News

Please see below article received from EPIC Investment Partners this morning, which provides a succinct and interesting insight into the success of Louis Vuitton’s parent company, LVMH.

Last week LVMH, the parent company of Louis Vuitton, surpassed USD500bn in market value, the first European company to reach the half a trillion-dollar mark, less than two weeks after joining the club as one of the world’s top 10 most valuable companies. LVMH, which also includes brands such as Moët & Chandon, Hennessy, Givenchy, and Bulgari under its umbrella, reported a 17% rise in first-quarter sales earlier in April, more than double analyst expectations. In total, LVMH controls around 60 businesses that manage 75 prestigious brands. The shares were up nearly 33% year to date.

The rise in LVMH stock means that its co-founder, chairman and chief executive, Bernard Arnault’s net worth now approaches USD213bn, the world’s richest man, and a staggering USD50bn more than the world’s second richest, Elon Musk.

Arnault’s vice-like grip on the company is also pretty much guaranteed in the long term after he recently appointed his offspring to key positions within the business. The eldest child, Delphine, was named CEO of Christian Dior, the empire’s second-largest brand. Antoine, her brother, was appointed head of the holding corporation that oversees LVMH and the Arnault family fortune.

His three youngest children were also given important roles within the company. Alexandre is an executive at Tiffany, Frédéric is the chief executive of TAG Heuer, while the youngest, Jean, heads marketing and product development for Louis Vuitton’s watch division.

According to some articles, Arnault, 74, in giving his children the positions, is auditioning them to see which one will be the best fit for the top job the day he decides to hang his boots up. It is reported he invites his offspring to a monthly lunch at the company’s headquarters in Paris, where he asks them for advice, their thoughts on how the company should move forward and even presents a list of topics up for discussion.

However, as the CEO of LVMH’s fashion arm, Sidney Toledano, said recently “there is no guarantee that any of his children will succeed him”.

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

Chloe

03/05/2023

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday afternoon, which provides a positive global market update.

Stock markets rose last week as signs of economic growth and easing inflationary pressures boosted investor sentiment.

The FTSE 100 ended its holiday-shortened trading week up 1.7% after figures showed the UK economy rose above its pre-pandemic levels in February. The pan-European Stoxx 600 also rose 1.7% following increases in eurozone industrial output and investor morale.

In the US, the S&P 500 and the Dow advanced 0.8% and 1.2%, respectively, as the annual rate of inflation slowed to its slowest pace since May 2021.

In Japan, the Nikkei 225 surged 3.5% after Warren Buffett said he intended to add to his investments in Japanese stocks. China’s Shanghai Composite edged up 0.3% as investors weighed a surprise 14.8% year-on-year increase in exports against softer-than-expected inflation.

Investors await slew of quarterly earnings

Stock markets had a quiet trading day on Monday (17 April) as investors braced themselves for this week’s raft of US quarterly earnings reports. Bank of America, Morgan Stanley, Netflix and Tesla are all due to release their results this week.

In economic news, a report from the Federal Reserve Bank of New York showed factory sector activity in the region significantly improved in April. The NY Empire State manufacturing index rose from -24.6 in March to +10.8 in April, smashing forecasts of -18 and marking the first increase in five months.

UK economy rises above pre-Covid levels

Figures released by the Office for National Statistics (ONS) last week showed the UK economy has finally risen above its pre-Covid levels. Although gross domestic product (GDP) was unchanged between January and February, revisions to data from previous months meant the economy ended the month 0.3% bigger than in February 2020.

February’s reading was held back by strike action in the services sector and was below the 0.1% expansion forecast in a Reuters poll. However, an upwardly revised 0.4% expansion in January led several commentators to speculate that the economy is unlikely to have contracted in the first quarter. Only a month ago, the Office for Budget Responsibility said GDP would shrink by 0.4% in the first quarter.

US inflation falls to 5.0%

Over in the US, investors were encouraged by figures that showed consumer inflation eased in March to its slowest pace since May 2021. The consumer price index (CPI) rose by 5.0% year-on-year, down from 6.0% in February, according to the Bureau of Labor Statistics.

Energy prices decreased 6.4% year-on-year, with gasoline and fuel oil falling 17.4% and 14.2%, respectively. In contrast, electricity rose 10.2% over the year, while natural gas grew by 5.5%. Food at home prices rose 8.4%, whereas food away from home prices rose by 8.8%.

Core inflation (excluding food and energy) rose by an annualised 5.6% in March. The largest driver was shelter, which grew 8.2% over the year and accounted for over 60.0% of the total increase. Other indexes that saw notable increases included motor vehicle insurance (15.0%), household furnishings and operations (5.6%), recreation (4.8%) and new vehicles (6.1%).

On a monthly basis, headline inflation rose by a lower[1]than-expected 0.1% in March, down from 0.4% in February, while core inflation grew 0.4% in March, down from 0.5% in February.

