Investment Blogs

Please see below article received from EPIC Investment Partners this morning, which provides a global market update.

This morning, we heard that UK inflation fell to 2.3% in April, the lowest level in nearly three years, as easing energy and food costs provided relief to households. However, the smaller-than-expected decline dampened hopes of an imminent interest rate cut by the Bank of England. Analysts had forecast a sharper drop to 2.1%, leading markets to trim predictions of a 25bp rate reduction as early as next month. 

The drop in the headline CPI from 3.2% in March was driven by falling energy bills (a sharp fall in the energy price cap), coupled with the cost of goods declining by 0.8%. Nonetheless, services inflation, a key measure watched by the BoE, came in hot, rising 5.9%, indicating the inflationary bug has spread through the economy. With wage growth also robust, economists warn the BoE may exercise caution at its upcoming meeting, as elevated services inflation poses an upward risk to inflationary pressures in the second half of the year.  

Ahead of the figures, the IMF upgraded its UK growth forecast to 0.7% for this year, from 0.5%, estimating a 1.5% expansion in 2025. The organisation expects inflation to near 2% in the coming months, predicting that the BoE will cut rates by as much as 75bps this year and 100bps in 2025, taking rates to 3.5% by the end of next year. The IMF also explicitly warned of further national insurance contribution cuts “given their significant cost.” The Fund also warned that the UK government is not on track to meet its main fiscal rule, i.e., reducing national debt in five years’ time, predicting net debt will continue to rise to 97% of GDP, instead of falling to 93% of GDP as forecast by the UK.  

Across the pond, supply chain disruptions continue to plague businesses across the United States, according to a recent survey conducted by the New York Fed. The survey, a follow-up to a similar poll in October 2021, revealed that about a third of service companies and nearly half of manufacturers are still struggling to obtain necessary supplies. This has hampered production, with many firms reducing output and raising prices in response – a troubling development as the Fed battles stubbornly high inflation. 

The survey results align with the New York Fed’s Global Supply Chain Pressure Index, which has tracked supply availability since 2021. However, there has been a slight divergence in the past few months, potentially indicating that inflationary pressures tied to stronger demand are building again. This is evident in the rising container shipping rates, with the spot rate for a 40-foot container from Asia to the US West Coast now more than double the level a year ago and nearly triple the pre-pandemic average. 

Lastly, for those of you in need of a giggle, the winner of the Beano’s Britain’s Funniest Class competition went to the Year 6 class at Northside Primary School in North Finchley, London:  

What’s the hottest area in the classroom? The corner – because it’s 90 degrees. 

In response, Mike Stirling, director of mischief at The Beano, said: “Year Six, Northside Primary School found the funniest angle overall and are deservedly now immortalised in Beanotown”. 

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

Chloe

22/05/2024

Please see below article received from Brewin Dolphin yesterday evening, which discusses new developments in the Middle East and fresh US inflation data.

Overall, last week saw stocks pause for breath. They’ve recovered well after some modest declines in April and bonds have made modest gains too.

Markets have had to digest the news of the death of the president of Iran, Ebrahim Raisi, in a helicopter crash, which follows the ongoing tension with Israel, but markets are doing so with few signs of stress. Whilst tragic, the circumstances around the crash do not seem suspicious. Visibility was poor in a mountainous area. The president is not the commander-inchief; that honour goes to the supreme leader, Ali Khamenei.

The president’s role will now be filled by Vice President Mohammad Mokhber, with elections held within 50 days. As with President Raisi’s election, the candidate list will be heavily filtered. All eventual candidates will have ideological views that maintain the current stance of isolation from the West and favour China.

Meanwhile, from a macroeconomic perspective, last week’s U.S. inflation data was the main focus. As inflation continues to normalise the case for lower interest rates becomes stronger, that in turn supports equities and bonds. The complication with this narrative is that inflation hasn’t necessarily been normalising, it has in fact remained abnormally high.

In a previous weekly round-up, we discussed the assertion that the current level of interest rates is restrictive. While it is likely this is the case, they aren’t clearly or substantially restrictive as some members of the Federal Reserve seem to believe. If that were true, then it would mean inflation would be coming down slowly rather than overshooting, as it has tended to in the past.

A small step in the right direction for inflation

Has last week’s data reinforced or undermined that narrative?

There have certainly been suggestions that the inflation picture is improving. One such suggestion is the fact that the monthly increase in prices has slowed. This is the important core measure of inflation (stripping out volatile prices of items the central bank can’t do anything about), and this was the slowest pace of price increase in four months, and the first time in seven months that the core monthly price move has not been more than forecast. Sometimes, though, movements can be skewed by dramatic movements in individual components.

So, what did the detail of this report tell us?

