/2022

Team No Comments

Ukraine/Russia negotiations continue

Please find below, an update on the ongoing negotiations between Ukraine and Russia and the impacts on markets, received from Brooks Macdonald, yesterday afternoon – 21/03/2022

  • Global equities rallied last week as Ukraine negotiations continued, China hinted at state support and the Federal Reserve meeting concluded
  • The Bank of England and Federal Reserve both increased interest rates last week, citing fears over inflation
  • The Federal Reserve revealed robust economic growth forecasts despite the impact of inflation on the cost of living

Global equities rallied last week as Ukraine negotiations continued, China hinted at state support and the Fed meeting concluded

Whilst last week proved a very strong week for risk assets, this of course needs to be compared to the volatility of March in aggregate. Technology outperformed, with reports of Chinese state support and the Federal Reserve (Fed) meeting both boosting sentiment towards the sector.

Negotiations between Russia and Ukraine continued last week which helped buoy risk appetite. Last night, Turkey’s Foreign Minister suggested that a peace deal and ceasefire was possible assuming neither side changed its negotiating demands too dramatically. The starting point, that Ukraine will agree to be a neutral country and commit to not join NATO, appears to have softened Russia’s prior hard-line approach to talks. After reports broke that Russia had requested military and economic aid from China, China has been in the spotlight over its position on the Ukraine war. On Friday President Biden and President Xi Jinping discussed China’s position over a call and both sides concluded with hopes for a peaceful resolution which saw no further escalation. The latter comment may well allude to suggestions from US intelligence sources that nuclear sabre-rattling could recommence should the Ukraine war become protracted.

The Bank of England and Federal Reserve both increased interest rates last week, citing fears over inflation

After the Bank of England and Federal Reserve both hiked rates last week, we will hear from a steady stream of central bankers this week, giving us more colour on the content of the discussions. The Federal Reserve ‘dot plot’ of interest rate forecasts showed a wide disparity of views amongst the Fed members, suggesting the speeches this week won’t be running off a shared narrative. Fed Chair Powell will be speaking today as well as on Wednesday. The Bank of England warned on inflation and economic growth when it hiked rates last week, the US has taken a different approach, showing heightened inflation expectations alongside robust economic growth forecasts. How the Fed speakers address their expected resilience of the economy in face of tightening monetary policy and cost of living squeezes will be of particular interest.

The Federal Reserve revealed robust economic growth forecasts despite the impact of inflation on the cost of living

The Fed are likely to come under significant pressure over the next few weeks as many economists have criticised the bullish economic growth projections as disconnected from the reality of consumer demand. Should the bond market conclude that the Fed speakers’ belief in the Fed’s own economic growth numbers is less than universal, we could see an extension of the technology outperformance that we saw after meeting last week, as markets price in the risk that the Fed will need to blink in the face of slowing growth.

The information in this article does not constitute advice or a recommendation and investment decisions should not be made on the basis of it. This article is for the information of the recipient only and should not be reproduced, copied or made available to others. The price of investments and the income from them may go down as well as up and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not a reliable indicator of future results.

The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

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

22nd March 2022

Team No Comments

US Fed raises rates: how does this impact our outlook and what risks lie ahead?

Please see below article received from Invesco yesterday afternoon:

What happened?

The Federal Open Market Committee (FOMC) released its statement following the March meeting, and US Federal Reserve Chair Powell held his regularly scheduled post-meeting press conference.

As anticipated, the FOMC increased the Fed Funds Target Rate2 by 25 basis points (bps), with James Bullard the sole dissenter preferring to raise by 50bps. References to the balance sheet were limited, with the Fed explaining that “the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”

There were some significant changes in the Summary of Economic Projections, compared to the December 2021 meeting.

The Fed revised its forecast for 2022 real GDP growth to 2.8% from its December 2021 forecast of 4.0%. The median forecast for 2022 core personal consumption expenditure3 (PCE) inflation increased to 4.1% from 2.7%. This has prompted the FOMC to adjust its 2022-end target for the Fed Funds Target Rate to 1.9% from 0.9%, with the highest individual forecast (presumably Bullard) at 3.1% by the end of 2022.