Producer prices unexpectedly fall

Further evidence of easing inflationary pressures came from the US producer price index (PPI) report. This showed prices paid by businesses unexpectedly fell by 0.5% in March, bringing the year-on-year increase to 2.7%, the smallest annual rise since January 2021.

Two thirds of the decline was attributed to falling goods prices, particularly energy, which decreased 6.4%. In contrast, when excluding food and energy, goods prices grew 0.3%.

Services also saw a decline of 0.3% in March, the largest decline since April 2020. This was primarily driven by a 0.9% drop in trade services margins.

Core PPI – which excludes food, energy and trade services – gained 0.1% in March, down from 0.2% in February. On an annualised basis, the index grew by 3.6%.

Eurozone industrial production rises

In the eurozone, figures from Eurostat showed industrial production grew by more than expected in February, thanks to easing supply chain issues and low energy prices. Industrial production rose by 1.5% month-on[1]month, bringing the year-on-year increase to 2.0%.

Further encouraging data came from the Sentix index of investor morale, which rose in April after dipping in March. The assessment of current conditions rose to the highest level in more than a year.

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

Chloe

19/04/2023

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

All major indices finished last week in the green as rising oil prices helped to boost energy stocks, while fears of financial instability eased.

In Europe, the Stoxx 600 gained 4.0% and Germany’s Dax added 4.5% after eurozone inflation eased to 6.9% year-on[1]year in March, down from 8.5% in February. The UK’s FTSE 100 rose 3.1% after fourth quarter gross domestic product (GDP) figures were revised upwards.

Over in the US, the Dow added 3.2% and the Nasdaq rose by 3.4% in a week that saw the Federal Reserve’s preferred inflation gauge rise by a less-than-expected 0.3% in February.

China’s Shanghai Composite edged up 0.2% and the Hang Seng gained 2.4% after premier Li Qiang said China would work to expand its domestic market, improve the business environment, and prevent financial systemic risks.

Markets mixed as global oil output cut

Markets closed with mixed results on Monday (3 April) following a decision by the Organisation of Petroleum Exporting Countries (OPEC+) to cut oil output by more than one million barrels per day. The move could harm efforts to cool global inflation, and has raised new concerns about a further US interest rate hike in May.

The pan-European Stoxx 600 ended the day down 0.1%, whereas the UK’s FTSE 100 gained 0.5%. Energy stocks performed particularly well, with Shell and BP adding 4.5% and 4.3%, respectively. In the US, the Dow gained 1.0% and the S&P 500 rose by 0.4%.

In economic news, the Institute for Supply Management’s manufacturing purchasing managers’ index slipped by more than expected in March to 46.3, the lowest level in nearly three years, as new orders declined.

US core inflation cools

Last week saw the release of the closely watched US core personal consumption expenditure (PCE) index – the Federal Reserve’s preferred measure of inflation. Core PCE, which excludes food and energy, rose by a lower-than-expected 0.3% in February, an improvement on the 0.5% increase seen in January. On an annual basis, core PCE increased by 4.6%, down slightly from 4.7% in January.

Headline PCE, which includes food and energy, grew by 0.3% month-on-month and 5.0% year-on-year, compared to 0.6% and 5.3%, respectively, in January. Food prices rose by 0.2%, goods prices by 0.2% and services by 0.3% month-on-month, while energy prices declined by 0.4%.

Eurozone inflation eases

The eurozone headline inflation rate slowed to 6.9% in March from 8.5% in February, according to figures released by Eurostat on Friday. This was lower than the 7.1% increase forecast by economists and represented the largest drop since 1991. The decline was largely driven by a reduction in energy costs, which helped to ease cost[1]of-living pressures. Annual energy inflation fell from 13.7% to -0.9%. In contrast, prices for tobacco, food and alcohol grew by 15.4% in March year-on-year.

Core consumer price growth, which excludes food and energy, grew to 5.7% from 5.6% in February, reaching an all-time high. This result, combined with unemployment remaining low at 6.6%, has added to expectations of further interest rate hikes by the European Central Bank. Investors are broadly expecting a 0.25 percentage point increase in May, with up to two more hikes of the same size in the summer.

UK house prices see highest fall since 2009

Here in the UK, house prices fell by 3.1% year-on-year in March, the largest decline since July 2009, according to figures from Nationwide. Prices fell by 0.8% month[1]on-month, the seventh-consecutive monthly decline. The average house price in the UK is now £257,122.

Separate data from the Bank of England showed the number of mortgage approvals increased to 43,500 in February, up from 39,600 in January. This was the first rise in six months. Meanwhile, net mortgage lending dropped from £2bn in January to £0.7bn in February, the lowest level since 2016 (excluding Covid).

Revised US and UK GDP figures released

Figures released by the Commerce Department last week showed the US economy grew by slightly less than expected in the fourth quarter of 2022. GDP grew at an annual pace of 2.6%, lower than the previous estimate of 2.7% and down from 3.2% in the third quarter. This was driven by downturns in exports, non-residential fixed investment, state and local government spending, and a decline in consumer spending to 1.0%.

