Blogs

Please see below ‘Monday Digest’ article received from Tatton this morning, which provides a global market update as we approach Christmas.

After a gangbusters November for global capital markets, December is also currently on a positive track with trading volumes higher than November’s averages generally, suggesting quite a bit of capital is being put to work by investors.

Global bond yields have fallen yet again (meaning bond prices have risen), driven by fears of slowing global growth. Economic data has been mildly soft, while energy and commodities have been weak. European bonds outperformed following dovish noises from members of the European Central Bank (ECB).

Economic data showed soft (but not awful) purchasing manager survey indices, offset somewhat by US mixed employment data. In the US, the job agency ADP’s November employment report weakened but Friday’s US employment report surprised economists by showing 199,000 jobs were added in November, a reasonable level of job creation paired with a very surprising fall in the unemployment rate, down to 3.7% from October’s 3.9%. Still, rate expectations have fallen because the policy setters at the US Federal Reserve (Fed) appear be more focused on inflation declines than worrying about what level of unemployment is too low for comfort. Nevertheless, bond investors had expected the US unemployment rate to worsen to 4% at least and November’s data does not support the case for any rate cuts without some other factor impinging.

But it seems bonds and equities are taking more of a cue from commodities and energy.

Equities ended the week back up to recent highs, with the US ‘Magnificent Seven’ bouncing back from fears about their exposure to softer consumer demand. Stocks had seen softness despite falling bond yields, as investors started to worry that earnings prospects may be challenged, with oil sending quite a weak growth signal.

Last week, we said how OPEC’s inability to act as bloc had led to ineffective supply cuts. Since then we have seen more oil price falls, and in addition, global industrial metals and agricultural prices moved down. They are less volatile than energy prices (mainly because energy stores are always relatively low compared to ongoing use) so the lesser decline is still significant. Commodity prices are still higher than they were 2021 but the decline from mid-2022 is clear. In the past 15 years, the biggest demand swing has emanated from China and there are all sorts of signals that the world’s second-largest economy is not providing the growth leadership that the largest economy in the world has given us.

With COP28 coming to a close at the weekend, the discussions have been neither a help nor a hindrance to asset and commodity prices, nor perhaps should they be, although COP28 president Sultan Al Jaber took the opportunity to swing the debate towards responsible fossil fuel policies. Ultimately, progress on dealing with emissions will be in the enactment of detailed policy, so perhaps this is good news. The conference also turned its attention to the loss of the natural world, which many think is a good refocusing.

Moody’s weighs in to add to the Chinese gloom
November was the continuation of a miserable year in Chinese markets, where economic and policy disappointments have been the defining feature. At the time of writing, the CSI is down 12.5% year-to-date in renminbi terms, while the Hang Seng has dropped a painful 18.3%. Weaker-than-expected growth and trade – compared to admittedly high expectations – has been the root of China’s issues for some time. The government has repeatedly tried to counteract this with various support schemes or political pronouncements – to varying degrees of success.

Last week brought another headache for Beijing, after ratings agency Moody’s cut China’s credit outlook to negative. Moody’s pessimism extends to both government and private banking debt – both of which are feeling the pressure from an extended property market downturn. Moody’s has only changed its outlook on Chinese credit, and a slight downgrade is unlikely to affect China’s medium-term borrowing capacity in a big way. That said, the news is clearly not a good thing for the Communist Party government and financial stress has been worsened by the exodus of foreign investors from Chinese markets this year.

The Chinese Politburo met last week to avow a significant fiscal push next year. Among the policies being swung into action, the People’s Bank of China (PBOC) has introduced something that looks very much like quantitative easing (QE), or the buying of bonds. This policy can work in different ways but one of its possible implications is that financial market liquidity improves, which can then feed through into rises in risk asset prices. The lack of foreign equity buyers has generated much comment but the similar lack of domestic equity buyers has also been notable.

Chinese consumers are feeling pessimistic to, and for good reason: 8.5 million of them (around 1% of the total working-age population) have defaulted on debt payments since the start of the pandemic and been blacklisted by authorities. As well as severely constraining China’s domestic demand – a side of the economy Beijing avowedly wants to foster – struggling consumers cannot pay taxes, hence reducing the government’s funds and worsening its fiscal metrics. All of this puts the Party in a precarious position.

