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EPIC Investment Partners – The Daily Update | Fed Won’t Crack Under ‘Eggflation’ Pressure as Core Trends Improve

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

Federal Reserve Chair Jerome Powell emphasised the central bank’s cautious stance on interest rate cuts during his recent congressional testimonies, a position bolstered by yesterday’s inflation data. The January Consumer Price Index (CPI) showed headline inflation rising 0.5%mom to 3.0%yoy, whilst core inflation, excluding volatile food and energy prices, increased 0.4%mom to 3.3% annually. 

The data, which represented the largest monthly increase since August 2023, prompted a swift market reaction. US Treasury yields surged, whilst equity futures declined and the dollar strengthened. Notably, shelter costs accounted for nearly 30% of January’s increase, with both owners’ equivalent rent and primary residence rent rising 0.3%. The grocery sector also experienced significant price pressures, with egg prices alone contributing two-thirds of the food price increases. 

However, beneath the headline figures, several encouraging trends emerged. Food prices, which had been a major concern for two years, have largely stabilised and are now running below the overall inflation rate, with the notable exception of egg prices. Core measures, including the Fed’s “supercore” (services excluding shelter), showed decreases, supporting the broader disinflation narrative. Even the January uptick in sticky price inflation appears to be largely seasonal, reflecting the typical clustering of price increases at the start of the year. 

During his testimonies Powell maintained that the economy remains robust, characterising the labour market as “largely in balance.” However, he stressed that inflation, though easing, continues to run “somewhat elevated” above the Fed’s 2% target. “The economy is strong, and we have the luxury of being able to wait and let our restrictive policy work to get inflation coming down again,” Powell stated. 

The Fed Chair also addressed various political challenges, carefully sidestepping questions about Trump’s proposed trade policies, including potential new tariffs on China, Mexico, and Canada. Powell emphasised that whilst it was not the Fed’s role to comment on tariffs directly, the central bank would respond through appropriate monetary policy adjustments if necessary. Throughout the proceedings, Powell repeatedly emphasised the Fed’s independence and commitment to data-driven decision-making, arguing that maintaining political neutrality leads to better policy outcomes and lower inflation. 

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

Chloe

13/02/2025

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The Tatton Weekly – AI upset challenges market status quo

Please see below article received from Tatton Investment Management on Friday afternoon, which provides a review of markets over the past week.

AI upset challenges market dynamics


Erratic US politics versus measured central bank action failed to grab the headlines over AI, while positive UK markets should have got a mention.

What’s next for AI investment?


DeepSeek’s surprise challenge to the dominance of the US Mega Tech stocks upset the market this week, but competition should be good news for AI driven productivity.

Central banks diverge


The US Fed held interest rates and the European Central Banks cut them – what are the implications for markets as central bank divergence grows?

AI upset challenges market status quo

It has been another interesting week in markets, although for different reasons than recently. Most of the major regional stock indices have performed well, but global equities are down in aggregate. This is largely down to the underperformance of Nvidia, following the release of a low-cost, more micro-chip efficient AI model from Chinese start-up DeepSeek. It was also accompanied by  mixed   fourth quarter results from Apple, Meta, Microsoft and Tesla (Amazon and Alphabet report next week). While these “Magnificent 7” (Mag7) stocks performed poorly in aggregate, the overall global picture still looks decent – just with a different regional and sectoral makeup, for now. We consider that a good sign for markets going forward.
 

The tech sell-off could be good for markets overall.

DeepSeek’s release was labelled a “Sputnik moment” by Western media, and Donald Trump called it a wake-up call for US tech – whose leadership in AI was previously unchallenged. We discuss the impacts on tech and AI in a separate article, so will avoid too much detail here, but the important thing to bear in mind is that DeepSeek is probably a net good for the global economy. Technology becoming more cost and energy efficient (if we believe the story) is a natural part of progress – even if it is not great news for some of the big tech companies.
 

Investors seemed to agree with this sentiment: the Mag7’s sell-off did not spread across global markets, and many stock indices – like smaller US companies, Europe and the UK – gained through the week. This divergence is significant, because global equity prices have been so strongly driven by the Mag7 in recent times, both up and down. The concentration of capital on this small cabal has been an increasing concern in that time. This week’s moves have increased market breadth for now, which is a good sign. 

