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Please see below, Brewin Dolphin’s ‘Markets in a Minute’ update which provides a weekly summary of the latest news from markets around the world. Received late yesterday afternoon – 05/09/2023

Stocks rise as US labour market cools

Most major stock markets rose last week after US jobs data raised hopes of a pause in interest rate hikes.

On Tuesday, the S&P 500 recorded its best one-day gain since June following an unexpected decline in US job openings. The index finished the week up 1.9%, while the Dow and Nasdaq added 0.8% and 2.4%, respectively.

Indices in Europe also rose as core inflation in the eurozone eased. The pan-European Stoxx 600 gained 0.6%, while Germany’s Dax edged up 0.3%. The FTSE 100 also ended the week in the green, despite another steep decline in UK house prices.

In China, the Shanghai Composite added 1.1% after the government announced measures that aim to bolster the world’s second-largest economy.

UK retail sales bounce back in August

It was a quiet start to the week for investors on Monday (4 September) with US markets closed for Labor Day and very little economic news. Tuesday saw the release of the British Retail Consortium’s (BRC) latest UK retail sales figures, which showed sales rose by 4.1% over the four weeks to 26 August. This was well above the 1.0% growth in August 2022 and the three-month average of 3.6%. Non-food products had their best month since February.

Helen Dickinson OBE, chief executive of the BRC, said the figures reflected the improvement in consumer confidence in August. However, she added that high interest rates and high winter energy bills will put pressure on many households to spend cautiously.

US unemployment rate rises to 3.8%

Last week saw mounting evidence of a slowdown in the US labour market, raising hopes that the Federal Reserve will keep interest rates on hold when it meets later this month. Data released on Friday showed the unemployment rate unexpectedly rose from 3.5% in July to 3.8% in August, the highest rate since February 2022.

The report from the Labor Department also showed employers added 187,000 jobs in August. This was above expectations, but gains for the previous two months were revised lower by a combined 110,000. Meanwhile, average hourly earnings rose by just 0.2% in August, slightly below expectations. The figures came a few days after data showed job openings unexpectedly fell by 338,000 in July to their lowest level since March 2001.

Although the US labour market is cooling, it remains strong. Economists are increasingly hopeful that the Federal Reserve will achieve a ‘soft landing’ for the US economy – where inflation is brought under control without sparking a recession.

US consumer spending accelerates

There was further evidence of a resilient US economy in the latest consumer spending data. Consumer spending, which accounts for more than two-thirds of US economic activity, increased by 0.8% in July, the most in six months, according to the Commerce Department. When adjusted for inflation, consumer spending rose by 0.6%, which was also the largest gain since January. Data for June was revised slightly higher to show a 0.6% increase in consumer spending instead of 0.5%.

UK house prices fall by most since 2009

Here in the UK, figures from Nationwide showed another steep decline in house prices in August. House prices fell by 5.3% year-on-year, the weakest rate since July 2009. In the first half of the year, the number of completed housing transactions was nearly 20% below pre-pandemic levels and around 40% lower than in the first half of 2021.

Robert Gardner, Nationwide’s chief economist, said the relative weakness of mortgage activity “reflects mounting affordability pressures as a result of the sharp rise in mortgage rates since last autumn”.

Eurozone core inflation eases

 Preliminary data released by the European statistics office on Thursday showed that while headline inflation in the eurozone held steady at 5.3% in August, core inflation eased. Core inflation, which strips out volatile food and energy prices and is a gauge of underlying price pressures, fell by 0.2 percentage points to 5.3%.

The figures come ahead of the European Central Bank’s (ECB) policy meeting on 14 September, when it will decide whether to press ahead with further interest rate hikes. As well as a slowdown in core inflation, last week saw signs of weakening economic activity. In Germany, the eurozone’s largest economy, monthly retail sales fell by a worse than-expected 0.8% in July. The number of unemployed people in the eurozone rose by 73,000 in July, although the unemployment rate remained at a record low of 6.4%.