Following on from some anxiety over growing tensions between Israel and Iran, the oil price had been strong. To see headline inflation slowing when there is a positive contribution from energy is quite unusual. The oil price has since eased off a bit, so unless it recovers it’ll likely be a drag on inflation next month.

The category weighing on prices is durable goods. Durable goods prices have declined every month for almost the last year, and for most of the last two years. This represents the hangover from a massive overspend on durable goods which took place during the lockdown when U.S. consumers had ample cash and time but had relatively few alternative consumption options. Second-hand cars have weighed heavily on this subcategory.

Services are still hot

Beyond goods though the picture is less encouraging.

Services prices are more directly affected by the labour market and fall more squarely in the category of things the central bank can influence. If services prices are rising, then raising interest rates should limit the amount consumers are able to spend.

Services consumption should decline, and services prices should slow or fall.

Alas, services prices are not slowing as much as had been hoped. The special category of core services excluding shelter, which policymakers and investors use to gauge this, rose 0.4% in April. That’s the slowest rate so far in 2024, but it’s more than double the target rate, so some improvement is needed to make policymakers believe inflation is on a sustainable path towards target.

We do assume this will happen though. One of the reasons consumers have been able to keep on spending on services is because of their accumulated savings, but according to estimates by the San Francisco Federal Reserve, these are now fully depleted.

The market cheered this release, which may seem odd given the ambiguous readings on services. But it came at precisely the same moment as a set of downbeat retail sales reports, so for investors hoping to see lower interest rates in the future, there was at least some evidence (although still mainly focused on goods rather than services).

And then there are other signs that interest rates may not be restrictive.

For one, we’ve seen a lot of corporate bond issuance in the early part of 2024. Issuers believing interest rates are going to fall might wait until their borrowing would be cheaper, but more importantly the ease with which the market absorbed this issuance suggests that financial conditions are quite loose.

Move over Lion King, ‘Roaring Kitty’ is back

We then have the bizarre return of the meme stock craze.

Meme stocks were a late 2020 and early 2021 phenomenon which saw a couple of relatively small companies experience incredible levels of price volatility driven by the actions of retail investors, aided by the widespread availability of leveraged investments.

YouTuber Keith Gill, known as Roaring Kitty, identified a situation in which hedge funds (one in particular) were speculating on declines in the shares of a particular company whose fundamentals were probably not as bad as they believed.

By investing on a leveraged basis and commenting on what he was doing, and thereby attracting fellow investors, he drove the price upwards.

This was not good news for anyone who had speculated on them declining. They were in a situation where they’d borrowed the shares to sell and were now needing to buy them in order to return them to the lender.

Eventually, for a variety of reasons, the speculation in both directions ebbed away and the prices of both stocks, Gamestop and AMC, declined.

But last week has seen the craziness resume. GameStop was at one time 200% higher, whereas AMC rose 300%, but both have since fallen sharply.

It might be surprising that meme stock mania has returned given the number of investors who were tempted into the speculation last time, only to suffer significant losses. But what is more surprising is what sparked the latest rise and fall.

It was prompted by Keith Gill posting an image on his social media of a video game player, leaning forwards. This single post added billions of pounds of implied value to the shares of this company, despite not really containing anything approximating an endorsement.

The original meme stock wave was partly ascribed to people having lots of time and money during lockdowns, but the economy has reopened and consumers are supposed to be tightening their belts. Perhaps this wave of apparent stock market speculation is consistent with an environment of restrictive interest rates?

China struggles on

Finally, it’s worth mentioning Friday’s economic data out of China.

Chinese shares have been terrible performers for the past six years, with only the occasional short-term rallies. Their most recent low was in mid-January and since then they have rallied 35%. But why is this?

It’s not because of the strong Chinese economy. In fact, it’s likely the opposite.

Friday’s data continues to show China struggling. Retail sales are slumping and a modest recovery in industrial production was driven by overseas demand. Consumers are suffering because the value of their principal wealth, their houses, has fallen by an average of 7% over the last year. The main concern is that because so many properties are empty, prices are likely to continue to significantly decline.

To date, property support measures have come via demand support mechanisms – directing more credit to developers to finance the completion of existing projects (good for economic activity but intensifying oversupply) and stimulating demand by cutting mortgage rates and relaxing purchase controls.

However, banks still don’t want to finance the new developments which would normally attract a lot of funds from pre-sales. Households understandably don’t want to purchase unfinished homes from developers, even at lower prices.

China’s Politburo has suggested it’ll address oversupply by taking properties out of the market. Media reports suggest that officials are considering “having local governments across the country buy millions of unsold homes,” and policymakers are considering creating a national real estate investment vehicle to acquire and revitalise unfinished properties across the country.