We welcome the increase in inflation forecasts by the FOMC, which is a reasonable step to move closer to what we are seeing in the data and prepare the ground for further revisions if necessary for 2023.

During the press conference, Powell made some key points:

  • The robustness of the labour market, highlighting that it is “extremely tight”, with wages rising the fastest in many years
  • Risks to inflation remain to the upside
  • The FOMC has “made good progress” in discussing the future of the Fed’s holdings of Treasury and mortgage-backed securities
  • The Committee’s view that the US economy is strong, and well placed for a tightening in monetary policy4. He also believes that a recession in 2022 is unlikely
  • He reinforced the idea that balance sheet reduction can be thought of in terms of interest rate increases, prioritising price over quantity analysis
  • Balance sheet reduction will “be faster than last time”, “earlier in the cycle than last time”, and “will look familiar”

What is our take on what is happening?

What we are experiencing is the unwinding of the “dash-for-cash” phenomenon that occurred in 2020. At the height of uncertainty related to the Covid-19 pandemic, investors de-risked portfolios and demanded to hold more liquid assets, including higher money balances. The Fed rightly accommodated this shift in investor demands, but grossly overestimated how accommodative they could be without affecting future inflation.

As consumer behaviour and spending has normalised, these excess money balances have been reflected in a strong economic recovery in the US, and ultimately accelerating inflation. The transitory explanation of inflation that was endorsed by the Fed has fallen away as inflation has broadened out throughout the US economy.

What is our outlook?

In our view, the Fed is attempting to “thread the needle”, by trying to limit the rise in long-term inflation expectations amid several notable headwinds for global economic growth. The most notable is the war in Ukraine and the zero-Covid policy in China. Three scenarios are possible:

  1. The Fed achieves its desire for a “soft landing”, with inflation returning to 2% relatively quickly, growth affected only marginally, and a terminal Fed Funds Target Rate in line with their projections;
  2. The Fed delays the required degree of tightening as a commodity price shock dramatically slows growth, and the US enters a period of stagflation;
  3. The Fed tightens too aggressively, facilitating a more conventional deflationary recession in 2023.

Our base case (based on current forward guidance from the Fed) remains firmly in the first scenario, but risks have increased recently.

History suggests that despite some initial volatility, stocks tend to outperform bonds once the Fed starts new tightening cycles. The FOMC’s projections portray the desire to remove the generous policy support provided since the outbreak of the pandemic, especially with inflation running higher than previously expected. 

The removal of support is likely to keep Treasury yields moving higher, although a flattening of the yield curve is likely to dampen the effect on longer maturities. It would not be a surprise to see 10-year yields above 2.5% this year, though after recent strong gains, a period of consolidation may be in order.

Higher yields may be expected to support the dollar, but it has already strengthened over the last year, even more so since Russia’s invasion of Ukraine. We wouldn’t be surprised to see the greenback consolidate over the rest of the year.

Within equities, value stock tends to outperform growth stock when inflation is high and falling, as cyclicals do over defensives. Alternatives such as real estate and private credit, as well as commodities, could also outperform in this environment.

US treasuries and high-quality investment grade bonds may be worth watching should the Fed decide to “slam on the brakes” and a recession ensues (where both growth and inflation fall).

What are we looking out for? What are the risks to our view?

The primary risk to the markets in 2022 is if the Fed makes a policy error by engineering a fully contractionary monetary policy in response to persistent, above-target inflation. This would likely result in a recession in 2023. We will follow a variety of incoming data, including inflation and inflation expectations, that could trigger more aggressive monetary policy.

Furthermore, the war in Ukraine has significantly increased the chances of a stagflationary scenario, although this is not our base case.

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

18/03/2022

Team No Comments

Brewin Dolphin – Are we heading towards 1970s-style stagflation

Please see article below from Brewin Dolphin – received late yesterday afternoon – 16/03/2022.

Are we heading towards 1970s-style stagflation?

A growing number of investors are beginning to worry about a return to the environment that characterised the 1970s. Both Otmar Issing, the European Central Bank, s first chief economist, and Larry Summers, former US Treasury secretary, have recently flagged stagflation risks (weak growth and high inflation). Could things get this bad? Paul Danis, our Head of Asset Allocation, discusses below.