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

6^th September 2023

Please see this week’s weekly market commentary from Brooks Macdonald providing their commentary on global markets:

• US equities surged last week, supported by a fresh adoption of the ‘soft landing’ narrative
• The US employment saw a surprise increase in the unemployment rate while wage growth slowed
• Chinese stimulus helped support the region’s equity market as policymakers seek to boost economic growth

US equities surged last week, supported by a fresh adoption of the ‘soft landing’ narrative

The US equity market climbed around 2.5% last week, its strongest weekly performance since June. European equities also rose but lagged behind the US rally as US mega-cap technology stocks supercharged the US market return. US bond yields fell last week on the back of weaker-than-expected economic data however this weekly fall masks a degree of volatility last Friday.

The US employment saw a surprise increase in the unemployment rate while wage growth slowed

While the headline number of new jobs slightly beat market expectations, the last two months of data were revised lower, more than offsetting the small beat. Recent nonfarm payroll releases have been consistently downgraded in future months which casts doubt on the true strength of the August numbers. One of the significant changes for this report was a pickup in the headline unemployment rate which moved to 3.8% versus expectations, and the previous reading, of just 3.5%. The driver of this was a large increase in the number of individuals looking for work in August. In terms of the all-important wage growth numbers, average hourly earnings fell more than expected, declining to 0.2% month-on-month compared to 0.4% the previous month.

In aggregate, the employment report showed a deceleration in labour market tightness which is welcome news for the Federal Reserve. That said, whether this softening gains momentum or not will play a large role in determining whether the US economy undergoes a soft or hard landing. Adding to the mixed data that the market has to contend with, the US Institute for Supply Management (ISM) manufacturing survey was stronger than market expectations even though the sector remains in contraction. Of more concern will be the pick-up in the prices paid sub-component which could mean that goods disinflation, a central driver of the recent falls in US consumer price index (CPI), may be moderating somewhat.

Chinese stimulus helped support the region’s equity market as policymakers seek to boost economic growth

This week will start slowly with the US on holiday on Monday. This week the focus will be on any hint of further Chinese stimulus with investors responding positively to the recent efforts to stimulate economic growth. We will also see the release of the US ISM services survey as well as hear from the Reserve Bank of Australia where the central bank is expected to pause its interest rate hikes.

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

Andrew Lloyd DipPFS

05/09/2023

Please see the below article from Tatton Investment Management providing a brief analysis of the key factors affecting global markets. Received this morning – 04/09/2023.

Overview: New school term has the US top of the class

Summer is officially over, but we are none the wiser regarding the direction of the economy. Or are we? Generally, the inflation backdrop continues to ease, although not fast enough for comfort according to Bank of England (BoE) chief economist Huw Pill. He wants interest rates to remain high and steady, and suggests policy should be kept steady at restrictive levels rather than sharp hikes followed by rate cuts. Pill argues the tight jobs market allows workers to push up wages which have previously been eroded by inflation, creating a dynamic that leads to inflation persistence. While Huw Pill may worry about the UK’s inflation persistence, the much more vibrant US economy would be far more likely to have a problem with sticky inflation as the labour market would remain tight. US bond yields may have fallen back recently on slight economic sogginess but we think it unlikely they will go too much further. Given the lag in economic dynamics in Europe and the UK, they have got more room to ease here.

So, are we any wiser at the end of months of seemingly economic procrastination, plateauing of interest rates, disappointing China news and fearing about imminent recession? Well, the general economic development has by and large withstood the monetary onslaught much better than expected while inflation has come down progressively. This tells us that despite widespread fears that after ten years of ultra-low interest rates, the return of ‘old normal’ levels of interest rates would spell imminent economic and market disaster are probably premature. As a result, markets have been much like the past summer months in the UK – not so hot but not disastrously cooler. Companies and households have been prepared for difficulties but it hasn’t been so difficult. Let’s hope the autumn is full of warmth, mists and mellow fruitfulness.

