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EPIC Investment Partners: The Daily Update | The Bank of England’s Dovish Tilt Amid Economic Crosswinds

Please see below, an update from EPIC Investment Partners which covers the Bank of England’s latest Monetary Policy Committee meeting and highlights the potential implications for markets. Received this morning – 10/05/2024

As expected, the Bank of England (BoE) maintained its policy rate at 5.25% in a 7-2 vote, with the two dissenters calling for an immediate reduction. This marked an increase in the number of dovish voters compared to the previous meeting. Notably, there were no calls for a rate hike this time around. The central bank revised its forecasts, projecting inflation to fall to the 2% target, reaching 1.9% in two years and 1.6% in three years. For context, CPI fell to 3.2%yoy in March. The central bank also upgraded its economic forecast, saying the recession has ended, predicting growth had expanded 0.4% in Q1’24.

The BoE’s Governor Bailey hinted at the possibility of a rate cut at the next meeting but cautioned that a reduction is not “fait accompli”. He also indicated that cuts may come more aggressively than markets perceive. Interestingly, markets appeared to shrug off the more dovish tone only marginally increasing pricing for a June cut, to ~60%, from just under 50% ahead of the MPC announcement. The odds have, however, been trimmed this morning to under 60% following the stronger-than-expected Q1’24 GDP print which showed the economy expanded 0.6% (exp. 0.4%, prev. -0.3%); indicating that markets do not currently perceive an urgent need for monetary easing.

There are still two sets of inflation – and labour market – data for the BoE and markets to unpick ahead of the June 20 meeting. Bailey expects inflation will ease, before increasing to 2.5% in the second half of the year, “owing to the unwinding of energy-related base effects”. In a similar vein with his ECB counterpart, Lagarde, Bailey stated: “There is no law that the Fed has to go first”.

Rate cuts would undoubtedly be welcomed as a “feel good factor” ahead of the elections, as described by Chancellor Jeremy Hunt. However, in a blow, we read a report from the National Institute for Economic and Social Research (NIESR), which indicates UK Chancellor Jeremy Hunt will likely need to raise taxes, as weak growth and sticky inflation undermine public finances. This clearly conflicts with his plans to cut taxes ahead of what is being reported as a potential Conservative election loss. NIESR recommends replacing Hunt’s fiscal rules with a longer investment compliant framework, potentially requiring income tax hikes up to GBP20bn despite £8.9 billion existing headroom. Moreover, the institute’s growth estimates of 0.4% this year and 0.8% in 2025 is even worse than last week’s dire OECD forecasts which said the UK will suffer the slowest growth amongst the G7 nations.

Finally, for those considering indulging in a “dirty kebab” this weekend, spare a thought for British southerners who must pay three times as much as the rest of the country. In fact, to rub salt into the wound, earlier this week we heard that the German Left Party has proposed the use of state funds to cap the price of kebabs at €4.90 (£4.20), and €2.50 (£2.10) for the youth. According to reports, the tasty meaty flatbread costs on average €7.90 (£6.80) and increases with inflation, so called “donerflation”. So, with roughly 1.3bn kebabs consumed in Germany annually, the proposed subsidies would amount to ~€4bn. While Kathi Gebel, a member of the Left Party, calls for a cap on kebabs as a “cry for help!”, the nation’s Chancellor Scholz, who is regularly heckled on the subject, highlighted the “good work” the ECB has done in handling inflation.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

10th May 2024

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Evelyn Partners Update – May Bank of England MPC decision

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

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Markets in a Minute

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

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The Daily Update | Pemex Unveils Sustainability Plan

Please see the below daily update from EPIC Investment Partners received this morning:

In a long-awaited move, the board of state-owned Petroleos Mexicanos (Pemex) recently approved the oil giant’s Sustainability Plan. The ESG outlay, which aligns with the company’s Business Plan to “consolidate the route to sustainability performance”, establishes goals and ambitions spanning the medium (2030) and long term (2050), with a focus on greenhouse gas emission reduction and energy transition.

Among the key objectives, the company aims to reduce methane emissions by 30% from 2020 levels by 2030 and phase out routine gas flaring by the same year. Additionally, Pemex plans to allocate 14% to 18% of its capital expenditures in 2024, and 10% to 14% annually from 2025 to 2030 towards ESG projects.

In terms of the social aspect, the plan outlines commitments to improve industrial safety performance, generate positive impacts on communities, and strengthen relationships with local populations. The anti-corruption approach is highlighted as a permanent legacy within the company’s compliance culture. Moreover, to strengthen governance conditions and enable effective execution of the sustainability strategy, the plan identifies key enablers and promotes transparency and disclosure of information, aligning with international standards.