Coincidentally, investor sentiment towards the Mag7 was dented by Tesla’s disappointing earnings results – which showed last quarter’s revenues down 8% from a year before. The electric carmaker’s stock shot up after November’s election, due to CEO Elon Musk’s role as Trump adviser, but was volatile this week. Tesla’s earnings miss might just be a blip, but one does have to wonder whether there is a tension between the profit interests of the electric car mogul and the “drill baby drill” president he has attached himself to. Interestingly, Tesla’s stock price moved less than one might have expected given the fact that analysts adjusted their outlook for earnings down by over 5% (according to Bloomberg’s data). 
 

This meant that Tesla’s valuation actually rose, with the forward price-to-earnings multiple (for the next twelve months) rising from 120 to over 130. It was by far the most expensive of the Mag7 even before the election, when it traded around 80.
 

All this contributed to volatility in the Mag7, as some of the shine seemed to come off the world’s biggest stocks. Many would argue this was overdue.
 

Foreign investors feel good about Britain – even if Britons don’t.

It was non-US stocks’ time to shine this week and none shone brighter than the UK. Encouragingly, gains in the FTSE 100 (which is dominated by multinationals) were almost identical to the FTSE 250 (whose companies are more sensitive to the domestic economy), suggesting a broad improvement. This was helped by the continued fall in government bond yields, making equities more attractive by comparison. Thankfully, we seem to be over the gilt market anxiety seen a few weeks ago.

Now that bond markets have calmed down, Chancellor Rachel Reeves is continually talking up the government’s focus on pro-growth policies – such as in the discussion of a new Heathrow runway. The effects of this should not be underestimated. UK media has been consistently negative about the economy and the Labour government’s ability to manage it, but we think that the narrative was too pessimistic. No one denies that there are problems, but consistent growth-focussed policy (even if it is not the best policy) goes a long way to stabilising expectations. 
 

Foreign investors have been generally averse to UK assets since before the Brexit referendum, which is partly why UK stocks have had consistently lower valuations than elsewhere. But lately, foreign investors are increasingly seeing Britain’s stocks and bonds as attractively priced – just perhaps in need of a jumpstart. We will have to await the follow-through, but Reeves’ growth talk might be helping, judging by this week’s rally. 

UK policy clarity contrasts with US uncertainty.

The UK’s rally was similar to the uptick in European stocks, but the key difference is that the European Central Bank (ECB) cut interest rates this week, while the Bank of England (BoE) is expected to hold rates steady at its meeting next week. That means UK equity faces a slightly more challenging environment than on the continent. Nevertheless, the UK is probably also helped by ECB rate cuts, as European investors should have easier access to capital, with which they can buy competitively priced UK equities. More importantly, Britain’s economy should be helped by tentative signs of a rebound in European demand. 
 

We discuss central bank meetings in separate article – where we note that uncertainty around Trump’s policies is forcing the Federal Reserve into a reactive, rather than proactive, role. Whatever one thinks about Trump’s politics, policy uncertainty makes it harder for people and businesses to plan ahead, which can weigh on economic sentiment. 
 

The president seems to have adopted the “move fast and break things” mentality of his disruptor-in-chief Elon Musk. His administration certainly is moving fast – as shown by its attempt to ban  all federal funding grants and then its rapid U-turn – but the problem is that it might end up breaking things. The funding ban was probably designed to be divisive (benefitting those aligned with Trump’s politics and punishing those opposed) but divisiveness does not build broad confidence. 
 

After much anticipation – and excitement from US investors – we are now in a phase where Trump’s policies will start affecting the real economy, rather than just market sentiment. Disappointing business confidence numbers, released last week, suggest that might not be as positive as US investors believed in November. Those numbers are still open to revision, but we will have to watch the data closely from here.

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

Chloe

03/02/2025

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update.

What has happened

There was a lot going on yesterday. In central bank news, while the Bank of Canada cut interest rates, the US Federal Reserve stayed on hold as expected – that is probably in contrast to the European Central Bank who are expected to cut when they announce at 1.15pm UK-time later today. After the US close yesterday, we had mixed reactions from three ‘Magnificent Seven’ US tech companies, with Meta and Tesla both up in after-marketing trading, but Microsoft down; instead, it was US tech company IBM that stole the limelight with its shares up almost +9% after the close on better numbers and blowout guidance. Elsewhere, a reminder that Asian markets are quieter this week given China is shut for new year celebrations.

DeepSeek or ‘DeepFake’?