Life and debt: an era of high public borrowing 

At August’s conference in Jackson Hole, Wyoming, central bankers got existential. According to European Central Bank (ECB) President Christine Lagarde, worldwide trends toward tighter labour markets, regionalisation and the green transition have fundamentally changed the way monetary policy works. In her words: “There is no pre-existing playbook for the situation we are facing today – and so our task is to draw up a new one”. Something this playbook needs is a way to deal with significantly higher public debt piles. The hope was that government debts would come down once the world returned to ‘normal’ after the pandemic, but supply-side crises and acute inflation pressures have put a spanner in the works. The UK’s debt-to-GDP ratio is now above 100% for the first time since 1960 (when finances were still recovering from the Second World War), while the US is at a record high of 129% according to the US Congressional Budget Office.

Bringing these ratios down meaningfully in the next decade seems unlikely. Governments would need to run primary budget surpluses, requiring growth in tax revenues or lower spending – ideally both. Or an extraordinary growth spurt, which means debt/GDP naturally diminishes as GDP outgrows debt. Neither looks feasible. The World Bank now expects slower growth over the long term, and indeed, investor hopes of lower inflation are arguably predicated on such sluggish growth. Meanwhile, calls for public spending have gotten louder rather than quieter. Ageing populations (and electorates) in developed nations – which require larger healthcare and pension payments – and much-needed investment in the green transition make spending cuts look fanciful.

The UK is a prime example of these dynamics. We are all aware of the need for public spending, both as a long-term investment in Britain’s sluggish economy and as ongoing upkeep for critical services like health, social care and education. At the same time, growth prospects have been slashed, drastically lowering the expected tax base with which we can pay for such policies. Barring improbable tax reform, the only way to front the bill is extensive borrowing. But since this borrowing would already start from a high base, and much of it would be earmarked for things other than improving productivity, the government would effectively be resigning itself to indefinite debts.

Ultimately, populations will have to accept one or more of the following: persistently high inflation, stagnating living standards, or higher tax rates. The first is famously politically unstable, while we have seen over the last 15 years how the second can undermine liberal democracy. The third is the more realistic option, but it requires social cohesion and faith in the political system. That has been hard to come by in recent years across the US and Europe. This side of the Atlantic, where tax burdens are already relatively high, increased tax burdens will be a hard sell. In the US – where politics is so divided that a third of Americans think a civil war is coming – it may be impossible. Where monetary policy goes in this environment is hard to say. We can hardly blame central bankers for getting existential.

Emerging markets – if not China, India?

Emerging Market (EM) investors have had a stressful year. China has dominated the commentary once again, as it so often does, but this time with growth disappointment unwinding initial market optimism. But what about the other EM nations? China dominates both headlines and financial indices, but India in particular has had an impressive year. The narrowly-based Nifty 50 index has gained 10.3% over the last six months, despite the wider fall for EM equities. Exports of both goods and services have grown substantially (bucking the general global trend), while India’s government-led infrastructure push has helped demand and set the scene for better prospects ahead. The relative weakness of China, and Beijing’s increasingly aggressive attitude to its private sector, have also seen some reallocation of both trade and foreign investment. Near-term growth prospects are arguably better in India, and political restrictions have already led many Western investors to switch their preferred EM. Further improvements could mean India wins even more capital bound for its geopolitical rival.

That said, President Modi’s government has many of its own issues that could put off Western investors. This has not happened to a large degree yet, but India’s eagerness to keep trading with Russia is a definite sour note. There is also the question of China-India cooperation through BRICS summits. The collective of Brazil, Russia, India China and South Africa announced its expansion at its summit last week, inviting Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates — to join its ranks, and China and India agreed to remove troops from their disputed border. Strangely enough, after the US ramped up tensions with Beijing, it might be against India’s short-term interest to ease its own tensions with China.