What was the economy like in the 1970s? The 1970s was a decade plagued by high inflation. The oil crises of 1973/74 (following the OAPEC oil embargo) and 1979 (following the Iranian revolution) made an already challenging inflation backdrop worse. The spike in energy costs in each crisis left consumers with substantially less disposable income to spend on other goods and services, which weighed on consumption.

Industrial action in the UK was particularly severe in the 1970s. The coal miner strikes early in the decade restricted supply, resulted in blackouts, and forced businesses to close. Ultimately, the government of Edward Heath imposed a three-day week, further weighing on growth. The widespread strikes in the ‘Winter of Discontent’ later that decade led to major disruption, with graves left undug and rubbish piled up in the streets.

High inflation eventually forced central banks to aggressively raise interest rates, which weighed heavily on the interest-sensitive areas of the economy. This combination of high inflation, weak demand and rising long-term interest rates was toxic for financial markets, and led to very weak ‘real’ asset returns (the return that is left over after subtracting inflation).

Just how bad were real returns?

Taking the US as an example, annualised real returns were negative for stocks, cash, government bonds and corporate bonds in the 1970s. In the case of equities, the annualised real return in the decade amounted to -1.5%, which compares to an approximate +7.7% annualised real return over the 100 years leading up to today. Conversely, returns on commodities such as gold and oil were much stronger than average in the 1970s.

What caused the high inflation of the 1970s?

A perfect storm of factors led to the high inflation 1970s. Sticking with the US as an example, government expenditure rose on the back of both the Vietnam War and President Lyndon Johnson’s ‘Great Society’ legislation, with the latter involving higher government spending on social programmes.

When the gold standard came to an end in 1971, the US dollar was able to float freely. The greenback dropped sharply over the next few years, pushing up import cost inflation. President Richard Nixon pressured then Federal Reserve chairman Arthur Burns (who was previously Nixon’s economic adviser) to maintain an expansionary monetary policy heading into the 1972 election, despite a growing inflation problem. Burns complied. Nixon also introduced wage / price controls in the early 1970s in a bid to get inflation under control. While temporarily slowing inflation, these measures led to shortages and so ultimately made the problem worse.

The oil crises of 1973/74 and 1979 reduced global oil supply and drove up petroleum prices. Meanwhile, real-time estimates overstated the ‘potential output’ of the US economy. This led policymakers to believe there was more ‘slack’ (unused resources) in the economy, which caused them to underestimate the inflationary effects of their policies. Finally, labour union worker contracts typically were linked to inflation. This setup produced a ratcheting effect when price increases picked up.

What was happening in the UK?

As was the case in the US, mismeasurement of the ‘output gap’ (the difference between actual output and the level of output consistent with sustainable full employment of resources) was a problem for UK policymakers. A Bank of England (BoE) working paper concluded that monetary policy errors due to this problem contributed about 3.0 to 7.1 percentage points to average UK inflation in the 1970s (Nelson / Nikolov, 2001). Meanwhile, the BoE was not independent. Several studies have established a significant link between the level and variability of inflation and the degree of central bank independence. Both the oil supply shocks and effects of wage indexation played a similar role in pushing up UK inflation as they did in the US.

Are there parallels between the 1970s and today?

Some of the factors that contributed to the high inflation of the 1970s are prevalent today. Labour markets across the developed world are tight. In the US, the unemployment rate heading into the 1970s was 3.5%. At present, it is 3.8%, and likely to reduce further.

The US has enacted massive fiscal stimulus under President Joe Biden at a time when the economy was already expanding rapidly. Global oil prices have surged, most recently on the back of Russia’s invasion of Ukraine. This will bolster inflation, and weigh on growth.

That said, there appear to be more differences than similarities. Central banks today are probably less likely to give in to political pressure. The Federal Reserve restored its credibility under Paul Volker, who quashed inflation after taking charge in August 1979. That credibility largely remains intact. Central banks have formally adopted inflation targets. Households, businesses and investors believe they will take steps to reduce inflation if inflation expectations were to become ‘de-anchored’. Meanwhile, developed world economies are now structured in a way that makes a wage / price spiral less likely. Union power has declined as economies have become more service oriented, and wage indexation is built into a much lower percentage of contracts today. Wage / price controls seem very unlikely. Importantly, the current ‘oil shock’ is nowhere near as bad as either of the two that occurred in the 1970s. We believe that supply concerns linked to the war in Ukraine have boosted the oil price by around 10%. This is far less than the 237% supply-driven rise in 1973/74 and 154% in 1979.