Microsoft and OpenAI this week confirmed they are investigating whether the Chinese AI start-up DeepSeek illegally used OpenAI’s proprietary models in order to train its DeepSeek competitor model. The news has also drawn a political response from US President Trump’s Whitehouse AI ‘tsar’ David Sacks: “there’s substantial evidence that what DeepSeek did here is they distilled knowledge out of OpenAI models, and I don’t think OpenAI is very happy about this” – Sacks added that “it is possible” that DeepSeek is guilty of Intellectual Property (IP) theft, and labelled DeepSeek a “copycat” model.

Bullish US tech talk shores up sentiment

US tech leaders were in upbeat mood yesterday following their latest results: Meta’s Mark Zuckerberg predicted that 2025 would be a “really big year” for Meta’s plans in AI; Tesla’s Elon Musk said he saw “epic” growth for the company ahead; Microsoft’s CFO Amy Hood said commercial cloud service bookings were looking “far ahead” of what the company had been expecting; while IBM CEO Arvind Krishna talked of “a faster-growing, more-profitable IBM”. Next up for the ‘Magnificent Seven’ megacap tech group is Apple which has results out after the US close this evening. After that, Alphabet and Amazon follow next week, with Nvidia book-ending things in late February.

What does Brooks Macdonald think

If China’s DeepSeek stole OpenAI’s IP, that will clearly ratchet up broader US-China geopolitical tensions. Yesterday US White House spokesperson Karoline Leavitt said that US officials were looking at the national security implications, adding that Trump is considering additional trade tariffs on Chinese goods imports and new curbs on Nvidia chip exports into China. All in all, it suggests that the eventual hit to China’s economy from the fallout of this week’s DeepSeek episode might be rather a lot bigger than the Chinese tech start-up’s claimed sub-US$6 million chatbot development cost.

Bloomberg as at 30/01/2025. TR denotes Net Total Return.

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Chloe

30/01/2025

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EPIC Investment Partners – The Daily Update | The Road to Neutral

Please see below article received from EPIC Investment Partners this afternoon, which provides market predictions for 2025.

As next week’s FOMC meeting approaches, we turn to our proprietary Fed funds model for insights into the likely path for US interest rates. Developed in the 1990s, the model analyses US capacity utilisation, unemployment, and inflation to predict the appropriate federal funds rate. While the neutral rate—or r-star—represents the interest rate that neither stimulates nor restricts growth, the model focuses on projecting short-term policy adjustments by analysing capacity utilisation and unemployment. At present, the federal funds rate remains above the neutral level, estimated at roughly 3%. 

Capacity utilisation, a key indicator of economic slack, currently stands at 77.6%, below its historical average. This underutilisation signals room for economic growth without triggering inflation, providing scope for a more accommodative policy stance. With inflation expectations anchored at 2% and a real rate of 0.5–1%, the neutral rate is estimated at approximately 2.5–3%, serving as a benchmark for evaluating monetary policy. Historically, periods of below-average capacity utilisation have supported lower rates, as slack reduces inflationary pressures. While a pause in rate adjustments is likely in January, gradual cuts toward this neutral range seems likely as 2025 progresses. 

The neutral rate is closely tied to capacity utilisation and unemployment, key inputs in our Fed funds model. While the model does not explicitly estimate the neutral rate, it aligns federal funds rate predictions with prevailing economic conditions, reflecting shifts in these metrics. Periods of high slack, for example, signal the need for lower rates, aligning policy with prevailing economic conditions. 

Market expectations for 2025 broadly align with the model’s forecast for federal funds rate adjustments, which consider both economic slack and inflation trends. Despite the uncertainty surrounding fiscal policies under the current administration, the economy remains below the conditions needed for a neutral monetary policy stance. Monetary policy remains restrictive, with rates above neutral estimates. A pause during the January meeting would provide an opportunity for the Fed to evaluate incoming data and refine its outlook. Should inflation continue to moderate alongside subdued capacity utilisation, a gradual shift toward the neutral rate is expected as economic slack persists and inflation moderates. However, the transition will require careful calibration to prevent reigniting inflationary pressures or undermining growth. 