Economists have predicted US GDP will grow by up to 3.2% in the first quarter of this year. On an annual basis, expectations are for growth of 0.3 percentage points to 1.2%. Sentiment has been dampened due to recent turmoil in the banking sector.

Meanwhile, revised figures from the Office for National Statistics showed the UK avoided a technical recession in the fourth quarter of last year as GDP grew by 0.1%. GDP in the third quarter showed a decline of 0.1%, a smaller contraction than initially thought. A technical recession is defined as two consecutive quarters of contraction.

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

Chloe

05/04/2023

Please see below article received from Brewin Dolphin yesterday afternoon, which provides a cautiously optimistic market update despite high inflation and banking sector concerns.   

Stock markets ended last week in the green as hopes of interest rate cuts outweighed recent concerns about the banking sector.

In the US, the S&P 500 and the Nasdaq added 1.4% and 1.7%, respectively, as the Federal Reserve hiked interest rates in line with expectations. The Fed’s ‘dot plot’ – a chart which summarises the central bank’s outlook for interest rates – suggested officials expect to stop raising rates after one more hike in May.

The FTSE 100 added 1.0% after UK retail sales recorded their largest monthly gain since October and business activity expanded for a second consecutive month, demonstrating resilience in the UK economy.

The pan-European Stoxx 600 gained 0.9%, despite a sharp decline in banking stocks. Eurozone business activity was stronger than expected in March, driven by growth in the services sector.

In Asia, China’s Shanghai Composite edged up 0.5% and the Hang Seng climbed 2.0% as analysts predicted policymakers would maintain an accommodative monetary policy in light of the banking sector turmoil.

Investors cheered by Silicon Valley Bank deal

Stocks started this week in the green, with the FTSE 100, Stoxx 600 and S&P 500 gaining 0.9%, 1.1% and 0.2%, respectively, on Monday (27 March). Banking stocks, in particular, were boosted by news that First Citizens Bank had agreed to buy the deposits and loans of Silicon Valley Bank, the US regional bank which collapsed earlier in the month. There are hopes that the turmoil in the banking sector has now peaked.

In economic news, a survey by the Ifo Institute showed German business sentiment unexpectedly improved in March. The business climate index rose to 93.3 from 91.1 in February, marking the fifth-consecutive monthly increase.

Fed suggests rate hikes are nearing an end

Last week, the Federal Reserve pressed ahead with a quarter percentage point increase in interest rates – its ninth-consecutive rate hike since March 2022. As ever, investors were more interested in the Federal Open Market Committee’s (FOMC) post-meeting statement than the rate hike itself, which had been widely anticipated.

Unlike previous statements which referred to “ongoing increases” in interest rates to bring down inflation, this latest statement said that “some additional policy firming” may be appropriate. Projections indicated that a majority of officials expect only one further rate hike this year.

Fed chair Jerome Powell said the FOMC had considered a pause in rate hikes because of the troubles in the banking sector, but went ahead with the increase due to inflation data and the strength of the labour market. Powell also stated that rate cuts were not in the Fed’s base case for the remainder of 2023. However, futures markets are nonetheless pricing in a more than 90% chance that rates will end the year lower than the current Federal funds target rate of 4.75% to 5.0%, according to the CME FedWatch Tool.

BoE lifts UK base rate as inflation soars

The Bank of England (BoE) also increased interest rates by a quarter of a percentage point last week, marking its 11th consecutive rate hike. The increase has brought the base rate to 4.25%.

UK base interest rate

The BoE’s meeting came a day after figures from the Office for National Statistics (ONS) showed the rate of inflation unexpectedly accelerated in February to 10.4% year-on-year, up from 10.1% in January. Economists had been expecting the rate to decline to 9.9%. Prices of food and non-alcohol drink rose by 18.2%, the steepest pace in more than 45 years, as high energy costs and bad weather led to shortages of salads and vegetables.

Data indicates UK economic resilience

Other data released last week suggested the UK economy may be more resilient than previously thought, despite high inflation and borrowing costs. Retail sales volumes rose by 1.2% in February from the previous month, with sales returning to their pre-pandemic levels. The increase was well above the 0.5% rise forecast by analysts.

S&P Global’s flash UK purchasing managers’ index (PMI) showed business activity expanded for a second consecutive month in March. The main composite output index measured 52.2, down from February’s eight-month high of 53.1 but still comfortably above the 50.0 mark that separates growth from contraction. Manufacturing production decreased slightly, whereas services sector activity picked up for the second month running.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the UK economy looks to have returned to growth in the first quarter, and that the improvement in order book growth “adds to signs that a near-term recession has been avoided”.

Meanwhile, research company GfK’s consumer confidence index rose two points in March to -36. Within that, consumers were more positive about the general economic situation over the next 12 months. However, they were more pessimistic about their personal financial situation – a measure which Joe Staton, client strategy director at GfK, said “best reflects the financial pulse of the nation”.

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

Chloe

29/03/2023

Please see below article received from Tatton Investment Management this morning, which reflects on the market’s reaction to global banking issues over the past week.