Pemex’s Chief Financial Officer, Carlos Cortez, emphasised the company’s commitment to reducing its environmental footprint through efficient practices and sustainable operations, calling the plan “a roadmap to a more prosperous future.”

The government-owned petroleum company has and will continue to be a topic of hot debate ahead of Mexico’s elections in less than a month’s time. Pemex has been grappling with mounting debt and lower crude oil production, and has thus received substantial support from its government, via tax cuts and capital injections. Leading presidential candidate Claudia Sheinbaum vowed to maintain support for Pemex whilst also pushing her renewable energy agenda. “It’s about strengthening Pemex in its main function of oil production, but at the same time, reinvigorating the company in the face of the current moment within the context of climate change,” Sheinbaum said. “Pemex is — and will continue to be — the company of all Mexicans,” she added.

Pemex is rated investment grade, BBB+, by S&P Global. The company’s bonds have broadly enjoyed positive performance so far this month and continue to offer attractive risk-adjusted returns. The 6.625% bond, maturing in 2035, for example, trades 465bps cheaper than similarly rated bonds with a duration of ~7 years, resulting in an expected return to “fair value” of 32%, plus a yield around 10.5%.  We have long held Pemex within our core Next Generation Strategy.

While some investors may need to see concrete steps to achieve the stated goals before fully embracing the ESG theme, we expect the sustainability plan to open the window of opportunity for those investors with ESG restrictions, particularly in Europe.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Andrew Lloyd DipPFS

08/05/2024

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Tatton Investment Management – Tatton launches three low cost Passive Funds to complement market leading MPS service

Please see the below article from Tatton Investment Management detailing information on their latest launch of three low-cost Passive Funds

I am delighted to announce the launch of the new risk rated Tatton Passive Funds – it’s a pleasure to respond to adviser demand for new solutions, and we are delighted to have three new passive tracker funds to sit alongside our market leading MPS service and, of course, our popular Blended Fund range.

With a competitive target OCF of 0.27%-0.29%, the new Tatton Passive funds will benefit from the same Tatton strategic active asset allocation to create multi-asset passive funds managed proactively by our proven investment team.

We are launching three risk profiles – aligned to Defaqto risk ratings 4,5 and 6:

Tatton Passive Cautious Fund – Risk Profile 4

Tatton Passive Balanced Fund – Risk Profile 5

Tatton Passive Growth Fund – Risk Profile 6

We will soon be able to confirm risk alignment to Dynamic Planner and additional risk profilers to support your individual business models.

The Tatton Passive Funds make a multi-asset fund family with the popular hybrid Tatton Blended Funds across your choice of platforms.

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

Alex Clare

07/05/2024

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Brooks Macdonald Daily Investment Bulletin

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

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EPIC Investment Partners: The Daily Update | No Surprises There

Please see below, an update from EPIC Investment Partners on US economic data released this week and the possible implications for US monetary policy. Received this morning – 02/05/2024

We had a mixed bag of US data yesterday. The ADP employment change surprised to the upside with private payrolls adding +192k in April, coupled with a substantial upward revision to the previous print.  Interestingly, the annual wage gain eased to 5%yoy; the smallest gain since August 2021. Next, the JOLTS job openings missed expectations, released at the lowest level since February 2021. We wonder whether these data points signal the start of a loosening labour market. The ISM manufacturing print followed, falling back into contraction, and the ISM prices paid unexpectedly shot up to 60.9 (exp. 55.4), the highest level since June 2022. The new orders component slipped back below 50, while the employment figure rose marginally, remaining in contraction. 

We also heard that the US Treasury kept its issuance of longer-term debt securities steady, according to its latest quarterly announcement released yesterday. This was widely anticipated by market participants. However, the Treasury also unveiled details about its first debt buyback programme in over two decades, set to commence May 29th. The upcoming programme will involve weekly buybacks of up to USD 2bn in nominal coupon securities and USD 500m in inflation-protected securities. The goal is to bolster market liquidity and enhance cash management practices, following an extensive review process spanning more than a year. 

However, the event markets were waiting for was Fed Chair Powell’s post-FOMC announcement remarks. Following three consecutive hotter-than-expected inflation reports, the FOMC unanimously voted to hold rates at 5.25%-5.50%, as expected. Powell noted that “so far this year, the data have not given us that greater confidence” on inflation moving sustainably towards the 2% goal. He went on to add that “readings on inflation have come in above expectations” and that “gaining such greater confidence will take longer than previously expected.” He also noted that rate hikes are unlikely as price pressure will likely ease this year. Although he gave no indication on the timing of a rate cut, he appeared to leave a cut this year on the table. Ahead of the meeting, futures markets were pricing between 1-2 cuts this year, with the first reduction likely to come in December. This morning the odds have edged up marginally for a December cut. 