Further Fed easing sets the stage for opportunities in fixed-income markets. Looking through the uncertainty of fiscal policies, higher-quality investment-grade emerging market bonds are particularly well-positioned to benefit from declining interest rates and stabilising global economic conditions. Mexican credit, in particular, looks attractively valued, offering compelling opportunities for investors looking for opportunities to diversify. These assets combine robust credit profiles with attractive yields, making them a compelling choice for investors looking for alpha opportunities. With risk sentiment likely to improve alongside monetary easing, 2025 offers a favourable environment for higher quality emerging market debt. 

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Chloe

24/01/2025

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EPIC Investment Partners – The Daily Update | Demographic Deflation: The Bond Trade You are Missing

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

Despite US Treasury yields suggesting higher growth and inflation in the years ahead, demographic trends tell a different story. By 2033, annual deaths in the United States will surpass births, leaving net migration as the sole driver of population growth, according to the Congressional Budget Office (CBO). Without sufficient immigration, the population would shrink, undermining economic growth, worsening fiscal pressures, and intensifying the challenges of supporting an ageing society. 

Recent OECD data starkly illustrates the issue: the working-age population’s growth rate has fallen to just 0.15%, sharply down from its peak of 2.24% in July 2000. Declining birth rates and an ageing population are primary drivers, but restrictive immigration policies have further compounded the slowdown. 

From 2017 to 2021, annual net migration averaged only 750,000, a significant reduction driven by stricter border enforcement, reduced refugee admissions, and tightened visa restrictions. The CBO projects net migration to average 1.4 million annually in the coming decades, but this estimate appears overly optimistic given persistent political resistance and growing global competition for skilled migrants. 

The stakes are immense. Without sufficient immigration, the US faces a shrinking workforce and fewer taxpayers to support an expanding number of retirees. Social security and healthcare systems, already strained, will face widening funding gaps, increasing the fiscal burden on younger generations. Slower economic growth would further constrain the government’s ability to meet its obligations, driving the debt-to-GDP ratio even higher. 

Demographic shifts also reshape inflation and interest rate dynamics. A shrinking population reduces demand, creating deflationary pressures akin to those seen in Japan, where decades of demographic stagnation have coincided with weak growth and persistently low inflation. In the US, these deflationary trends could partially offset upward pressures on interest rates caused by sustained fiscal deficits. 

Immigration is the clearest solution. Migrants not only fill labour shortages but also sustain demand and drive innovation. Between 2000 and 2018, immigrants accounted for nearly half of the growth in the working-age population. However, countries like Canada and Australia are actively competing for talent, adopting aggressive immigration policies that threaten to outpace the US. To remain competitive, the US must streamline visa processes, expand pathways for high-skilled workers, and implement integration programmes. 

The bond market’s pricing, reflecting expectations of sustained growth and inflation, conflicts with long-term demographic realities. Projections for net migration must be realised to avoid population decline. If migration fails to meet these expectations, the US risks slower growth, intensifying fiscal pressures, and reduced global competitiveness. 

Given these demographic and fiscal constraints, long-term bond yields appear too high. A return to zero-bound interest rates is plausible as debt servicing and demographic stagnation exert downward pressure. Persistent budget deficits make the current debt trajectory unsustainable, underscoring the urgent need for deficit reduction and immigration reform. Without these changes, a disruptive market correction may ultimately enforce this reality. 

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Chloe

17/01/2025

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The Daily Update | Hotels and Eggs Drive US Inflation

Please see below article received from EPIC Investment Partners yesterday, which provides an update on the US economy.

US consumer prices rose 0.3% in November, marking the largest monthly increase since April. The increase, which matched economists’ expectations, was largely driven by shelter costs and food prices.  

Shelter expenses, particularly hotel and motel rooms, accounted for nearly 40% of the CPI increase. Hotel lodging costs jumped 3.7%, the highest since October 2022. Food prices climbed 0.4%, with notable increases in eggs (up 8.2% due to avian flu) and beef prices, though cereal and bakery products saw a record decline of 1.1%. 

The annual inflation rate reached 2.7%yoy through November, up slightly from October’s 2.6%. While this represents significant progress from the June 2022 peak of 9.1%, core inflation (excluding food and energy) remained steady at 3.3%yoy, showing limited improvement in underlying price pressures. 

There were some positive signs in the report. Rent increases slowed to 0.2%, the smallest gain since July 2021, and motor vehicle insurance costs moderated. However, new and used vehicle prices increased, in part due to hurricane damage replacements. 