This weakness is surely one of the main reasons China has been so conciliatory toward the west in recent months. It is hard to see President Xi’s meeting with President Biden last month – his first visit to the US since early 2017 – as anything other than a big peace offering. Trade tensions between the world’s two largest economies may well continue, but they are likely to be pushed much more by Biden than Xi. For the global economy at least, conciliation is a positive. But for China, its underlying weakness seems worryingly hard to address.

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

Happy Christmas.

Chloe

11/12/2023

Please see below article received from Brewin Dolphin yesterday evening, which looks to the future as we near the end of 2023.

After a year of interest rate hikes and renewed geopolitical uncertainty, Guy Foster, our Chief Strategist, discusses what the next 12 months could have in store for investors.

This time last year, economists were talking about the near inevitability of a recession in 2023. In the event, the economy proved more resilient than many expected. Now, forecasts are improving for 2024 as well. If anything, the last year has reminded many forecasters that predicting recessions is a task that has eluded the best-resourced central banks for decades.

So, what can we say about the possibility of a recession hitting in 2024?

Some conditions for a recession are already fulfilled. Economists believe that most developed economies are operating beyond their capacity. This jargon refers to the fact that demand currently exceeds supply. There are, for example, shortages of some of the things economies need to grow – the most obvious being skilled labour.

Under such circumstances, central banks have been trying to bring demand and supply back into balance. One such way has sought to reduce the demand by raising interest rates. The question is whether they are able to do so with enough finesse that they do not discourage spending so heavily that they inadvertently plunge the economy into a recession.

Typically, this has proven to be a task at which policymakers fail more often than they succeed.

For them to succeed, we would need to see a more gradual realignment of demand and supply in such a way that doesn’t cause a sharp increase in unemployment. Investors call this ideal scenario a ‘soft landing’ for the economy, making it distinct from the ‘hard landing’ of a recession.

Will central banks achieve a soft landing?

With all the economic forecasting resources at their disposal, and plenty of practice, we might hope that central banks could achieve the fabled soft landing through carefully calibrated interest rate increases. The fact that inflation does seem to have peaked gives hope. But these interest rate increases do not take place in a vacuum. Often, it is the combination of the stress of higher interest rates and an external shock that tips the economy over the edge.

Examples of these shocks include the bankruptcy of Lehman Brothers and the collapse of a US housing bubble that prompted a global recession during 2008 and 2009; the collapse of the speculative bubble in technology stocks at the start of the millennium; and, in the early 1990s, the first Gulf War, which saw a sharp increase in oil prices.

So in terms of predicting whether the UK, the US or the world will enter a recession next year, we can say it is possible. In the end, however, it will likely depend upon whether the economy is subjected to some shocks which, by their nature, are unpredictable. It’s often appropriate to paraphrase former US defence secretary Donald Rumsfeld: “There are things we know we know, there are things we know we don’t know, and there are things we don’t know that we don’t know.” This is useful structure for considering the risk in economic forecasting.

What ‘we know we know’ is that the labour market is tight and interest rates have increased substantially, which raises the risk of a recession. However, the fact that inflation is falling and that recent declines in the oil price give households more flexibility over their discretionary spending makes the soft landing scenario more likely.

The things that ‘we know we don’t know’ would include whether tensions in the Middle East could disrupt oil supply and cause a price spike of the kind that has shocked the economy into recessions in the past.

But above all, there are the things ‘we don’t know that we don’t know’. As with every year, we have to acknowledge that things could happen that will not have been predicted in this or any other outlook piece. And it is that uncertainty which has historically made the forecasting of recessions a very challenging task.

Beyond the likelihood of a potential recession, we should also consider the potential severity of one. The recession taking place as Covid struck was by far the deepest in modern times (fortunately, it was also the briefest). Prior to that, the recession accompanying the financial crisis was the deepest since the early 1900s. The bubble in real estate was symptomatic of very high levels of consumer indebtedness, which ultimately caused such a severe recession. Households then spent the following decade reducing their reliance on debt and, in aggregate, are in relatively robust financial health.

What impact could upcoming elections have?