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

Alex Clare

04/09/2023

Please see below, the ‘Tuesday Digest’ from Tatton Investment Management providing a brief analysis of the key factors affecting global markets. Received this morning – 29/08/2023

Growth divergence between Europe and the US widens

After a global bond sell-off over the last few weeks that drove up bond yields they ended last week lower due to unexpectedly weak business sentiment reported through the ‘flash’ Purchasing Manager Indices (PMI) survey results. While the worst figures come in from the services sector in Europe and the UK, the US services PMI at 51.0 was also weaker than expected but still managed to remain above the neutral 50 level. Indeed, recent US data may have felt mixed but the combination indicators suggest growth is solid to strong.

Some of the divergence can be traced back to energy prices still remaining more of a burden for Europe’s manufacturers, especially for natural gas and electricity. Sentiment improved through the first half of this year as gas prices declined but the recent uptick in both oil and gas prices is a blow. Meanwhile, the auto sector (much more important in Europe than the US) is also feeling a sharp pinch, with Chinese electric vehicle manufacturers gaining substantial market share at home and getting an easier ride in Europe than in the US.

Economic divergence between regions is not unusual, and Europe is prone to having bouts such as the euro crisis. We don’t think something as serious as that is about to happen, but there is little doubting that Europe has less resilience than the US currently, due to the conspicuous lack of growth momentum. This probably means pressure on the US dollar to strengthen at least for a time and, historically, that has coincided with increased global risks. Over the weekend, central bankers were gathered in Wyoming’s Jackson Hole, focusing their attention on longer-term “Structural Shifts in the Global Economy”. Our hope the meeting would bring more clarity on how central banks view their current policy options was somewhat disappointed, although markets took the relative calm of central bankers as a sign that we have or are close to ‘peak rates’. 

EU and UK both shocked by disappointing sentiment surveys 

We wrote last week that, after being the best performing currency of the year so far, sterling looked vulnerable. As if like clockwork, the pound fell against the US dollar into midweek. As mentioned, the fall was incited by unequivocally bad business sentiment surveys for August painting a very gloomy picture of the British economy. A PMI above 50 usually suggests expansion ahead, while anything below that points to contraction. So it was somewhat alarming that the composite PMI fell to 47.9, its lowest level in 31 months. Manufacturing recorded a dour 42.5, below both the projected level and last month’s figure. Meanwhile, the all-important services sector – which represents around 75% of the UK economy – fell to a downbeat 48.7, against expansionary expectations of 51. This weakness has thankfully gone hand-in-hand with reduced inflation expectations, causing markets to reassess the likelihood of further Bank of England (BoE) rate rises. But as we wrote last week, this puts downward pressure on sterling, since an aggressive BoE seemed to be the key factor supporting the currency.

Meanwhile, European PMIs were their worst in nearly three years, amid a sharp deterioration in consumer confidence. The preliminary Eurozone composite PMI for August fell to 47, below expectations of 48.5 and the lowest figure since November 2020. Manufacturing actually surprised to the upside, though the reported 43.7 was still very firmly in contractionary territory. Services were expected to post a practically neutral 50.5, but instead delivered the first contraction in eight months, with a reading of 48.3. This puts the European Central Bank (ECB) in an unenviable position. Just like the Bank of England (BoE), a deteriorating growth outlook has decreased expectations of an interest rate hike at the September meeting (which markets now price as roughly 50/50). But again like the BoE, labour shortages – particularly in Europe’s peripheral nations – mean the economy is vulnerable to persistent inflationary pressures from the wage-price spiral effect. If input prices were to increase again, as we have seen some signs of already, inflation could easily increase once more. 

Is Japan’s central bank ‘ice age’ thawing at last?

The yield on 10-year Japanese Government Bonds (JGBs) rose to their highest level in nine years last week, at 0.68%. UK and US investors would be forgiven for being underwhelmed by this, as 10-year US Treasury yields, peaked above 4.3% at the start of last week, while UK 10-year gilts reached higher than 4.7% last week. 