Regarding the balance sheet, the Fed said it will slow the pace of run-off, starting June 1st, lowering the monthly redemption cap on Treasuries to USD 25bn, from USD 60bn, while the cap for mortgage-backed securities (MBS) will remain at USD 35bn. Any excess MBS principal payments will be reinvested into Treasuries. All-in-all, the Fed has reduced its holdings by roughly USD 1.5bn to USD 7.5tn. 

Markets had quite a lot to chew on overnight; US Treasury yields ticked lower, while stock market action was mixed. We will receive further colour on the health of the labour market on Friday. Currently, expectations are that +240k jobs were created in April; unemployment will remain at 3.8%; and average hourly earnings will have eased to 4.0%yoy in April. The ISM services prints will also garner market focus on Friday.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

2nd May 2024

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Brewin Dolphin – Markets in a Minute

Please see the below article from Brewin Dolphin detailing their insights into global markets. Received yesterday.

Earnings season continues…

The U.S. first quarter earnings season reached its zenith last week. Almost half of the companies had reported, and analysts will now start to question what share of them have beaten profit forecasts. Regular readers will know this is an almost irrelevant number, which tends to be pretty consistent at around 80%. Indeed, for the current quarter it stands at just under 81% for now. Similarly, sales surprises tend to be fairly consistent at around 50% (this quarter, it’s 56% for now).

The tone of reports has been mixed, with nuances seeming to reflect the characteristics of individual companies rather than clear macroeconomic trends. Overall consumption continues to support earnings in the U.S.; the question is how long that can continue for.

Did GDP growth disappoint?

A slight shock came with the first quarter gross domestic product (GDP) numbers from the U.S., which were significantly below the average forecaster’s estimate. However, further reading shows that U.S. demand remains pretty robust, with final demand growing by over 3% (annualised) during the quarter.

The drag came from two sources. One source is unsold stock held by companies, known as inventories. Growing inventories imply backlogs of unsold goods piling up in warehouses, which suggests companies need to slow production to let sales catch up. In this instance where inventories are declining, the opposite is true, which is encouraging.

The other drag on GDP was net trade. When net trade is a drag on GDP, this is because imports grow relative to exports.

However, GDP are quite lagged data, so the more timely measure comes from purchasing managers indices (PMIs). The contrast here was striking. In the U.S., manufacturing activity appears to be slowing in April. It seems too early for the current upturn to be petering out, especially if inventories contracted last quarter. At the same time, even services activity, which had been the brightest spot globally, seemed to slow in the U.S.

Again, this could be mere noise because outside the U.S. the consumer recovery continues to gather pace.

Is the UK government on borrowed time?

UK public finances for March were released last week, and they made disappointing reading. Borrowing was considerably higher (£6.6bn) than the Office for Budget Responsibility predicted the previous month. This is both an economic and political setback because in an election year, it was widely assumed the government was planning to cram in one further “fiscal event” before calling an election. The schedule always looked tight for that, as the most anticipated date for an election seems to be mid-September, although there are some reasons to be sceptical about that.

One compelling reason is that an established preference exists to not have elections coinciding amongst members of the so-called Five Eyes intelligence collaboration alliance (driven by the U.S. and UK and incorporating Canada, Australia and New Zealand). The perception is that a change of power in these countries can complicate their responses to signals intelligence.

The UK and U.S. electoral systems tend to mean complete changes in the executive government, rather than the evolving coalitions seen in other countries, which heightens the risk.

The U.S. election will take place on 5 November, although recent elections suggest the scope for a disputed result may be higher than has historically been the case. This is partly mitigated by the fact that the incoming president is not scheduled to take power for more than 70 days while a transition is planned.

Aside from the timing being tight, these latest data suggest UK finances are also getting tight. There will be little point in holding a fiscal event if there is no scope for further tax cuts. If forecasts are excessively optimistic, the risk is that fiscal policy might need to be tightened, a politically unpalatable prospect both parties are hoping to postpone until after the election.

What can be done?