These proposals are promising, but a lot will depend on how forcefully they are implemented and how purchases will be financed. The size of the property overhang is enormous, and any purchased units would need to be maintained or see their value diminish.

Investors are betting that based upon these challenges, monetary policy will be loosened, and local savers will see the equity market as a better home for their wealth than the struggling property market.

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

Chloe

22/05/2024

Please see below article received from Evelyn Partners this afternoon, which conveys their Investment Strategy team’s thoughts on today’s Bank of England MPC decision to continue to hold interest rates at 5.25%.

What happened?

The Bank of England (BoE) held the base rate at 5.25% at their meeting today. This was consistent with market expectations and marks the sixth consecutive meeting where rates have been held at this level.

The committee vote remained split two ways albeit with another move in the more dovish direction with 7 members voting to hold the base rate at 5.25% and Ramsden joining Dhingra in calling for a 25 basis point cut.

In addition to this there was also a further dovish tilt with 2-year and 3-year CPI forecasts being revised down to 1.9% and 1.6%, from 2.3% and 2.2%.  The guidance remained more balanced in keeping the “policy could remain restrictive even if Bank Rate were to be reduced” but adding that it will watch “forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding.”

What does it mean?

As widely anticipated, the BoE held the base interest rate at 5.25%.  Dovish changes included the vote split moving from 8:1 to 7:2 and CPI projections showing a quicker deceleration beyond the 2% target. 

Since the March meeting, UK economic data has come in mixed with weak Q423 GDP offset by a stronger start to the year.  Domestic wage data and inflation, while still heading in the right direction, then came in slightly above expectations. 

Market rate expectations over the period however moved significantly higher, arguably more in relation to stronger US data than the combination of domestic news.

The BoE’s downgrades to CPI forecasts could be seen as indicating that the markets had potentially priced in too much.  However, that the guidance remained more neutral arguably detracted from this nuance and market reaction was muted.  The odds of a June rate cut nudged up to ~55% from ~50% before the announcement with the full cut still being priced in for August.  In total there are 2 cuts priced in for 2024.

Bottom Line

The BoE held interest rates at 5.25%.  We continue to expect the first rate cut to materialise over the summer as inflation heads to target but acknowledge that a stronger US and global recovery could have implications.

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

Chloe

09/05/2024

Please see below article received from Brewin Dolphin yesterday evening, which discusses US interest rates, US jobs data, and financial conditions impacting monetary policy.

Last week, investors’ interest was drawn to two beacons, Wednesday’s decision on interest rates by the Federal Reserve (the “Fed”), and the health of the labour market.

The new norm for interest rates?

Firstly, interest rates, and it came as no surprise that they remained unchanged for the sixth meeting in a row, by virtue of which the upper threshold of the U.S. Federal Funds rate has remained at 5.5% for over nine months. A major topic of this year has been the disconnect between the economy and expectations of interest rate movements. For some reason, investors were very confident that rates would fall this year, and I have discussed in previous weekly round-ups that this expectation seems at odds with the available evidence. So, why did investors believe it? There are a few connected reasons:

• Monetary policy operates with long and variable lags, so just because the economy is doing well now, doesn’t mean it won’t be doing badly soon.

• The Fed has raised interest rates to a level it believes should slow the economy down.

• Historically, attempts to do this have tended to go too far.

• While interest rates often fall and stay low for long periods of time, they rarely rise and stay high for very long.

Speculation that interest rates could stay higher for longer has been rife over the last year or so. While it was discussed a lot, economists’ forecasts and market positioning made it clear that the general belief was in interest rates that followed a historical precedent of a rapid decline from a short-lived peak.

However, lately that view has been challenged. Speculation has moved from interest rate cuts starting by March this year to there being no rate cuts at all in 2024; more recently, some have even suggested the next move in interest rates might be upward.

Where are expectations now?

The consensus is still for interest rates to fall by a quarter to a half percentage point by Christmas this year.

Last week offered an opportunity to hear from Fed chairman Jay Powell whether his conviction that rates would fall was wavering, and it is to some extent. Powell believes that gaining the confidence to cut rates will take longer than previously expected.

Why? Well, partly because interest rate cuts have had relatively little effect on the household sector. The very low interest rates during the pandemic allowed most U.S. homeowners to lock in very low mortgage rates, such that there has been minimal impact on aggregate consumer debt service costs.

Beyond interest rates

Sometimes, monetary policy is measured through a broader concept of financial conditions rather than just through interest rates. That includes such things as the level of the stock market (which makes people feel wealthier), or the cost of new borrowing for individuals and companies.

Financial conditions have been loose due to the strong performance of the stock market, and the Fed’s conviction that it will be cutting policy rates has pre-emptively caused a decline in market interest rates.