Historically, low growth, inflation and interest rates have kept JGB yield volatility almost non-existent for years. Stability was officially enshrined in 2016, when the BoJ began its policy of ‘Yield Curve Control’ (YCC), restraining the yield on the benchmark 10-year JGB to a ‘target’ rate around 0% and from rising above a specific yield level – previously 0.5%. But at the end of July, BoJ Governor Kazuo Ueda announced the 0.5% margin around the official zero target would stop being treated as “rigid limits”, and now merely be “references” for bank operations. Many analysts suggest this is effectively the end of Japan’s YCC, but according to Ueda the policy remains in place, just with a little more leeway. The shift may have looked rather technical, but marked quite a change in the pace of monetary injection, effectively slowing the central bank’s liquidity push.

A few economists have warned inflation in Japan could become ‘sticky’ unless the BoJ tightens quickly. Headline inflation has been holding steady at or around the 3.3% mark for most of the year, in a marked change to decades of deflation. But price rises have been consistently above the BoJ’s stated 2% target and for the last two months actually higher than US inflation. That said, Japan still lacks the main inflation pressure that has worried western central bankers for so long: rising wages. Japanese core inflation – excluding volatile elements like food and energy – was lower in July than the month before, with many analysts suggesting the country’s inflation impetus had already peaked. Indeed, in stark contrast to the US and UK, the BoJ has been actively trying to encourage wage rises to spur its economy.

It is therefore far too early for the BoJ to think about tightening policy in earnest, despite fears about abandoning YCC. It knows full well that a weaker currency and lower financing rates are improving Japan’s attractiveness both as an exporter and an investment destination. Policymakers also know inflation could quickly give way to deflation if global financial conditions change. A tweak to YCC is far from the end of Japan’s accommodative policy. This is good news for western investors, as JGBs so often act as an anchor in global bond markets. Higher Japanese yields are an important sign for the global economy, and thankfully one that is unlikely to destabilise markets.

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

Alex Kitteringham

29^th August 2023

Please see below, Tatton’s ‘Monday Digest’ which provides a weekly update on markets and the key news from global economies. Received this morning – 21/08/2023

Bonds are back

Last week was another difficult one for both equity and bond markets. As a result, the positive returns of July have mostly been erased so far in August. Overall, world markets are largely unchanged from a year ago. Many commentators have pointed to the rise in global bond yields as a big driver of the reversal in sentiment, or at least the underlying cause of a renewed re-rating of equities on the back of higher bond yields. The US 10-year bond yield has risen to 4.3%, higher than at any point going back to July 2008, while the UK 10 year gilt yield has risen to 4.7%, the highest since June 2008.

At first glance, investors may think the rising yields are building in higher long-term inflation expectations, but this current move does not appear to have been spurred by a worsening inflation backdrop. Inflation expectations – as implied by the pricing of inflation-linked bonds – for the next two to three years seem to have fallen back a little. Therefore, what has changed is the ‘real’ yields, which have turned more positive after spending many months (even years) near or below zero. Real yields matter, and the rise in US real yields has come at a point when US economic data suggests ever more strongly that reasonable and persistent growth – rather than looming recession – may force rate cuts.

So, capital markets appear to be undergoing a rather technical shift, based on the re-rating on the back of higher-for-longer bond yield expectations, making recently extended equity valuations untenable, even if the earnings outlook has marginally improved. Given that August is a month with low trading volumes, it could continue to be negative, especially if the momentum trading funds start to add to the flows. However, a valuation adjustment would be no bad thing in the medium term, as it would alleviate some of the recent market nervousness.