US PPI figures due later will grab market focus with the Final Demand figure expected at 2.6%yoy in November, from 2.4% previously. Despite sticky inflation concerns, markets expect the Fed to implement a third consecutive interest rate cut next week, to a range of 4.25-4.50%.  

Looking ahead, inflation pressures may slow as rent costs continue to cool and labour market slack increases. However, some market makers are concerned that potential policies from the incoming Trump administration, including new tariffs and immigration changes, could pose inflationary risks. Treasury Secretary Janet Yellen also warned that the incoming Trump administration’s proposed sweeping tariffs could fuel inflation, hurt US competitiveness, and raise household costs. Our view is that tariffs can dampen demand rather than accelerate price increases resulting in lower long-term inflation. 

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Chloe

13/12/2024

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EPIC Investment Partners -The Daily Update | The Dance of Unemployment and Inflation

Please see below article received from EPIC Investment Partners this morning, which provides an insight into economic theory.

The traditional Phillips curve has long been a cornerstone of macroeconomic theory, suggesting a straightforward relationship between unemployment and inflation. The underlying theory posits that as unemployment falls, increased economic demand leads to higher wages, which in turn drives up prices and inflation. However, researchers have historically struggled to consistently demonstrate this relationship in real-world data.  

Groundbreaking new research now reveals that the relationship is far more nuanced and distinctly non-linear, with firms responding to economic changes in surprisingly asymmetric ways. The most striking finding is how firms respond asymmetrically to economic shifts. When facing positive economic changes, companies are much more likely to raise prices than to lower them during negative shifts. This “convexity” in pricing behaviour helps explain why inflation can be sticky and unpredictable.  

The OECD’s recent warning about persistent services inflation provides crucial context. With services price inflation at a median of 4 percent across rich nations, the non-linearity becomes especially relevant. The research uncovered that this non-linear pricing behaviour is most pronounced during periods of high inflation with firms becoming more responsive to economic signals and creating a potentially self-reinforcing cycle. 

Interestingly, the study found that the convexity varies across different economic contexts. Firms with average price growth above 4 percent exhibit a strongly non-linear response to positive versus negative shocks. In contrast, firms with lower price growth show a more linear pricing pattern.  

The implications extend beyond simple economic theory. The non-linear relationship suggests that monetary policy tools may be less effective than previously thought, with firms’ pricing strategies creating economic momentum that could push the economy towards unexpected trajectories. For policymakers, this research highlights the importance of understanding firm-level pricing dynamics. During periods of high inflation, prices can become much more responsive to positive economic shocks, creating potential risks for economic stability.  

This research fundamentally challenges traditional macroeconomic models, revealing that economic systems are far more complex and adaptive than previously understood. The non-linear pricing dynamics demonstrate that firms are strategic actors who actively interpret and respond to market signals, not passive recipients of economic conditions. These insights have significant implications for investment managers and policymakers alike, highlighting the need for more sophisticated approaches to understanding and modelling economic scenarios and resilience and designing targeted strategies in an increasingly nuanced economic landscape. 

Like a dance, economic relationships are about rhythm, timing, and unexpected moves, not just simple steps forward or backward.  

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Chloe

10/12/2024

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EPIC Investment Partners – The Daily Update | India’s Meteoric Rise

Please see below article received from EPIC Investment Partners this morning, which provides an update on India’s thriving economy.

In the four years to the end of November 2024 the Indian stock market returned 77.2%, a compound annual growth rate of 15.4% (USD). This compares to the -0.8% and -0.3% compound rate of return of Asia ex Japan and emerging markets respectively. In Asia, only Taiwan (+13.3% CAGR) comes close.

PM Modi’s business friendly approach with a focus on infrastructure development and the country’s relatively favourable demographics have all played their part. More recently the focus is turning to building out India’s manufacturing capabilities which looks likely to be a significant contributor to future growth. Perhaps more an accident than a design, India’s geopolitical position has improved markedly in recent years. 

In short, India’s stars are aligned. 

Domestic retail flows into equities have played an increasingly significant role. In round numbers, monthly net flows into mutual funds have risen threefold or more over the same four year period. However, for the prospective investor this comes at a price. On both a price earnings ratio or price to book measure, India is roughly twice as expensive as the Asian or emerging equity universes.  

Some lingering disappointment in the BJP’s performance in the national elections earlier this year has been followed by a number of underwhelming corporate results and a weaker than expected third quarter GDP print. The market has consolidated. 

