News

Please see below, a weekly market commentary received from Brooks Macdonald yesterday afternoon – 25/07/2022

• Europe was in focus last week with Nord Stream 1’s reopening, Italian elections and the European Central Bank’s (ECB) hike all competing for attention
• This week the US Federal Reserves’ (Fed) meeting and US Q2 Gross Domestic Product (GDP) will set the tone as we close out a volatile July
• US and European earnings ramp up this week with the majority of companies beating expectations so far

Europe was in focus last week with Nord Stream1’s reopening, Italian elections and the ECB’s hike all competing for attention

Economic growth expectations remained a key driver of market moves last week with weaker data continuing to paint a picture of a slowdown in the US and the rest of the world. As a result bond yields fell, helping growth focused equities outperform already strong gains within the European and US stock markets.

Last week was dominated by European headlines, be those around the resignation of Italy’s Prime Minister, the restarting of the Nord Stream 1 pipeline or the ECB which scrapped its forward guidance in favour of a 50bp hike1 . This week the US will be in focus with the Federal Reserve concluding its rate setting meeting on Wednesday where it is widely expected to hike rates by 75bps2. Investors will be looking at how Fed Chair Powell balances the inflation risks with economic growth risks particularly given the weaker initial jobless claims of recent weeks which suggests a deterioration in the employment outlook. With the market now pricing in a change in tone at the Fed at the start of next year, with subsequent interest rate cuts, how the Fed addresses this elephant in the room is arguably more important than the size of Wednesday’s hike.

This week the US Fed’s meeting and US Q2 GDP will set the tone as we close out a volatile July

With recession fears remaining central to market moves, investors will also be watching the US GDP number on Thursday, which if negative means the US has entered a technical recession after contracting in Q1 of this year. It is worth stressing the technical nature of this recession, should it occur, given Q1 US GDP was driven lower by global factors rather than US factors. Equity markets are likely to look through such an outcome however it may have second order impacts on consumer demand should it solidify consumer negativity about future economic growth.

US and European earnings ramp up this week with the majority of companies beating expectations so far

All of this alongside a bumper week for US and European earnings means that the week will be a fitting end to a volatile July. So far in the earnings season, around 20% of US companies have reported with the majority beating earnings expectations. Many companies have painted a more cautious picture of 2023 however this largely chimes with the market’s broader macroeconomic thinking and therefore has been accepted by investors without too much concern.

Economic indicators (week beginning 18 July)

Economic indicators (week beginning 25 July)

Asset Market Performance

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

David Purcell

26th July 2022

Please find below, a Daily Investment Bulletin received from Brooks Macdonald, this morning – 15/07/2022

What has happened 

Risk appetite remained supressed yesterday as bank earnings and recessionary fears combined into another poor day for equity markets. JPMorgan yesterday missed expectations and Morgan Stanley saw investment banking revenue halve compared to the previous year. Q2 earnings will be a key determinant of whether the market concludes that the year-to-date falls adequately compensate for the expected deterioration of margins over the short to medium term.  

Federal Reserve 

With the US CPI report causing investors to reappraise the near term path for US interest rates, ‘Fed speak’ is being scrutinised to gauge the chances of a 100bp hike. The Fed will enter their communication blackout window on Saturday so yesterday’s comments are one of the last tests of Governor sentiment that the bond market has to work with. Governor Waller yesterday said that the CPI beat earlier in the week justified another 75bp rate hike however he was open to a larger hike if economic data was stronger than expected. President Bullard meanwhile also supported a 75bp hike, with the result that markets reduced their expectations for a 100bp hike. The 2-year US Treasury yield gave back some of its recent rise, trading at 3.11% at the time of writing. US technology stocks were a particular beneficiary of this reduction in rate expectations, managing to secure a small gain yesterday even as the broader US market sold off.  

Italy 

European political risk returned to the fore yesterday as Prime Minister Mario Draghi attempted to resign after the Five Star Movement refused to back his government in a confidence vote. Draghi said that ‘The loyalty agreement that was the foundation of my government has gone missing.’ With President Mattarella declining the resignation, the Italian political backdrop is uncertain with a fresh round of elections possible. Italy has been facing a large number of economic and political challenges since COVID, as reflected in the spread between German bond yields and Italian yields. Yesterday saw that spread widen to its largest level in over a month.