How do you expect the economy and markets to evolve?

Absent an escalation in the Ukraine crisis that causes energy prices to surge anew, it is likely that inflation in the Western world will moderate as the year progresses. Supply bottlenecks should continue to improve, the impact of last year’s fiscal stimulus should wane and monetary policy will tighten. That said, inflation is likely to remain uncomfortably high. Even without additional upside, the process by which commodity inflation filters through to consumer prices should last for some time. Tight labour markets should bolster wage inflation, which will encourage businesses to raise prices to protect profit margins. So-called shelter inflation pressure (categories related to rent and imputed rent) will also likely remain strong.

Regarding growth, we believe that 2022 should see most developed world economies grow at a solid pace. However, the rise in energy costs and inflation more broadly should combine with rising interest rates and slower job growth to weaken the pace of the global economic expansion.

On markets, we continue to expect stocks to outperform bonds. However, the economic cycle has moved into a later stage. As such, we expect to use periods of market strength to lighten our equity exposure.

What about longer term?

Although a repeat of the 1970s seems unlikely, there are good reasons to have subdued expectations with regards to longer-term economic growth prospects. Demographics are a headwind, as labour force growth is likely to be weak.

Meanwhile, we suspect that longer-term inflation risks lie to the upside. Entitlement spending (healthcare, pensions) for ageing populations will require continued deficits. There is a risk that these may end up being partly financed by central banks via additional quantitative easing, which would amount to moneyfinanced fiscal policy. Globalisation headwinds are mounting, and the age structure of populations is shifting so that the ratio of workers relative to consumers will fall. Both developments risk higher inflation. The process of decarbonisation of the global economy also risks boosting inflation over the longer term.

Subdued growth combined with rising inflation risks suggest that equity returns over the next decade will likely be much lower than investors have grown accustomed to since the 1980s. But even so, we would still expect equities to be a better investment than cash over the long term.

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

Charlotte Clarke

17/03/2022

Team No Comments

Protecting your pension in difficult times

Please see below article received from Brewin Dolphin recently, which provides advice on how to protect your pension in these uncertain times, amidst rising inflation and stock market volatility.

It can be difficult to make decisions about how to safeguard your lifetime savings when you’re feeling anxious and unsure about the future. A financial adviser can help you decide on the best route for you but, in the meantime, these are some of the main considerations.

Avoid making rash decisions

It’s perfectly natural to be worried about your investments and the impact of wider economic events on your pension’s performance. However, letting your emotions cloud your judgement could prove extremely costly in the long run. Selling investments that have fallen in value risks crystallising losses; and if the markets recover quickly, you could miss out on subsequent gains.

Before you rush into making any decisions, take a step back and try to understand how recent events may have affected your broader retirement plans. A financial adviser can give you a clear picture of your savings, such as how long they’re likely to last, and whether your goals are still achievable.

Beware inflation

When stock markets are volatile, you might be tempted to start shifting all your retirement savings into cash. However, this might not be the wisest move. As well as the risk of crystallising losses and selling good quality investments at an unfavourable time, you’ll be at the mercy of inflation, which in the UK recently reached a 30-year high. Over time, inflation has the potential to erode the purchasing power of your savings, which means your money might not last for as long as you need it to.

Although cash is important for short-term expenditure and unexpected costs, the current rates of interest on cash savings products tend to be very low and below the rate of inflation. Keeping a portion of your pension invested in the stock market will give it the chance grow in real terms, tax efficiently, over what is hopefully a long retirement. If you don’t need the growth, then instead of cashing in you could move to a lower-risk level to try to limit the level of volatility while still, hopefully, at least keeping pace with inflation.

If you’ve not yet reached retirement, a market dip could present an opportunity to top up your pension; the income tax relief and potential market recovery could give your fund a serious boost. But whether this is appropriate for you will depend on your exact circumstances, objectives, and time horizon, and you should always seek advice before investing.