Step forward Maharashtra, India’s second most populous state and largest state measured by GDP, accounting for just over one eighth of Indian GDP. The state assembly elections held late last month saw the BJP and Allies win a thumping victory. The BJP won 132 seats (up from circa 100) and the BJP alliance won 235 out of the 288 seats. 

The Economic Advisory Council for Maharashtra has laid out a vision for the state economy to grow to US$1tr before the end of decade with manufacturing rising from 16% to 21% of GDP. There have been large transformative infrastructure projects for Mumbai over the past decade (trans-harbour link, new airport, 300km metro, coastal roads etc) which are now maturing. The target over the next decade will be further expansion of coastal roads and metros and using the new airport as a development hub and progressing a high speed rail project to completion. 

India may not be cheap but it knows where it is going. 

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Chloe

05/12/2024

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What’s driving the U.S. stock rally?

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday evening, which provides a global market update for your perusal.  

Global equity markets were a mixed bag last week. U.S. stocks ended a pullback (a temporary dip in price) after their sharp post-election rally, while UK stocks were a relative bright spot. The rest of Europe lagged.

It’s always right to think of the equity market in terms of the stocks it contains. However, in this instance, the weakness of the equity market does seem to be reflecting some downbeat economic prospects for continental Europe.

The ongoing conflict in Ukraine and the upcoming presidential transition in the U.S. have created a sense of uncertainty. Investors are watching closely for any developments that may impact the global economy.

Bitcoin rallies towards milestone high

Data released last week on U.S. Treasury sales showed Japan and China reduced their exposure to U.S. bonds over the last quarter. Efforts to reduce America’s trade deficit with other countries can also lessen the need for those countries to hold as many dollars as they had previously. This can in turn lead to decreased demand for U.S. bonds. At a time when the U.S. is running a substantial budget deficit and may be considering further tax cuts, any reduction in foreign demand for U.S. Treasuries would be unhelpful.

These kinds of concerns have prompted investors to look at investments that protect their holders from the perils of government fiscal largesse. Two obvious examples are gold and Bitcoin, which both benefit from a limited supply. These two assets, which share many features, have diverged sharply in performance since the election; gold sank back while Bitcoin has marched onwards towards the milestone of $100,000 per coin!

Strictly speaking, the supply of Bitcoin is more limited than the supply of gold, as there’s a finite limit to the number of coins that can eventually be released (only another 5% are able to be mined). In contrast, gold reserves already account for 25% of existing circulation, and it’s possible more could be discovered.

But the reason for the difference in performance has been President-elect Donald Trump’s perspective on Bitcoin. Trump’s stance has changed from regarding Bitcoin as a scam that facilitates crime and requires heavy regulation to an apparent willingness to entertain a U.S. strategic cryptocurrency reserve.

The environmental impact of Bitcoin mining is a concern, as it generally requires much more power than gold mining, leading to the disposal of obsolete tech equipment. Bitcoin mining also consumes a lot of water.

Perhaps the biggest challenge for cryptocurrencies is that while the supply of one of them, like Bitcoin, may be finite, there are huge and growing arrays of other cryptocurrencies with no real limit on how many could be created. Some of these have been better designed, with more use cases and less environmental impact than Bitcoin. Bitcoin holding the top spot among crypto peers relies on its status of being the first cryptocurrency.

Gold and Bitcoin are traditionally priced in dollars, so they’ll rise if the dollar falls. Introducing new stores of value as alternatives to the dollar might not be in America’s interests – this would diminish the ‘exorbitant privilege’ enjoyed by the U.S. for being the issuer of the world’s reserve currency.

Earnings season draws to an end

The draw of the U.S. equity market remains as we approach the end of the third quarter earnings season.

Nvidia’s third quarter results have become something of a highlight. This quarter, its revenue beat expectations, and guidance for the next quarter is strong. The company’s Blackwell architecture is expected to drive growth, although margins may be impacted in the short term.

The stock’s valuation is a topic of vigorous debate. Its recent growth would easily justify its current multiple – but semiconductors are a cyclical industry, which makes estimating the length of the current upturn, as well as the depth of the next downturn, very challenging. This remains the main controversy around the current market darling.

What’s next for UK interest rates?

A flurry of UK data last week has poured more doubt on forecasters’ expectations for UK interest rates. This is partly reflected in the market already, as interest rates, which spent a year at 5.25%, have already fallen to 4.75%, with a limited number of further rate cuts expected in the short term.