Overview: Bank stress-testing in real-time 

Following the run on Silicon Valley Bank (SVB), fear has spread. The nervousness of market participants over recently elevated stock and bond valuations found its focal point and so the stock index of the aggregate global bank sector had a very bad week. SVB has become the first sizeable victim of the steepest rise in rates since the 1970s, but its close affiliation with tech, healthcare and crypto is particularly notable. After seeing a near tripling of money deposited by start-up companies and their affiliates during the good times (namely the 2020/2021 tech and healthcare boom), those deposits were heavily drawn on recently when those same companies required funds to bridge the financial strains of these distinctively more challenging times.

Taking into account how much better capitalised and less credit risk exposed banks are today when compared to the run up to the GFC, they seemed an unlikely target and victim this time, but it turns out banking sector trust had never been fully rebuilt. Given SVB specific weakness was an outlier, with its losses from its long maturity government bonds wiping out its equity base, it was right that central banks stepped in to stop the self-enforcing avalanche of mistrust. That stock markets continued their highly volatile trading into the latter part of the week goes to show that once confidence is dented investor are more open to consider that there is the possibility for a much worse than the ‘steady as she goes’ scenario that could play out this year.

The lesson from the past few days is that the pain caused by the rises in rates is hitting small and micro-cap firms particularly hard, even if they are strictly speaking growth stocks whose valuations would otherwise benefit. But we should be heartened that this week proved central banks are reactive to issues of financial instability. The centre of the storm moved to Europe and particularly Switzerland as Credit Suisse came under pressure. The European Central Bank (ECB) still raised rates by 0.5% on Thursday as it had promised at its previous meeting, but President Christine Lagarde was notably reticent about offering any further indications of rate moves.

To top it all off, the market is now pricing in the strong likelihood that March will see an end to all the rate rises in the Western world, and that rates could be cut everywhere by year-end. This week, the Federal Reserve (Fed) and the Bank of England (BoE) meet. Despite the turmoil, markets on balance expect a 0.25% move from both. We have revised our views as well and see a 0.25% move in the US where data remains strong enough to justify it, but we expect the UK will not move. So, for the shorter term it appears that central banks’ objective to tighten financial condition to bring down inflation has suddenly been significantly accelerated through market action.

Is this a banking crisis? And if so, could it get as bad as last time?

 
What makes a crisis a crisis? Ernest Hemingway said bankruptcy happens “gradually, then suddenly”. Weaknesses build up over time, and wider economic circumstances add pressure on them. But for any given company, the full extent of its weaknesses is only revealed when things get so bad those weaknesses cannot stay hidden. The nature of banks means the financial system is more vulnerable than other sectors. Often the first bank failures in a downturn don’t precipitate a crisis but they do reduce the system’s overall willingness to tolerate risk. When the next set of bad news gets out, confidence plummets and financial problems spiral. We saw this a decade and a half ago with Bear Stearns and later Lehman Brothers. Cracks emerge slowly, but shattering happens all at once.

Over the last year, interest rates have risen at the fastest pace in a generation. Meanwhile, economic growth has slowed dramatically. That means higher capital costs with lower aggregate returns, a difficult environment for banks as a whole. When crypto hub FTX collapsed last year, we said this was a sign of the times – opaque high-risk investments being exposed – and that further casualties down the line were likely. That is exactly what happened with Silvergate Capital l, and then SVB. 

The fact that troubles have spilt over to Credit Suisse is a sign that contagion is still very possible, though. Even if the US tech banks can fail in a relatively isolated fashion, a bank as big and important as Credit Suisse is a different matter. Moreover, European banks are much more tightly linked than US counterparts. If Credit Suisse had been allowed to collapse, shockwaves would have been felt far away, and weaknesses at other banks would certainly be exposed. The Swiss regulators’ decision to wipe out holders of Credit Suisse Coco bonds as part of the UBS ‘shot-gun’ marriage deal may still prove too much for the system, with a need to address the failout in some way. That being said, there are two key differences to the events of the global financial crisis. First, the policy response has been swift and decisive. In the US, the Biden administration effectively bailed out depositors of a bank considered too small to be systemically important, as soon as troubles began. Meanwhile, SNB provided billions in liquidity to Credit Suisse on the same day its stock sunk. The long-term merit of these moves is debatable; indeed, European lawmakers are reportedly angry about the US flouting bailout rules they helped create. But they undoubtedly make short-term financial contagion less likely. Second, crises spiral when unknown risks come to light, but most of the current risks exposed at Credit Suisse were already in the light, and known about for some time. We should not underplay the troubles that could spread from such a big institution, but it is important to note that many other banks will have already reduced their exposure to the investment bank. 