What does Brooks Macdonald think? 

Adding to the concerns of a global slowdown, overnight China released their Q2 GDP data which showed that the economy contracted on a quarter-on-quarter basis. China continues to struggle in applying the zero COVID policy to the latest Omicron led surge and this slowdown may well prompt Beijing to provide further economic support to ensure that the economy does not stall over the summer.

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

David Purcell

15th July 2022

Please find below, a Daily Investment Bulletin received from Brooks Macdonald this morning – 07/07/2022

What has happened

 Despite fairly dire economic sentiment, equities made gains yesterday with European equities outperforming as they caught up on the late US rally on Tuesday night. Below the surface, investors continue to rachet up their probabilities of a recession with commodity prices falling and the US 10-year Treasury yield remaining below the 2-year yield, a historical precursor to recessions.

 Boris Johnson

 This paragraph has needed to be rewritten several times in the last hour but with the announcement that Boris Johnson will step down as Conservative leader, the scene is set for a leadership contest, the winner of which will become Prime Minister. Yesterday saw some fairly extraordinary scenes with a large number of ministers resigning but Boris Johnson remaining resolute that he retained a political mandate to govern after the large majority at the last general election. This morning, Downing Street officials briefed that Boris Johnson would resign as Conservative leader later today whilst remaining caretaker Prime Minister until the election process is concluded in the autumn.

 What next

 Sterling has seen a small bounce this morning versus the major currency pairs however until a clear leader emerges from the pack of contenders, the true economic and political impact of the change in leader will be hard to price in. At this stage we probably shouldn’t read too much into the bookmakers odds however Penny Mordaunt is leading. Mordaunt has distanced herself from the Prime Minister for several months, which could prove a factor amongst MPs as well as the Conservative membership, and pairs pro-Brexit leanings with liberal Conservatism – potentially appealing to both wings of Tory MPs. Conservative MPs will debate the benefits of each candidate, voting until two candidates remain, with the ultimate winner chosen by Conservative party members.

 What does Brooks Macdonald think?

 Back in 2019, sterling’s price was closely correlated with the perceived probability of a softer or harder Brexit. In recent weeks, with global central banks opting for differing levels of aggression in tackling inflation, currency pairs have largely been determined by expected differences in interest rate policy. This leadership contest however will undoubtedly draw the attention of currency markets given a) the new leader would have up to 2 years until the next general election b) EU/UK relations remain highly uncertain and c) the cost of living crisis makes fiscal policy even more important.

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

David Purcell

7th July 2022

Please find below, a market update received from Brewin Dolphin, yesterday evening – 28/06/2022

Global stock markets rose last week as reports of a slowdown in economic growth helped to calm interest rate fears.

The S&P 500 ended its holiday-shortened trading week up 6.5%, lifting it out of bear market territory, amid signs the Federal Reserve’s monetary tightening was helping to moderate inflation. The Dow and the Nasdaq climbed 5.4% and 7.5%, respectively.

Stocks in Europe broke their three-week losing streak, with the STOXX 600 and FTSE 100 advancing 2.4% and 2.7%, respectively. Weaker-than-expected purchasing managers’ indices (PMIs) helped to alleviate fears of more aggressive interest rate hikes.

In China, the Shanghai Composite gained 1.0% after the country’s president Xi Jinping said it would adopt “more forceful measures to deliver the economic and social development goals for the whole year and minimise the impact of Covid-19”.

Last week’s market performance*

• FTSE 100: +2.74%

• S&P 5001 : +6.45%

• Dow1 : +5.39% • Nasdaq1 : +7.49%

• Dax: -0.06%

• Hang Seng: +3.06%

• Shanghai Composite: +0.99%

• Nikkei: +2.04%

*Data from close on Friday 17 June to close of business on Friday 24 June. 1 Closed Monday 20 June.

China eases Covid-19 restrictions

UK and European indices started this week in the green as an easing of Covid-19 restrictions in China boosted investor sentiment. The FTSE 100 climbed 0.9% on Monday (27 June) with miners leading gains after G7 leaders pledged a $600bn boost to global infrastructure. In contrast, the Dow, S&P 500 and Nasdaq gave back some of last week’s gains, ending the trading session down 0.2%, 0.3% and 0.7%, respectively.