Maintain a diversified portfolio

Beware that taking on too much investment risk could cause problems. If you’re approaching retirement, your investment time horizon is likely to be much shorter than that of younger investors, meaning you have less time to recover from market downturns. And if you’re already drawing an income, investment losses can deplete your pension savings more quickly, thereby increasing the risk of you running out of money.

One way to seek to safeguard against losses is to hold a range of diversified assets, with different risk and return characteristics. Different asset classes tend to perform differently to one another in a range of market conditions, which can help to minimise overall losses and smooth returns over time.

If you are in the process of de-risking your pension portfolio you could, for example, take gains from the best-performing investments to buy more defensive assets, that are well positioned to weather future market volatility. Doing this by yourself can be complicated. An adviser will help you balance your portfolio to ensure you have the right mix of investments for you, and that they’re appropriate for your stage of life.

Consider your income strategy

If you are already in retirement and markets have dipped, it might make sense to draw from cash holdings to avoid having to sell investments that have fallen in value. You might also want to consider allocating a larger proportion of your portfolio to income-producing assets to meet longer-term spending needs. Again, a financial adviser can help you decide on the right income strategy for your individual circumstances.

Next steps

Understanding the steps you need to take to protect your pension from market volatility and inflation isn’t always easy. The key is to remain calm, and remember that stock markets tend to recover, given time. Seeking some smart advice can help you feel confident you’re doing the right thing and that you’re on track to meet your goals, regardless of where you are in your financial journey.

We will continue to publish relevant content and news on a regular basis, so please check in again with us shortly.

Chloe

15/03/2022

Team No Comments

Blackfinch Group Monday Market Update

Please find below, an update on global markets, received from Blackfinch, this morning – 14/03/2022

  • UK fuel prices hit record highs as the surge in crude oil prices continued. Unleaded petrol hit £1.61 a litre on Thursday, up from £1.51 per litre at the start of March, while diesel reached £1.70 a litre.
  • UK gross domestic product (GDP) was estimated to have increased by 0.8% in January. This was a notable improvement from the 0.2% contraction in December, suggesting the UK economy had shrugged off the negative impacts of the fast-spreading Omicron COVID-19 variant.
  • Figures released by the Office for National Statistics showed every sector in the UK grew in January, with services up 0.8%, production up 0.7% and construction up by 1.1%.

  • Propelled by surging costs for gas, food and housing, US consumer inflation climbed to an annual rate of 7.9% at the end of February, the sharpest rise since 1982, with even higher price increases to come.
  • As various experts highlighted, the reported rise in US inflation came before Russia’s invasion of Ukraine sparked dramatic surges in oil, gas, wheat, metal and other commodity prices.
  • In the US, job vacancies remained high in January as firms continued to struggle to hire workers. According to the Job Openings and Labor Turnover Survey (JOLTS), there were 11.3m job openings at US firms in January, ahead of the 10.9m forecast.
  • The European Central Bank (ECB) announced it would speed up the end of its asset purchase programme – designed to help European economies weather the COVID-19 pandemic – sooner than expected. The announcement sent eurozone bond yields soaring. 
  • The ECB also raised its inflation projections and cut its economic growth outlook, believing war in Ukraine was likely to keep commodity prices high, holding back the ability of households to spend and businesses to invest.
  • Eurozone inflation forecasts for 2022 were revised upwards from 3.2% in December to an average of 5.1%. The forecast for 2023 was also raised from 1.8% to 2.1%. 
  • Western governments announced plans to impose punitive tariffs on Russian trade to further isolate Moscow from the global economy following the invasion of Ukraine.
  • Inflation in Brazil hit a seven-year high as the country’s cost-of-living crisis intensified. Consumer prices increased 10.54% in the year to February, ahead of expectations, with monthly inflation rising to just over 1%.

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 March 2022

Team No Comments

AJ Bell – Does invasion of Ukraine mean I should reduce risk in my pension?