We have no doubt that further problems – at different, as yet unknown banks – will become known in the weeks and months ahead. Such is the nature of a monetary tightening cycle. Those institutions that end up in trouble will be those with opaque or misleading balances of assets and liabilities. In that respect, we also expect financial hardship at some (probably recent entrant) private equity or private debt funds (private meaning not available to the general public and therefore not part of Tatton’s portfolios). It may be that such hardship catches only a very small number, and will be seen as idiosyncratic and containable as the demise of SVB, but it is something of which investors should be wary. 

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

Chloe

20/03/2023

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

What has happened

With markets having run out of fresh reasons to panic, we saw a marked rally across the board in risk assets on Tuesday. Equities, and importantly including bank stocks, saw a major recovery, and sovereign bond yields pared back a good chunk of their declines suffered in recent days. On some measures, US and European banks saw their best positive trading day in 4 and 5 months respectively on Tuesday. In US Treasuries, the 2-year yield saw it’s biggest one-day rise since June last year. Also supporting yields, the US CPI print for February, out yesterday, saw another repeat of the sticky-inflation narrative, with US core CPI month-on-month up 0.5%, above the 0.4% consensus estimate.

Panic over, no global financial meltdown after all?

After the SVB-driven risk-version over the past week, markets seemed to be settling back into a more constructive mood on Tuesday. At their simplest, banks’ operating models are intrinsically linked to a liability-asset duration mis-match… after all, it’s in a bank’s DNA to borrow short (deposits) in order to lend long (loans), and profit from the interest rate spread less some provisioning for the risk of loan-defaults. The fact that banks might choose to park excess deposits into generally-considered-risk free assets such as government bonds is not necessarily bad in and of itself. If banks can hold to maturity, then in nominal terms, there is no risk (assuming we’re not worrying about a government default). As we’ve seen from the SVB debacle last week, the problem arises when a bank cannot hold to maturity, where the discounted mark-to-market price of a bond reflects the impact of the remainder of the bond’s life in real terms. With the Fed now allowing banks to swap Treasury holdings for cash loans at par (the value that the bonds were originally issued at) through a so-called Bank Term Funding Programme (BTFP), this has significantly eased that problem. Initially, the BTFP is to run for one year, but frankly, given the hitherto history of central bank QE-led intervention over the years, it’s probably not a big stretch to assume this programme could be extended if it were needed.

Not yet all clear for bank profit margins though?

Whilst the consensus is that we are not facing financial systemic risk after all, there is still the problem of varied margin impacts for banks. The speed of interest rate hikes over the past year provided a boost to banks’ net interest margins, as interest rates on loans repriced quicker than deposits. The events over the past week have reminded us that with greater competition for deposits, this has given rise to concerns of whether we have seen peak net interest margins for the time being. That said, some relative perspective is important – given we have mostly moved-on from a world of zero interest rates, with interest rates higher and likely to be around these higher levels for some time, the medium-term outlook for bank profitability in aggregate is still arguably much better than it was over the past decade or so.

What does Brooks Macdonald think

With the SVB-induced volatility in recent days now falling, markets are turning back to weighing up the latest economic data, and how it might influence interest rate policy ahead. We have the ECB rate decision up tomorrow, and then it’s the turn of the Fed next week. How these and other central banks balance the recent bout of worries around financial conditions, versus still sticky-inflation pressures, will clearly be the key focus over the near term.

Bloomberg as at 15/03/2023. TR denotes Net Total Return.

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

Chloe

15/03/2023

Please see below weekly market commentary received from Brooks Macdonald yesterday afternoon, which provides global economic data and market news.

• China officials set out an economic growth target of “around 5%”, a little below expectations and potentially cooling hopes for fresh stimulus later this year
• Next 8 days will be crucial for shaping the market’s outlook on jobs and inflation, with US Federal Reserve (Fed) Chair testimony to Congress plus monthly jobs and Consumer Price Index (CPI) all in the mix
• Bank of Japan’s Governor Kuroda takes his last meeting this week, as markets continue to speculate if and when his successor might change BoJ policy goals

China officials opt for a slightly-softer-than-expected economic growth target of “around 5%”

Over the weekend, China officials set out a modest economic growth target of “around 5%” for 2023, at the low end of estimates that had hoped for more than 5% or maybe even 5.5%; the implication is that it lowers, a little, hopes for the size of any fresh policy stimulus later this year. As a result, Chinese equities are lagging small gains across Asia Pacific in early trade this morning. Over in the US, equity futures are indicating up, having capped off a positive day on Friday – that was despite a stronger US ISM Services print pointing to a still-tight labour market and inflation stickiness. Turning to the week ahead, the US will dominate the news flow with the latest jobs report out on Friday, along with US Fed Chair Powell’s biannual monetary policy report to Senate and House committees tomorrow and Wednesday respectively. Elsewhere this week, we also get China CPI on Thursday, UK January GDP on Friday, as well as 3 central bank decisions this week from Australia (tomorrow), Canada (Wednesday) and Japan (Friday). Also looming on the horizon for investors is next week’s CPI print (next Tuesday) which will cap a busy next 8 days for news flow.