In economic news, US pending home sales unexpectedly rebounded in May after declining for six consecutive months. Sales rose by 0.7% from the previous month but were down 13.6% on a year-on-year basis.

The FTSE 100 was up 1.1% at the start of trading on Tuesday as hopes of an economic rebound drove commodity prices higher and boosted mining stocks.

UK inflation accelerates to 9.1%

The UK consumer price index, published last Wednesday, showed inflation hit a new 40-year high in May as food and energy prices soared. The Office for National Statistics (ONS) said prices rose by 9.1% in the 12 months to May, slightly higher than the 9.0% increase recorded in April. Prices for food and non-alcoholic drinks rose by 8.7% year-on-year, the biggest jump since March 2009.

Encouragingly, core inflation – which strips out food and energy prices – eased to 5.9% in May from 6.2% in April. On a monthly basis, consumer prices rose by 0.7% in May, much less than the 2.5% monthly increase seen in April.

Consumers rein in spending

The latest UK retail sales data suggests rising prices are resulting in consumers reining in their spending. Sales volumes fell by 0.5% between April and May, reversing the expansion seen in the previous month.

The decline was driven by a 1.6% fall in food store sales, which the ONS said seemed to be linked to the impact of rising food prices and the cost of living.

Separate figures showed UK consumer confidence fell to its lowest level since records began. GfK’s consumer confidence index slipped by one point to -41 in June, with a particularly large drop in expectations around personal finances. “With prices rising faster than wages, and the prospect of strikes and spiralling inflation causing a summer of discontent, many will be surprised that the index has not dropped further,” said Joe Staton, client strategy director at GfK.

Eurozone business growth slumps

Last week’s economic data also showed a slowdown in business growth in the eurozone. The S&P Global flash eurozone PMI composite output index fell from 54.8 in May to 51.9 in June, a 16-month low. Manufacturing output contracted for the first time in two years and service sector growth cooled considerably, particularly among consumer-facing services.

Companies also scaled back their business expectations for output over the coming year to the lowest since October 2020. Both the stagnation of demand and worsening outlook were widely blamed on the rising cost of living, tighter financial conditions and concerns over energy and supply chains.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Eurozone economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost-of-living shock and slumping business and consumer confidence. Excluding pandemic lockdown months, June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008.”

Signs US inflation is moderating

Over in the US, data suggested inflation could be moderating. The University of Michigan’s consumer sentiment survey showed consumers expect inflation to rise at an annualised rate of 5.3% in June, below forecasts and the peak rate of 5.4% recorded in March and April. Meanwhile, S&P Global’s flash PMI data for June showed the pace of input price inflation eased to the lowest for five months, and output charges rose at the softest pace since March 2021.

However, the data also revealed the weakest upturn in US private sector output since January’s Omicron[1]induced slowdown. The rise in activity was the second softest since July 2020, with slower service sector output growth accompanied by the first contraction in manufacturing production in two years. Meanwhile, business confidence slumped to the lowest since September 2020. “Business confidence is now at a level which would typically herald an economic downturn, adding to the risk of recession,” said Williamson.

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

David Purcell

29th June 2022

Please find below, a weekly market update received from Brooks Macdonald, yesterday evening – 20/06/2022

• US and European equity markets fell heavily last week as the Federal Reserve (Fed) u-turned on its forward guidance
• President Macron’s party has lost overall control of the National Assembly, challenging future legislative plans
• Fed Chair Powell testifies to Congress this week, keeping central bank policy front and centre

US and European equity markets fell heavily last week as the Fed u-turned on its forward guidance

 Last week saw one of the worst weeks for equity markets in recent memory as last minute changes to central bank policy mixed with a poorer economic backdrop. The losses were widespread with few markets and sectors able to avoid the contagion. European peripheral bond markets fared better, as the market gained some comfort from the European Central Bank’s (ECB) emergency meeting to discuss how to tackle any fragmentation between national bond markets.