The main concern for the coming year is not consumer indebtedness, but government indebtedness – both in terms of the risk that it could cause a shock and because of the constraints that it places governments under.

For many years, there has been anxiety over the seemingly inexorable march upwards in government debt to gross domestic product (GDP) ratios. GDP is a measure of the money that gets earned within an economy and, as such, represents an upper limit on the amount that can be used to derive government revenues (what can be taxed).

The outlook for public finances will be a further ‘known unknown’ because there are a lot of elections taking place during 2024. The two obvious ones will be a probable election in the UK (which could theoretically be held any time until January 2025) and November’s election in the US.

The UK endured a brush with fiscal mortality following the mini-budget of September 2022. Even prior to that, there was widespread acceptance by both major political parties that fiscal policy should be constrained by a robust fiscal framework with independent verification of government financial projections (from the Office for Budget Responsibility). Whilst both parties will attempt to thread the needle between appearing not to be neglectful of public services and giving hope that the historically high tax burden can be reduced, it seems unlikely that either will offer particularly bold policies to do so. Labour (which currently enjoys a commanding lead in the polls) has adopted a more centrist approach after an unsuccessful lurch to the left between 2015 and 2020. The nuance upon which the election will be fought will not be revealed until a date is set, but is likely to focus on distributional and social rather than major economic differences.

In the US, it seems likely that November’s election will be contested between president Joe Biden and former president Donald Trump. Neither seems likely to strike an austere tone on the public finances, and it is possible that the bond market could react should it appear likely that Trump will win. This is because as the Republican candidate, he has a greater chance of controlling the two houses of Congress, which set budgets, than his likely opponent. Control of the Senate, where only a third of seats are contested each election, seems very difficult for the Democrats to retain. If Congress is divided, then financial policies tend to be restrained by partisanship.

What is the overall outlook for investments?

Whilst many will look to the coming election season with dread, the bright news from an investment perspective is that US election years have historically produced quite good returns. Brighter still are the relatively high yields on bonds, which now promise better returns in future years than they had done for a decade or more. These yields reflect current high interest rates, which bring the likelihood of interest rate cuts over the coming year, either to prevent a recession or at least reduce its seriousness. These are tailwinds for the equity markets.

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

Chloe

08/12/2023

Please see below article received from EPIC Investment Partners this morning, which provides an update on both US and UK markets.

Yesterday, Janet Yellen expressed confidence that the US economy will not require significant hikes from the current level to curb inflation, believing the economy is on a path towards achieving the Fed’s desired soft landing with the unemployment rate averting a sharp increase. 

“Signs are very good that we’ll achieve a soft landing, with unemployment stabilising more or less where it is, or in the general vicinity,” Yellen stated, speaking to reporters following a speech at a lithium processing plant in North Carolina. 

Yellen added she doesn’t believe the Federal Reserve will need to push as harshly in lowering inflation as it has done in past instances when price rises ran out of control. “Those recessions you’ve talked about were times when the Fed, similar to now, was tightening policy to bring down inflation, but found it necessary to tighten so much that they flipped the economy into a recession,” Yellen said. Adding: “Perhaps it was necessary in order to reduce inflation and expectations of inflation that became ingrained, but we don’t need that now.” 

Helping cement that view were the PCE deflator figures, released yesterday. The Fed’s preferred metric for assessing progress on its inflation mandate showed core softening to 0.2%mom, in-line with expectations and below last month’s 0.3% print. Moreover, the measure eased from 3.7%yoy, in October, to 3.5%yoy last month, again in-line with the market consensus.  

Here in the UK, we also see the housing market continuing to defy forecasts by some of a sharp correction. House prices climbed for a third straight month according to Nationwide, as a lack of properties and lower borrowing costs underpinned the market. House prices rose by 0.2% in November, against an expectation for a drop of 0.4%.  

Following the release, Robert Gardner, the Nationwide’s Chief Economist, said: “There has been a significant change in market expectations for the future path of Bank Rate in recent months which, if sustained, could provide much needed support for housing market activity”. 

House prices are roughly 5.5% lower from where they peaked in August 2022. Many had predicted a 10% fall this year with some outliers going for 20%, even 25% lower. The average cost of a house in the UK is now just over £258,500.  

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

Chloe

01/12/2023