Please see below an article published by AJ Bell yesterday (10/03/2022), detailing their views on how investors should view risks in markets arising because of the Russian invasion of Ukraine:

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

11/03/2022

Team No Comments

Brewin Dolphin: Markets in a Minute

Please see the below article from Brewin Dolphin, summarising the performance of financial markets over the last week, as the Russian invasion of Ukraine and soaring oil prices continue to disrupt the economy – received yesterday afternoon – 08/03/2022

Stocks slide as Ukraine conflict escalates

Stock markets experienced another week of heavy losses last week as the conflict in Ukraine escalated.

The pan-European STOXX 600 and the FTSE 100 both lost around seven percentage points, while Germany’s Dax and France’s CAC 40 plunged by more than 10%. Losses were particularly heavy on Friday as ceasefire talks failed and Russia seized control of a nuclear power plant.

US indices also ended lower. The S&P 500 declined 1.3%, dragged down by the technology, financials, consumer discretionary and communication services sectors. Energy stocks performed well as oil prices surged.

Over in Asia, Japan’s Nikkei 225 slipped 1.9%, with concerns about tightening monetary policy in the US also weighing on investor sentiment.

Oil prices soar to near all-time high

Oil prices soared at the start of trading on Monday (7 March) as the US and Europe mulled a ban on imports of Russian oil. In the first few minutes of trading, the price of Brent crude oil surged to $139 a barrel, the highest since July 2008.

On Sunday, US secretary of state Antony Blinken said the Biden administration and its allies were discussing a ban on Russian oil supplies. Later, US House of Representatives speaker Nancy Pelosi said the chamber was exploring legislation “that will further isolate Russia from the global economy.”

The surge in oil prices was accompanied by another day of losses for global stock markets. In the US, the S&P 500 closed the day down 3.0%, the Nasdaq lost 3.6% and the Dow slipped 2.4% amid fears the conflict could hinder US economic growth and add further inflationary pressure. The pan-European STOXX 600 declined 1.1% and the FTSE 100 slipped 0.4%, with news of a ceasefire offer from Moscow helping to limit losses.

European stocks started Tuesday’s trading session in the green, with the Dax, CAC 40 and STOXX 600 up 1.7%, 2.6% and 1.5%, respectively.

Eurozone inflation hits record 5.8%

In economic news, figures released last week showed inflation in the eurozone surged by a record 5.8% year on-year in February, up from 5.1% in January and above the 5.4% forecast by economists. Energy prices soared by 31.7%, while unprocessed food prices increased by 6.1%, according to Eurostat.

The European Central Bank (ECB) faces the difficult dilemma of whether to raise interest rates in an attempt to combat soaring inflation. Several ECB governing council members have said policy decisions should be delayed because of the uncertainty caused by the Ukraine war. Meanwhile, the heads of the Portuguese and Greek central banks warned the crisis risks plunging the eurozone into a period of stagflation — a mix of stagnating growth and inflationary supply pressures.

According to the Financial Times, Fabio Panetta, an ECB executive board member, said: “We should aim to accompany the recovery with a light touch, taking moderate and careful steps as the fallout from the current crisis becomes clearer.”

UK services activity hits eight-month high

Here in the UK, growth in the services sector accelerated sharply in February as the Omicron wave of Covid-19 subsided. The headline seasonally adjusted IHS Markit/ CIPS UK Services PMI Business Activity Index rose to 60.5 from 54.1 in January, the fastest rise in output since June last year. Respondents said market demand and client confidence improved alongside the reduction in pandemic-related disruption, thereby supporting growth of activity.

However, input costs increased substantially in February, with the rate of inflation the second-fastest in more than a quarter of a century of data collection. The rate of output price inflation hit a fresh record high for the second month running, with around one-third of respondents raising their selling prices during the month.

Andrew Harker, economics director at IHS Markit, said: “Although the latest set of PMI data were encouraging, the inflationary picture still has the potential to limit growth, while it remains to be seen what impact the Russian invasion of Ukraine will have on the service sector and wider economy. As such, there are still downside risks even as disruption from the pandemic finally appears to be fading.”

US jobs growth accelerates

In the US, meanwhile, figures from the Labor Department showed non-farm payrolls rose by 687,000 in February, far greater than the 400,000 increase expected by economists. This was led by hiring in leisure and hospitality, education, and health services. The unemployment rate fell from 4.0% to 3.8%, whereas the annual rate of growth in average hourly earnings slowed from 5.7% to 5.1%.