The implication in the UK is that either taxes will rise, or spending will be cut after the election. However, certain areas of expenditure are protected (e.g., the NHS, schools, aid and childcare) meaning much steeper cuts of around 2-3% in real terms for areas like further education, courts and prisons. Even these forecasts likely understate the money needed to flow into the NHS or for this week’s pledge to increase defence spending to 2.5% of GDP by 2030.

Polling still indicates that any long-dated commitments would likely have to be delivered by a new government, but making the commitment now forces the opposition to either match the pledge (and tie its own hands for the future) or risk losing votes.

The challenge the UK faces is that it has relatively high debt already, which was assumed at a time of low interest rates. Over time, that debt will be refinanced at higher interest rates and as it does so, it will absorb a growing share of national income – currently estimated at 3.2%.

The Bank of England (BoE) is the owner of £700m worth of UK government bonds. As the BoE is owned by the public sector, when it buys government bonds, it is arguably cancelling the debt. However, although it is widely understood that the BoE buys these assets with printed money, which sounds costless, they are actually purchased in return for bank reserves, which suffer the BoE rate of interest. Unusually, that rate is currently above the government bond yield, so the debt has become more expensive since being acquired, because interest rates have risen.

By the end of this week, most of the excitement of earnings season will be starting to wind down. But it is at this stage we start to see the upgraded estimates from analysts feeding into consensus numbers. It’s also a big week for economic news, with hopes for another quarter of a million new jobs to have been created during April.

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

Alex Clare

01/05/2024

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Brooks Macdonald: Daily Investment Bulletin

Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning (30/04/2024):

What has happened

Equities had a solid-enough start to the week on Monday, with a so-far-respectable Q1 earnings results season edging out concerns that central banks might have to keep interest rates higher for longer in the battle against the risk of still-sticky inflation pressures. In stock news, Tesla, one of the so-called ‘Magnificent 7’ group of US megacap technology companies saw its share price close up +15.3% after news reported by Bloomberg that it had cleared key regulatory hurdles to unlock more autonomous driving technology for its cars in China. Elsewhere, overnight, Samsung Electronics has topped earnings estimates for calendar Q1 after its semiconductor division returned to profitability.

Japanese yen rebounds

The Japanese yen saw some big swings on Monday. After touching its weakest level versus the US dollar in 34 years, the yen staged a decent rebound, with speculation that authorities in Japan had intervened to support the currency. Intraday, after briefly weakening through an exchange rate of 160 to the US dollar, the yen rallied. The day’s trading range of around 160.25 – 154.5 was the widest one-day trading range since late 2022. Japan’s top currency official, Masato Kanda, yesterday declined to comment specifically as to whether or not policy makers had intervened but did add that “we cannot overlook the negative impact that excessive and abnormal foreign exchange fluctuations driven by speculation are having on the nation’s economy … so we will continue to take appropriate measures as necessary.” For context, the Japanese yen is the worst performing G10 currency (group of ten major currencies globally) year-to date, down around -10% against the US dollar.

Oil prices fall as markets weigh up renewed Middle East peace hopes

Brent crude oil prices were down -1.2% to $88.40 per barrel yesterday, as investors weighed up the chances for renewed Middle East peace hopes. The US has been trying to broker a peace deal between Israel and Hamas, with the US Secretary of State, Antony Blinken, visiting the region again on Monday – his seventh visit to the region since the Israel-Hamas war started last October. Blinken boosted peace hopes, saying that Israel had been “extraordinarily generous” in its proposals during talks mediated by Qatar and Egypt, adding that Hamas “have to decide quickly.”

What does Brooks Macdonald think

In commodity markets, the copper price was up +1.7% yesterday, and back up above US$10,000 a ton, at around 2-year highs. The latest copper price rise has come on the back of the recent news in the past week that BHP, the world’s biggest mining group is seeking to acquire Anglo American in an all-share offer. More generally, the rise in the copper price this year (up around 18% year-to-date in US$ terms) is in part reflecting growing concerns around a future where supply constraints are increasingly coupled with structural demand growth. As regards supply, copper production from existing mines globally is forecast to fall sharply in the coming years according to industry research group CRU – they estimate that miners globally in aggregate would need to spend more than US$150 billion between 2025 and 2032 to fulfil the industry’s copper supply needs.

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

Carl Mitchell – DipPFS

Independent Financial Adviser

30/04/2024

Team No Comments

Tatton Investment Management: Monday Digest

Please see below, Tatton Investment Management’s ‘Monday Digest’ which summarises all the key factors currently affecting global markets and economies:

Inflation, a common side effect of growth

Volatility is back, but it’s not all bad. UK stocks fared well, thanks to BHP’s takeover bid for Anglo American, and China is recovering from January blues. On the other end is Japan, whose equities are now 7% down from their March peak in Sterling terms – partly down to currency weakness. Geopolitics were thankfully calmer, but bond yields edged higher.