Whilst last week’s Federal Reserve meeting is out of the way, investors are still reeling from the last minute change in Fed forward guidance which saw a 75bp interest rate hike in June after such a hike had previously been ruled out1 . Forward guidance is extremely difficult at a time when the central bank is data dependent on what happens to inflation and economic growth, however a feeling that the words of Fed Chair Powell should be taken with a pinch of salt will only heighten volatility. This week Chair Powell will testify to both the Senate and House Committees where he is expected to be questioned on what the central bank is doing to control the inflationary spike in the US. Last week Powell said that a 75bp rate hike would not become a typical event however with forward guidance in question, this may not stop markets from pricing in such an outcome.

President Macron’s party has lost overall control of the National Assembly, challenging future legislative plans

The French legislative elections have seen President Macron lose overall control of the National Assembly. Whilst Macron’s party remains the largest overall party, any legislative items will require delicate coalitions to be formed. The elections saw a strong showing for far left and far right parties, splitting the centrist vote. Macron is likely to rely on votes from the fractured centre right parties to pass key items such as pension reforms however such legislation is likely to need to be watered down to pass through a complex web of political priorities.

Fed Chair Powell testifies to Congress this week, keeping central bank policy front and centre

The recent market volatility has been driven by inflation data and the central bank reaction to that data. With the US closed on Monday, no US inflation releases this week, and Powell unlikely to err too much from his statements last week, we may be in for a calmer week. Now we are back to an era of emergency central bank meeting however, the chance of a surprise has greatly increased.

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

David Purcell

21^st June 2022

Please find below, a summary of this week’s Tatton articles, received from Tatton this morning – 13/06/2022

Outlook: new worries, old concerns?
After renewed positive sentiment in recent weeks, markets once again are showing signs of fragility. We could characterise this ‘risk off’ mood as growth scepticism or more wariness that inflation needs even stronger and swifter central bank policy tightening before being squeezed out. Last week’s change in emphasis from the European Central Bank (ECB) – while expected – provided the necessary headlines. Interest rates were unchanged, but ECB President Christine Lagarde “committed” that rates will rise by 0.25% at the July meeting, and that bond buying will also end (although there was no mention of actual bond sales). From the current overnight market rate of -0.5%, most economists expect the year-end traded rate to be around +0.75%. 

If the ECB is so certain of a rate hike next month, why not start now? If the ECB’s own inflation forecasts keep going up – and all the risks lie towards higher inflation – this is like driving towards a cliff edge with a broken speedometer and promising your passengers you won’t brake too sharply. There may be reasons to think the ECB’s laggardly stance (pun intended) is intentional because most believe the underlying issues are ‘global cost push’, and that the policy that matters comes from the US Federal Reserve (Fed). In which case, policy compression is already underway. US inflation data for May released on Friday worried some investors by being slightly above expectations (with monthly core consumer price index (CPI) inflation still rising at an annualised rate of 7%). US ten-year Treasury yields returned to above 3% last week. Perhaps investors are yet to be convinced inflationary pressures may have peaked.

The current upswing in market risk premia seems to us to be more of a straightforward tale of risk aversion. If energy prices keep rising, or some other external threat emerges, those more anxious investors who headed for the exit might been justified. But resilience levels and activity potential for the global economy have not been in as promising a state for a long time – as has been the resilience of systemically important financial institutions. We suspect last week’s wobble was no more than that. 

Monetary and fiscal policy: giving with one hand, taking with the other
Boris Johnson’s pyrrhic victory on Monday’s ‘no-confidence’ vote could have big implications for the UK economy. Not that you could tell from the market reaction: the FTSE 100 dropped ever so slightly in midweek, while sterling stayed at the same dollar value. But the Prime Minister’s weakened position makes him much more amenable to the whims of his colleagues, and the pressure to ease the UK’s tax burden is mounting. Backbench MPs are reportedly urging the Prime Minister to override the Treasury on cutting taxes, regardless of the inflationary impact. If this happens, it is unlikely to be matched by spending cuts, which could threaten another rebellion. As such, we should expect that the government will loosen fiscal policy in the coming months.

Let that sink in for a moment. Britain is currently seeing its highest inflation levels in 40 years – higher than any other G7 nation – and unemployment is the lowest it has been since the 1970s. Energy and goods supply is severely constrained, and with an excruciatingly tight labour market, we are on the cusp of a wage-price spiral. And amid all of this, the government is throwing more fuel on the fire by loosening fiscal policy. As politically and socially understandable as this may be, such a move would increase inflationary pressures and put the Bank of England (BoE) in a bind. In this environment, monetary policymakers cannot afford to balance growth prospects against price stability. Instead, they must tighten policy hard, raising interest rates and likely choking off growth potential. 