Federal Reserve chair Jerome Powell described the labour market as extremely tight, and said he would support a 0.25% increase in interest rates at the central bank’s March policy meeting and would be “prepared to move more aggressively” later on if inflation does not start to ease.

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

Alex Kitteringham

9th March 2022

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Weekly Market Commentary – Ukraine crisis continues to dominate investor sentiment

Please see below article received from Brooks Macdonald yesterday afternoon, which details the impact that Russia’s ongoing invasion of Ukraine is having on markets and economies.

The humanitarian impact of the Ukraine crisis hardens political resolve towards sanctions on Russian energy imports

With US Secretary of State Blinken confirming that the US and allies were discussing bans on Russian oil and gas, energy prices surged on Friday and over the weekend. This rapid increase has spread into equity market volatility with most major indices mirroring their Friday movements, falling further in today’s European session.

Price surges in the oil and natural gas markets hit equity market sentiment and muddy inflation forecasting

Russian oil and natural gas import sanctions were previously avoided by the US coordinated bloc due to disagreement from European allies. As the Ukraine war has continued and the severity of the humanitarian crisis has increased political pressure, a ban on Russian oil and gas has become increasingly possible. Adding to Blinken’s comments, Speaker Pelosi has said that the House of Representatives is exploring legislation on this topic to restrict payments into the Russian economy. One of the big questions is whether a release from the US’s Strategic Petroleum Reserves, or a softening of Iranian sanctions, could take some of the pressure off the dramatic moves within oil prices. With Iran being probed for its ties to Russia over the weekend, the latter may be delayed in the short term at least. In the interim, the oil price remains elevated and highly volatile.

US Consumer Price Index data this week is unlikely to cause the Fed to stray from a 25bp hike in March, however inflation remains the key data point in markets

The Ukraine crisis will dominate investor sentiment this week however we also have the release of the latest US Consumer Price Index (CPI) numbers, as well as the latest European Central Bank (ECB) meeting. US CPI is expected to increase to 7.9% year-on-year in the latest reading (from 7.5%)1 and the core reading (ex-energy and food) is expected to soften slightly from the previous reading. Market expectations were for CPI to begin to plateau in Q2 of this year before falling into the summer, but with the recent moves in energy prices we may well see an increasingly divergent story between US headline and US core CPI data. With Federal Reserve Chair Powell showing his support for a 25bp hike in March, it is likely that the bar to change path from that is reasonably high. In terms of central banks, we expect the ECB to reiterate caution and the need to retain price stability.

Inflation data will become increasingly difficult to read for markets and central banks, as the supply side impacts from COVID-19 will now mix with the sanctions and supply side issues from the Ukraine crisis, as well as the surge in energy prices. As ever, investors will listen closely to central bankers to understand how a short-term overshoot in the CPI numbers will be interpreted within the world’s major economies.

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

Chloe – 08/03/2022

Team No Comments

A Double Edged Sword

Please find below, an update on how the Russian invasion of Ukraine is impacting markets, received from Tatton, Friday Evening – 04/03/2022

During the course of this week, the impacts of the war on global financial assets changed in nature. Last week, we wrote that minor sanctions were a help for asset prices even if the sanctions did not match the level of outrage. Starting Sunday, the European Union (EU), US and UK imposed new sanctions almost every day. Perhaps inevitably, this has resulted in equity market weakness.

There are separate aspects of the week’s market moves. One is centred around liquidity and the risk of contagion across the financial system. In a separate article below, we write about how Russian equities and bonds have not only seen their values plummet, the inability to trade them at any price has then impacted broader emerging market mutual funds and exchange-traded funds (ETFs).

Often, as in the global financial crisis of 2008-2009, markets worry about the banking system. As the blue line in the chart below shows, currently European financial credit spreads do not show exceptional levels of stress. That’s potentially quite comforting. However, direct sanctions on Russian banks have created problems for financial institutions that share larger lending and trading flows with them. For example, Raiffeisen Bank of Austria saw its share price dive again this week after Europe’s weekend sanction announcements.