What markets are looking for in this week’s US monthly jobs report

This coming Friday sees the latest print for the US monthly jobs report (for February), the non-farm payrolls data. It’s always a key print for markets, but arguably more so now given the importance that the Fed has put on the strength of the jobs data as a key factor in sticking to its hawkish rhetoric on interest rates in recent months. Friday’s monthly jobs data will also be the last one ahead of the Fed’s next FOMC (Federal Open Market Committee) decision due 22 March. In terms of what to expect, Bloomberg’s estimate is for 215,000 jobs added in February (down from January’s monster gain of 517,000 where some think the mild winter weather ended up providing a bit of a boost), with the unemployment rate expected to hold at over-50-year-lows of 3.4%.

Bank of Japan’s last meeting for Kuroda, and expectations for policy change are low….for now

Also due Friday is the Bank of Japan (BoJ)’s rate decision, and it’s the last meeting for the outgoing Governor Kuroda. Expectations for any fireworks are low, given the incoming Governor Ueda (pending final voting by Japan’s parliament on his appointment) said last month that current monetary policy settings remained appropriate. That said, markets are still speculating that the BoJ might change its yield-curve-control policy framework later this year, allowing bond yields to rise. The BoJ policy direction this year could have major ramifications for markets globally – with the BoJ as the last major central bank hold-out of zero rates, it has arguably hitherto pushed Japanese liquidity overseas in the hunt for yield – but if the BoJ allows yields to rise later this year, this could suck some of that liquidity back home again, and which might end up creating upward pressure on yields in other international bond markets.

Will the Fed stick to its rate-hike down-shift path or change course?

Fed speakers in recent weeks have raised the risk of a higher terminal interest rate, with market expectations for peak rate currently at 5.439% in September this year, and vs the current Fed policy rate range of 4.5-4.75%. After last month’s nonfarm payrolls print came in well above expectations, and the recent CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures) reports showed stickier-than-expected price pressures, this next set of data will be crucial. Markets are currently pricing in 29.8bps of hike in March, so split between expecting 25bps which is still seen as the most likely for now, or whether there’s a small-outside-chance of a 50bps move instead – the latter would be tough pill for markets to swallow, with the Fed so far having down-shifted its rate-hike pace from 75bps to 50bps to 25bps over the last 3 consecutive meetings.

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

Chloe

07/03/2023

Please see below Tatton Monday Digest article received this morning, which provides a global market update and an update on the UK economy.    

Overview: Balancing acts

Last week saw global equity markets give back some of February’s earlier gains. Even so, global equities have made a total return of around 5% in £-sterling terms since the start of the year. Over the past fortnight though, market participants have come to accept inflation – and in its wake interest rates – will stay higher for longer than previously anticipated. As a result, rising bond yields have been one factor pushing equity markets lower. Global risk assets tend to fare better when the US Dollar is in a bit of a decline, and that was the situation for November through to January. However, as February has progressed, the Dollar has strengthened. The biggest driver of the moves appears to be China, with weakness in the Renminbi. The surprise caused by the end of its zero- Covid policy generated optimism, but a bounce in the economy is taking longer than hoped. Activity may start getting stronger when spring arrives, but global metals and energy price falls are not a great sign.

Still, last week’s preliminary Purchasing Manager Index (PMI) data for January pointed to remarkable strength, especially within services. The resilience of households is striking, but not really surprising, given the buoyancy of jobs markets across the western industrialised world. In the US, seasonally adjusted initial claims (the weekly count of people applying for unemployment insurance) remained below 200,000. A normal level (when the job offers and seekers are in balance) is around 300,000. However, as we discussed last week, despite the tightness in labour markets there is a growing sense that inflation is not in any upward wage-price spiral. Consumption is being underpinned by the solid jobs markets, but not by household borrowing, nor by reducing savings. Spending growth is solid and sustainable rather than booming, and therefore unlikely to be overly inflationary. 

To summarise, it looks as though the big threat to market valuations of a deep and sustained recessionary period – as anticipated at the market lows of last autumn – has passed and given way to a more moderate outlook. At the same time and against the backdrop of once again considerably elevated stock market valuations, this does not mean it is all plain sailing for investors. Nevertheless, as long as labour markets and with them consumer demand continue to be resilient – weakening global growth scenarios should only result in short-term volatility. Patience will once again be of the essence for the long term investor, while for their investment managers, continued scrutiny in assessing and identifying the relative winners and losers from the gradually unfolding scenarios will be the order of the day.