In the background, inflation has remained higher than had been expected. Some of that has to do with core inflation and reflects a labour market that is still strong and house prices that are more resilient than predicted. Headline inflation has also been driven higher by gasoline prices.

Right now, some of these forces are turning. Gasoline prices have been easing back as the situation in the Middle East shows signs of stability, and connected to that, inflation arising from supply chains has slowed.

The jobs market

The main focus, though, must be on the labour market.

Typically, the labour market responds to a weak economy, so by the time the central bank sees a rise in the unemployment rate, that increase has often developed enough momentum to trigger a recession.

And with that, focus has been on labour market data from last week. Earlier, the very lagged data on job openings suggested the medium-term trend of declining job openings remains in place. We have also seen a decline in the number of people who are voluntarily leaving their jobs – job quitters often achieve higher compensation, so a high quit-rate suggests inflation may be high.

Last week’s monthly labour market report for the U.S. had some very encouraging news for investors. Although new jobs were created, the pace has slowed. The unemployment rate edged up, but only slightly, while wage growth slowed slightly. Everything about the report exuded a sense of controlled descent.

What’s next?

Looking forward, the question is firstly whether this month’s data is noise, and strength will recur next month. That seems unlikely given many of these trends were already in place.

So, if this trend intensifies, could this mean an economy that decelerates or contracts in the run-up to the election? Or can the economy maintain its state of grace, slowing towards target without triggering a recession?

That might seem far-fetched but in support of the latter, more optimistic scenario, the nine months that interest rates have spent unchanged (after a series of rate hikes) is a relatively long time. It’s similar to the year that rates spent unchanged before the financial crisis.

Other than that, it’s almost unprecedented. In the mid-90s, there was a period in which interest rates declined before being reasonably stable for around four years. And these periods of stability seemed to congregate around interest rates of between 5% and 5.5%.

The timing is of interest because the beginning of the 90s ushered in a new era of inflation targeting by central banks, which led to remarkable stability in interest rates.

There are some very valid observations that this period was unusually easy because it coincided with globalisation and the onset of the internet – which conspired to reduce inflationary pressure. Perhaps to some extent, central bankers, who have had a torrid time over the last few years, can claim they are getting to grips with the art of monetary policy and not just lurching from crisis to crisis, as it sometimes feels.

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

Chloe

09/05/2024

Please see below article received from Brooks Macdonald this afternoon, which provides an update on the US economy and markets.

What has happened

Ahead of a key monthly US jobs report due out later today, markets appear to have regained a bit more optimism. To be honest though, it’s hard to pin down the better mood to any one specific data point. In a somewhat familiar theme, once again, leading the broader US equity market yesterday were the so-called ‘Magnificent 7’ group of US megacap technology stocks. The latest return to positive market sentiment is likely to carry over into today’s session as well, given the better results from US tech company Apple that were reported after the US market close yesterday. Otherwise, overnight in Asia it’s been very quiet, with markets closed for holidays in both Japan as well as mainland China.

Apple announces biggest ever US share-buy-back

Apple shares jumped in late trading on Thursday after the company posted stronger-than-expected sales. The company also buoyed growth hopes looking forwards, having had to contend with a hitherto sluggish smartphone market plus headwinds out of China in recent quarters. Perhaps most significantly, Apple announced the biggest US buyback ever, at US$110bn. According to Bloomberg, Apple is currently responsible for 6 out of the 10 biggest US share-buy-backs ever made. Apple shares rose as much as +7.9% at one point in after-hours trading on Thursday.

US non-farm payrolls beckon

Later today, we get the latest monthly US non-farm payroll jobs employment data due out at 1.30pm UK time. This data is always closely watched, so today won’t be much different in that regard. In terms of what to expect, from a Bloomberg median survey estimate, payrolls are thought to have grown by a net 240,000 in April. Meanwhile, average hourly earnings are expected to have risen +4% over the past year, which if that’s the number would be the slowest annual growth in almost 3 years, since June 2021.

What does Brooks Macdonald think

It will be interesting to see if today’s US non-farm payrolls data points to any softening trends emerging in the jobs market that have been arguably hinted at from other data releases recently. The US JOLTS (Job Openings and Labor Turnover Survey) report for March that came out earlier this week for example showed that both job openings and the quits rate were down to their lowest in over three years. Ultimately, should we see some cooling off in the job market dynamics for economies more broadly, that isn’t necessarily a bad thing, and may even help support the narrative of a softening inflation pressure outlook.

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

Chloe

03/05/2024

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

What has happened

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

Japan’s flash PMIs land

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

Middle East tensions ease a little

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

What does Brooks Macdonald think

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

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

Chloe

23/04/2024

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

What has happened

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

A mixed data bag from China

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

Allies try to deescalate Middle East tensions

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

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

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

Chloe

16/04/2024