US growth for Q1 came in below expectations, but this hides the strength of US demand – with domestic final demand still above 3% annualised. Inventories came down and, for the first time in two years, the US imported more than it exported. While it is unusual that net exports have taken this long to move into a negative contribution, the fact that this has happened shows the strength of US demand.

This is a problem for the Fed. Core personal consumption is running well above where it should be to meet the 2% inflation target. The US is so strong it’s making problems for the world’s other central bankers – with March’s core global inflation picking up to 3.7% annualised. The ECB will probably cut rates in June, but its recent messaging suggests it may leave a big gap before the next cut.

That is unusual in rate cut cycles, which normally move down swiftly. Markets are pricing just 1 percentage point’s worth of cuts in Europe for the next year, and less in the US. At least inflation pressures aren’t enough to make central bankers talk about raising rates. And at the moment, interest rate disappointment is being offset by strong corporate results and pricing power – as shown in the Anglo American deal and the impressive profits at Microsoft and Google.

Next week’s Fed meeting will be key to watch, but we should brace for more volatility before then. It seems markets have finally realised that returning inflation could be bad news after all, having gotten overexcited during the Q1 equity rally. The correction makes sense, but the medium-term growth outlook remains strong, as shown by earnings reports. Keep calm and carry on.

Buying Back: growth strategy or accounting trick?

UK companies have a deserved reputation as dividend payers, but many are increasingly opting to buy back shares instead – most notably Tesco’s recently announced £1 billion buyback plan. People debate whether dividends or share buybacks are better value for the company or its investors: US companies historically favour big share buybacks, while European firms prefer to give shareholders the money directly.

In theory, there should be no difference for long-term investors. If the capital that would have been paid out instead manifests as added stock demand, the share price should go up in direct proportion, all else being equal. If you are a total return investor, the value of your holdings (cash plus stock) should be the same. But the reality is more complicated in terms of tax implications, for example, with share buybacks historically having more tax benefits.

The bigger debate is about how buybacks affect value. Self-bought shares are cancelled after buybacks, which reduces the number of shares outstanding and therefore increases earnings per share. This shouldn’t affect valuation in terms of price-to-earnings, since the price should go up in equal measure. But growing EPS looks good, particularly in the current era where ‘growth’ stocks dominate the market.

Moreover, the more companies spend on buying back shares, the less they have for earnings. So if firms are always opting for buybacks instead of dividends, their share price will go up but projected earnings would go down, meaning the price-to-earnings ration increases. This growth focus is probably why European firms are increasingly buying back shares instead of paying dividends. They are emulating the American model, which ironically seems to be delivering less value for US corporates now than it used to. European corporates might stand to benefit though, as buybacks are starting from a low base. If it is an accounting trick, it could be a very handy one to use.

China long on copper

Copper is in the news after BHP lodged a takeover bid for Anglo American. The world’s biggest mining company wants Anglo’s copper exposure, and is willing to pay above market valuation for it. This comes amid rallying prices: S&P’s copper index is up 6% in April, despite negative returns for wider commodities.

Citi Research reported that copper funds have a record $36 billion in ‘long’ investment positions – an all-time high. Copper prices rallied above $10,000 per tonne on Friday, but Citi think they could go even high thanks to structural and cyclical factors. Copper funds with ‘short’ positions are also at a record $21bn, but these bets could drop out as prices rise. Underneath this prediction is both long-term copper demand from the global green energy transition, and short-term demand from returning global growth.

The fact so many are buying doesn’t mean the buying is justified, though. Other eco-related assets haven’t done as well recently, and the global reflation story has been challenged in recent weeks. Interestingly, a lot of the physical copper demand is coming from China – despite continued weakness in the world’s second-largest economy. Chinese companies’ copper buying has been well above seasonal trends this year.

We suspect this is a precaution against potential currency devaluation. The People’s Bank of China (PBoC) is letting the renminbi-dollar exchange rate push the boundary of its target range, something it historically does before devaluing. Chinese citizens are buying gold to protect against this (a big reason for gold’s huge rally) and it looks like firms are buying copper.

This will likely continue as long as the PBoC maintains its holding pattern with the currency. If devaluation happens, copper demand could drop suddenly. Until then, Chinese manufacturers and financial speculators will probably keep buying, even if the metal looks expensive in dollar terms.

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Andrew Lloyd DipPFS

29/04/2024