Inconclusive recession indicators leave markets guessing

Recession talk has been rife over the last year, with media commentators – and even some policymakers – suggesting investors and the public should brace for an upcoming global recession. These calls are backed up by many classic contraction signals: bond market upheaval, compressed business sentiment and mortgage credit stress depressing housing market activity. Contrary to this though, several key indicators are suggesting things are not so dire: employment is strong, consumer demand is resilient and equity valuations are still relatively high. With all these mixed signals, what should we make of recession chances?
One of the most well-known predictors of recession is the shape of the yield curve – the difference in maturity between long and short-term government bonds. In a healthy growing economy, the curve should slope upward, as investors expect a stronger economy in the future and therefore demand higher returns when lending over the long-term. By contrast, when investors expect the economy to be weaker in the future than it is now, the reverse happens. The US yield curve has inverted only a handful of times in the last half century. Every single one was followed by a recession. The US yield curve is currently inverted steeper than at any point since the 1980s, as short-term (three-month) deposit rates, and two-year government yields, are significantly higher than the 10-year yield on US Treasury bonds. But this does not mean a recession is guaranteed, much less imminent. For starters, the time lag between inversion and recession is long and variable, historically speaking. And in any case, the effects of rapid inflation and aggressive monetary tightening are severely distorting bond market dynamics. That makes classic signals like these much harder to interpret.

As another fairly reliable recession indicator, credit spreads do reliably spike before and during recessions. But interestingly, the highest credit spreads tend to come when a recession is already at its nadir, which if anything can be seen as a sign of recovery ahead. In fact, since the end of last year, credit spreads around the world have trended downwards. This suggests conditions are not immediately going to turn sour, and explains some of the more positive indicators we are seeing, such as relatively high equity valuations. So, we should take heart in the recent fallback in credit spreads. We are still on recession watch, but the alarms are not sounding just yet.

European gas prices 

Britons are bracing for another energy price hike next month. The energy price guarantee – currently at £2,500 a month per household – will rise to £3,000 in March, unless the Treasury’s plans change, which seems unlikely, despite pressure from major industry players. The recent fallback in wholesale gas prices – which should give the Treasury some breathing room – will only have a “marginal” benefit to public finances, according to Chancellor Jeremy Hunt. That is debatable, depending on how you look at Government spending on the cap which will fall. 

The market prices for natural gas are expected to continue to decline quite substantially. European natural gas recently became cheaper than at any point since the summer of 2021, six months before Russia’s invasion of Ukraine and the subsequent upheaval in international energy markets. Gas is still expensive by historical standards, but crucially, energy supplies – particularly those from Russia – are no longer the immediate threat to British and European economic stability that they seemed for much of last year. Analysis from Morgan Stanley suggests European gas consumption was 22% below the seasonal average in January. Even adjusting for the warmer weather, demand was 14% lower than would be expected at this time of year. The shortfall is not only big but growing too, down from a 10% weather-adjusted fall in December. Much of this seems due to a change in the energy mix, with a 20% increase in wind power generation.

Unfortunately for UK households, falling prices will take time to filter through. But it is only a matter of time, and the effect on budgets should be roughly proportional to the fall in wholesale prices. That means, should gas tumble by more than expected – as is very possible – bills should be lower too. For growth, inflation and for people more generally, that would be a welcome relief during the next cold season.

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

Chloe

27/02/2023

Please see below article received from Brewin Dolphin yesterday evening, which provides a positive outlook on the UK economy and global markets.

The UK has been the subject of many headlines in recent weeks as journalists and politicians spar over the country’s economic performance. Ironically, this comes at a time when the economy is doing very little. We therefore felt it might be worth giving some consideration to the true state of the UK economy and what it means for investors.

Recession bound?

Traditionally, we measure economic strength by looking at the speed of growth (or shrinkage) in economic activity. The go-to measure here is gross domestic product (GDP). Faster GDP growth is assumed to be better, while two consecutive quarters of declining GDP is often considered a technical recession.

Speculation has been rife recently over whether the UK will enter a recession. If the economy shrank during the final quarter of 2022, then it would meet the technical definition of a recession because it had already contracted in the third quarter. Hence, there was great focus on the first estimate of growth for that period. As it transpired, it neither grew nor shrank, meaning that a recession has been averted for now. This splitting of hairs misses the point that the UK economy stagnated during 2022 and is in danger of doing the same during 2023.

Taking 2022 and 2023 as a whole, a recession could be avoided, or suffered, but the likelihood is that either way the economy will be a lethargic performer throughout. When we talk about the risk of a recession in the UK it conjures pictures of queues outside job centres as unemployment picks up sharply. But the opposite remains the problem for now. Jobs growth has been strong and the challenge for businesses has been finding workers.

Although the worst fears of rapidly rising energy bills due to spiralling gas prices have been eased by a warm winter and bolstering of gas supplies, prices seem likely to hover around the level of the fuel bill cap. More pressing will be the cost of refinancing mortgages for anyone whose deal is coming to an end. Mortgage interest rates have moved sharply higher during the last few years. Taxes are also set to rise from April in a bid to shore up the public finances.

The current economic environment is a difficult one, and so lower rates of growth might be inevitable to some extent.

New highs for the UK stock market

At the same time, though, the FTSE 100 has hit all-time highs. While rising oil and gas prices have weighed on the UK economy, they have helped the commodity-sector[1]heavy FTSE 100 rise by 6.2% year-to-date and breach the 8,000-point mark for the first time ever. Meanwhile, the FTSE 250 is up by around 5% year-to-date. This may initially appear counter-intuitive and, historically, the strength of an economy would inevitably have an impact upon the companies listed on the stock market there.