The markets currently expect rates to fall to 4% by the end of 2025. The consensus of economists is 3.6%, but we expect those forecasts will edge upwards.

UK inflation high during October

In recent weeks, we’ve discussed how the government is drawing a lot of tax revenue from the economy, but despite this, it’s increasing borrowing to fund spending – specifically over the next two years.

Pound for pound, government spending is assumed to boost the economy by more than taxes reduce it. This is because when measuring economic activity, everything the government spends will be included, while anything the government gives away in terms of tax cuts may be partly saved by those benefitting from the cuts.

The upshot is that there will be a big fiscal boost over the next couple of years, at a time when the economy has limited spare capacity (in other words, when unemployment’s low). The risk is that this spending is inflationary, meaning that market interest rates need to rise to keep attracting bond buyers.

Inflation was indeed relatively high during October. Although some of this strength came from volatile air fares rebounding after a weak September, and a monthly increase in utility bills, these inflation numbers remain too high for us.

The annual rate of price growth rose above target at a time when energy prices (despite being higher this month) are still dragging inflation down compared to the year before. The persistence of inflation in core services should be worrying the Bank of England as it considers when it can afford to cut interest rates again.

The other consequences of inflation are higher expenditure and higher interest rate costs. Combined, these outweighed the consequent higher tax revenue and led to an overall increase in borrowing during October, which makes the current fiscal plans of the government look tenuous.

European services trend downwards

Finally, at the end of the week, we saw the early window into the current performance of many economies. The news is that Europe has seen no real progress. In fact, it seems European services are being dragged down towards the region’s struggling manufacturing sector.

As earnings season winds up, there will be a lack of material economic or corporate news this week. And with Thanksgiving approaching, the focus will switch from Wall Street to the high street and one of the big retail weekends of the year.

However, we can probably expect the flow of news about the shape of President-elect Trump’s new government to continue.

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

Chloe

27/11/2024

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.

What has happened

At an aggregate equity markets level, there wasn’t a big catalyst for moves in either direction yesterday. By the close on Monday, the US S&P500 equity index was up +0.39%, while the pan-European STOXX600 equity index was down marginally at -0.06%, both in local currency price return terms. Elsewhere, a fade in recent US dollar strength coupled with a reminder of geopolitical risk around Russia-Ukraine helped buoy the Brent crude oil price, which gained +3.18% to US$73.30 per barrel yesterday.

Tesla has a very good US election

Tesla’s share price has so far had a very good US election. From the close on the day of the election on 5th November through to yesterday’s close the stock is up almost +35%, and in the process adding around US$280bn to Tesla’s market capitalisation – a gain alone that is slightly bigger than the total market size of Toyota (at around US$276bn equivalent), the world’s second largest auto company after Tesla. That Tesla gain includes a sizeable +5.62% surge in the Telsa share price yesterday and came on the back of a Bloomberg report that US president-elect Donald Trump’s upcoming administration is planning to make a US federal framework for self-driving cars a priority.

Chinese ETF investor outflows

Exchange Traded Funds (ETFs) that buy Chinese stocks have seen continued outflows according to a Bloomberg report yesterday. As an example, the US$8.2bn iShares China Large-Cap ETF saw US$984 million in outflows last week, its largest weekly outflow on record, and extending a five-week streak of withdrawals for that ETF. Chinese equity investor sentiment has been under continued pressure in recent weeks on two counts: (1) investors harbouring lingering concerns that Beijing’s stimulus will not prove to be enough to lift consumer spending; and (2) the impact on Chinese businesses from the risk of materially higher US tariffs under Trump.

What does Brooks Macdonald think

It must be a very frustrating time for those in the market who continue to be bearish on the US economy. Even excluding the current enthusiasm around the prospect of tax cuts, deregulation and greater fiscal deficits under Trump, the US economy appears to be doing just fine currently. According to the Federal Reserve Bank of Atlanta’s ‘GDPnow’ forecast model yesterday, US real (constant prices) Gross Domestic Product (GDP) growth is expected to be running at +2.5% annualised for the current calendar 4Q of 2024 – if that turns out to be the actual number, that would be above the US Federal Reserve’s longer-run GDP annual growth assumption for the US economy of +1.8%.

Bloomberg as at 19/11/2024. TR denotes Net Total Return.

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Chloe

19/11/2024