Sterling strength nothing to write home about

You might be surprised to learn that, on a trade-weighted basis, the best performing major currency of the year so far is none other than the Great British pound. Sterling has gained 5.13% against the UK’s trading partners since the start of 2023. Moves in currency values are normally seen as reflecting confidence – or lack thereof – in regional economies. But the commentary around Britain’s economy this year has been nothing but glum. Although the UK has not officially dropped into recession, growth has been effectively zero for over a year. And yet, sterling has gained against its peers. So what’s behind sterling’s strength?

After a series of rate rises from the Bank of England (BoE) and the recent fall back in implied inflation expectations, the real yield on 10-year gilts is now just under 1.5%. Should we read this also as an expectation of higher growth? It is possible, but unlikely, given the wider pessimism about the UK economy. More likely, the move up in real yields is a consequence of the BoE’s aggressive stance – necessitated by persistent and UK-specific supply-side problems – together with an extended bond market sell-off. Nominal UK gilt yields are now above where they were during October’s ‘mini budget’ crash, and have risen much more steeply than German yields, for example.

Moreover, while a rising pound has helped ease input costs, Brexit-driven changes mean the goods and services British consumers buy from abroad (which are still overwhelmingly from Europe) are structurally more expensive now than a few years ago. The flipside of being able to buy more from trading partners with your pound is that those partners can buy less from you – making British firms less competitive. This might not be much of a problem if the economy is vibrant enough to handle it, but it does mean that both UK assets and its currency have become more expensive relative to economic fundamentals. Put another way, sterling looks vulnerable in the medium term. Over the coming months, we might see a slide – particularly against competitive currencies like the yen. The pound is strong now but, unfortunately, this may not be a good thing for the British economy.

Is Russia struggling to shift its oil supply?

Oil traders are feeling bullish. In July, international oil benchmark Brent crude was one of the best performing indices, gaining 11.9% in sterling terms. Last week’s jitters came after further economic disappointment in China, but some industry analysts see them as just a hiccup. Thanks to meaningful production cuts from OPEC+ (which includes Russia), predictions of $90 per barrel (pb) or even $100pb are being floated. That would be quite the turnaround. Brent has not settled above the $90 mark since mid-2022. Since then, supply side fears have faded, and global demand has become the key concern.

Saudi Arabia, the world’s largest crude exporter and OPEC’s de facto leader, recently extended its voluntary production cut of 1 million barrels per day to September and noted that cuts may deepen in the future. Russia also promised to export 300,000 fewer barrels per day in September, showing the cartel’s commitment to maintaining high prices. According to one recent survey, the total production output of OPEC+ hit its lowest point since August 2021.

For us, the most interesting player in this supply tightening is Russia. Despite some near-apocalyptic warnings when Moscow launched its invasion of Ukraine, the aggregate effect of Russia’s war and the ensuing western sanctions on global oil supplies has been relatively small. This was – as widely suspected – down to a rerouting of Russian supply to Asia, most notably the large energy-intensive economies of India and China. That is why, in the early part of last year, Russia’s trade balance (exports minus imports) stayed surprisingly healthy despite its apparent supply cuts.

In the last few months though, Russia’s trade balance has deteriorated significantly. This is clear from the slide in foreign currency reserves, which threatens to bubble over into a full-blown rouble crisis as widely reported last week. Last Wednesday, Moscow hiked interest rates by an extraordinary 3.5% to stop the bleeding, and its finance ministry is reportedly proposing tough capital controls. One of which would force Russian exporters to sell up to 80% of their foreign currency revenue within 90 days of receiving it or risk being banned from government subsidies.

It is particularly jarring that the rouble has slid so much while oil prices (including Russia’s discounted offering) have climbed, as the former is unequivocally a petrocurrency. It puts further pressure on Russia’s economy and finances, though as always, the question is whether this pressure reaches the inner circle. Optimists might suggest this leads to ceasefire talks, although the more likely outcome is increased friction between Russia and Saudi Arabia over production cuts, with the former needing revenues to fund its damaging war. In either case, oil prices could struggle to go higher over the medium term.

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

Alex Kitteringham

21^st August 2023