However, in one of the anomalous features of modern finance, that is no longer necessarily the case. Most of the major companies on the UK stock market are listed there by virtue of history, not as a reflection of their current business activities. Some 80% of FTSE 100 revenues and 50% of FTSE 250 revenues arise from outside the UK. Most companies gather sales from around the world, and a few are even specifically focused on individual countries outside the UK.

That is not just the case in the UK. New technology companies seeking to list on the stock market would feel inclined to do so on the US Nasdaq exchange, almost no matter where they were founded.

The long term

If we were to look to the long term, what can we conclude about the UK?

Convention dictates that we should judge the UK’s performance relative to its peers in the G7. This is a collection of countries who loosely formed a group in the 1970s when they were among the biggest economies in the world, excluding the Soviet Union. Today, most of these countries remain towards the top of the table, with China and India having supplanted the Soviet Union.

Starting at a discreet distance, the UK economy has been a relatively strong performing economy against this peer group since 2000. The trailblazers have been the US and Canada, but the UK has outpaced its European peers.

Much of that strong performance for the UK, however, came in the early years and a series of shocks mark useful milestones to check on our national progress. Since the financial crisis, for example, Germany has pretty much caught up with the UK, while France, Japan and Italy have all lagged.

Looking ahead, we can observe that there are some features of the UK which act as impediments to its economic growth.

The most obvious is demographics. In many parts of the world, populations are growing more slowly or, in some cases, starting to decline. Demographics is one of the key determinants of growth. The UK population has been growing faster than its European peers, but Canada has been the fastest growing in the G7 both economically and in terms of population. The worst-performing economies for growth have been Japan and Italy whose populations, unsurprisingly, are contracting.

Connected with demographics is the fact that the UK is the second-most densely populated of the G7 (after Japan). This results in a lot of opposition to new development, particularly on greenfield sites. This has been a hindrance to economically stimulative activities such as housebuilding as well as new infrastructure projects such as rail links or runways. The UK has a similar population growth rate to that of the US but the latter is managing to grow more strongly than demographics alone would suggest.

The UK also has a disproportionate share of its economy devoted to services. One of the advantages of this is that many services activities create a lot of value. However, one of the shortcomings is that the services sector tends to experience less productivity growth than the goods and production sectors, where new tools and techniques see a more stable pace of efficiency gains.

All European states suffer relative to G7 highflyers like Canada and the US from being relatively poor in natural resources. The UK, in particular, with its higher-than[1]average population density, imports a higher share of energy and food than some other members of the G7.

Growth isn’t everything

If this description of the UK seems very downbeat, then some additional context is needed.

The UK has several strengths, most notably its time zone, its language, its legal system, its universities and its history. As a desirable place to work and live, the UK continues to be an attractive destination for talented young workers. The UK has a strong competence in technology and science, which is not represented in its investment market.

As mentioned at the beginning, GDP is a conventional way of measuring economic performance, but that doesn’t mean that it necessarily captures every aspect of standard of living, which most people would care more about. And which contribute to creating a desirable place in which to work and live.

What does this mean for investors?

When deciding which investment market to invest in, the constituents of the index are as important as the region it is based in. Technology is the largest sector in the US, for example. The UK, on the other hand, has quite a spread of industries represented. The biggest sector is financial companies but that can be misleading; many of them are investment trusts, which themselves invest across a whole host of other sectors within the public markets or more diverse asset classes. The UK is rich in defensive ‘staple’ goods, which are less exposed to the vagaries of the global business cycle. Conversely, however, it also has some of the most economically sensitive companies in the form of its substantial constituents from the energy and mining sectors.

Whilst it makes the market somewhat incoherent – it is neither defensive nor cyclical – it does mean investors in the UK have scope to choose from a lot of different kinds of companies.

The fact that UK stocks generally generate a lot of their revenues from overseas provides some benefits. When the UK economy performs poorly or suffers shocks, the pound tends to fall. We saw this around the global financial crisis, Brexit referendum and emergence of Covid. These falls increase the value of the overseas profits UK companies generate, which helps to cushion some of the falls (although the same can generally be said of overseas-listed companies too).

Other assets such as UK bonds, and particularly UK government bonds (or gilts), are more connected to the UK economy. When the economy is struggling with a more conventional recession, the Bank of England is expected to cut interest rates. This increases the value of UK government bonds, which pay a fixed rate of interest. Some government bonds provide protection against inflation as well, although they are still sensitive to interest rates; balancing the extent to which they may benefit from higher inflation but suffer from higher interest rates is a complex analytical task.

Across the spectrum of company shares, bonds and the pound, there are various ways to benefit from the UK, whether it is on the up or down in the dumps. Currently, we believe that the UK’s economic headwinds make gilts more attractive than most other government bonds. However, we have reduced our long-term UK equity weightings after a strong year that was driven by the resource-heavy nature of the market during 2022.

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

Chloe

17/02/2023