Over two weeks, Raiffeisen’s share price has halved, with the collapse in its value being more than all of the Russian-based assets and businesses it had under management. However, its fall in creditworthiness accounts for the rest – other banks are much less willing to transact with it, so its ongoing going costs rise dramatically.

In our opinion, one difficult aspect has been the interplay between sanctions on Russian banks and energy and commodity markets. For example, European utility companies are not barred from buying Russian oil and gas. However, they have difficulty in paying for it in the normal way. Rebuilding these payment channels will take time. If businesses are still able to buy Russian energy, then authorities must ensure financial channels are open to make those energy purchases. Moreover, companies will need reasonable reassurance that energy sourcing sanctions won’t be put in place later, and that they will be protected from other reputational risks.

The confluence of issues has led to another surge in global oil and European gas prices. In past weeks of rising spot prices, the prices of log-dated contracts didn’t rise as quickly. It has therefore been interesting how futures markets have seen longer-dated contracts moving up sharply, perhaps indicating a more extended surge in costs.

And therein lies the other aspect prompting equity market weakness combined with bond market strength. Government bond yields across the developed world have dropped sharply. This is almost certainly because investors have substantially downgraded real growth estimates amid greater inflation pressures for this year. The epicentre has been Europe, but the rise in energy costs has meant the US is also affected.

Bruce Kasman, JP Morgan’s chief economist gave us his team’s thoughts on Thursday evening. They have revised global growth for 2022 lower by 0.8%, down to 3.1%. Here is the table of their new estimates and the extent of the revisions:

Russia is expected to contract almost 10% (in rouble terms). Europe’s growth is now expected to be +2.5%, down from +4.6% previously. The main hit will be for this first quarter.

US growth stays almost unaltered (+2.7%, from +2.8% previously) while China remains at +5.6%. The stability of their stock markets in recent days suggests that investors are broadly in line with these estimates.

Bond markets are telling us a similar story. In particular, the yields on inflation-linked bonds have headed down sharply as increased demand for safe haven assets saw bond prices soar. US ten-year ‘real’ yields are back down to -1.0%, where they were last year. Fixed coupon yields have fallen back to 1.75%. German inflation-linked bonds are at -2.6%, substantially below last year’s low of -2.1%. Fixed coupon yields moved back into negative territory, at -0.16%.

These bond moves also may be telling us that central banks could look through the current input cost-push inflation and keep monetary policy accommodative for the time being, thereby allowing elevated levels of inflation persist for longer. In his three-hour testimony to Congress, US Federal Reserve (Fed) chair Jay Powell said interest rates will still almost certainly go up 0.25% on 16 March, less than the 0.5% almost universally expected two weeks ago. Even today’s startlingly strong US employment numbers (non-farm payroll data) (which suggested the US economy added 678,000 jobs in February) failed to push up fixed coupon yields.

JP Morgan’s economists suggested their growth forecasts are probably still too high. A lot depends on the passage of energy prices so, with European natural gas prices pushing up to new highs again on Friday afternoon, equity markets remain vulnerable.

So, is there any hope? We believe there is. As JP Morgan suggests in its forecasts, the damage is to Europe growth estimates. While there will be a big hit from energy costs, a lot of nominal spending will be unaffected. Impetus from the EU’s Next Generation Fund will continue through this year and next, come what may. And, the massive increase in defence spending by the German government will also come through quickly. A lot of this will be spent among European defence manufacturers (the UK should also benefit). Defence spending has a large ‘multiplier’ effect – the spending being recycled round the economy. Looking out beyond 2022, growth could be shifted up to a higher, not lower, level over the next few years.

Over the short term, as has been the case for the past weeks, much depends on energy costs and how long they remain elevated. While the de-coupling of bond yields to oil prices is heartening, it would be good to see the Brent crude spot price fall back from today’s $120 per barrel to a more manageable level well below $100.

Ultimately, when risks are obvious and emotions are running at a high level, markets will overshoot the downside at some point. Of course, it’s difficult to know when that is. Meanwhile, the strategy of remaining calm and waiting for the market to cool off has usually proved beneficial, and we think it probably still is.

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

7th March 2022