This combination of tight monetary and loose fiscal policy is far from confined to the UK either, as the ECB announcement made clear. More generally, it is a reversal of the policies promoted for more than a decade after the global financial crisis. In that time, we have seen incredibly easy financial conditions while governments have been reluctant to loosen the public purse-strings and in many cases applied outright fiscal austerity. Over the years, many called on politicians to match central banks’ largesse,  that it is happening now – while global inflation surges – will no doubt make many uncomfortable. 

Rising interest rates and central bank tapering puts upward pressure on yields. But so too does loose fiscal policy, as higher government borrowing increases the bond supply competing for investor’s buying interest. Both happening at the same time could mean dramatic upward pressure on yields – which is unlikely to stop anytime soon. Rising bond yields also push up borrowing costs for consumers and businesses. If these increase too rapidly, widespread defaults become much more likely – the classic harbinger of recession. The silver lining is that increased borrowing costs act as a dampener on demand, pulling down inflation and lessening the need for higher interest rates. Yields are pushing up from extraordinarily low levels, so there could still be some way for bond yields to go before there is a significant risk of triggering a debt default cycle. 
The BoE will certainly hope that is enough to tame price rises. With the UK economy forecast  to be the second-worst performing in the G20 (behind only sanction-ravaged Russia) tighter monetary policy could mean severe pain for businesses and consumers. But with the government apparently pushing ahead with fiscal aid, the central bank has little choice. What the new policy mix means over the longer-term remains to be seen.

A fistful of chips: from supply shortage to glut 
US technology giant Intel took a beating from investors last week, leading to a 5.3% fall in its share price on Wednesday. This came after projecting disappointing results for the second quarter. Intel reckons its profits will be around 70 cents a share, well below analyst estimates of 82 cents, and follows a disappointing first quarter of 2022, which saw falling revenues for its PC microchips. Intel’s management insists decent growth forecasts for 2022 will be achieved, implying a stronger second half than previously expected. Investors are not so sure that optimism is warranted, unnerved by signs of faltering demand for PCs – Intel’s largest revenue source. 
Of the other global chip manufacturers, NVIDIA has had a harder time this year whereas Taiwan Semiconductor Manufacturing Co (TSMC), the world’s most valuable chip maker, expects revenues to grow 30% overall this year, a jump from the near 25% growth of last year. TSMC’s projections seem at odds with actual chip price moves, and concerns that demand for computer chips is stalling from global economic and political factors: war in Ukraine, Chinese lockdowns and the cost-of-living crisis across the developed world. Last year, waiting times for games consoles and new cars were unheard of all over the world. TSMC claim these supply shortages continue. 

Wait times for semiconductor delivery hit a record high in May, and chipmakers are raising prices due to rising costs, but in other respects, the chip shortage seems much less pronounced. Companies in need of chips are reportedly starting to see relief and, more importantly, demand has plateaued. Apple, one of TSMC’s best customers, is planning to keep its production of iPhones flat in 2022 – capping off a potential route for growth. This comes as global growth is slowing significantly and inflation is eating into consumers’ disposable incomes. Rapid price rises have also forced the hands of central banks, which are now tied into a rate-hiking cycle that will result in higher borrowing costs and less available capital. The smartphone industry has struggled with these headwinds all year, but the pressures are broad-based, hitting demand for goods well beyond consumer electronics. 

Therefore, despite manufacturer claims to the contrary, capital markets clearly believe chip demand is weaker than supply. Where once there was extreme undersupply, stock markets indicate there is now oversupply. This looks unlikely to change anytime soon, either. Slowing global growth and a cost-of-living crisis will hold back demand in the short term. And over the medium term, there are signs that supply will be boosted. Beyond the question of how we look at chip manufacturers from an investment perspective, the other takeaway from the easing of chip supply is perhaps this: just as chip shortages were the first sign last year of building supply chain disruptions, the easing of supply issues for ‘commoditised’ semiconductor chips now may well mean that price pressures from the supply shortage of goods might be behind us soon.

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

David Purcell

13th June 2022