News

Please see below article received from Legal & General yesterday afternoon, which sets out their market-related predictions for the year ahead.

A ‘grey swan’ is a by-product of Nassim Taleb’s ‘black swan’. Taleb described a black swan as an extremely unpredictable event where what happens is beyond normal expectations of a situation and has potentially severe consequences. Grey swans should be conceivably possible if not necessarily probable. They typically fall into the camps of geopolitics or macro financial markets but can appear more… left field. This year, we are naturally more attuned to potential COVID-19 outcomes, as well as environmental, social and governance (ESG) -related matters. It’s also a good time to look back at what we said this time last year and consider what impacts those events had on markets, if they materialised.

What did we get right and wrong – and what had an impact?

Let’s start with the small stuff before we move onto the elephant in the room. Among our top risks for 2020 that came true were: Argentina’s default; the Democrats winning the US election; and Hong Kong losing its special status with the US. Of these, despite the deep social impacts of Hong Kong’s political turmoil, the impact on financial assets has been more limited.

We gave credence to idea the UK would leave the EU with either no deal or a very basic deal… something that now seems almost certain. Also high on our list for 2020 was the possibility of ‘helicopter money’, but for all the fiscal stimulus measures of the past year, purists would still say we have not seen the choppers in the sky – although for us this seems like semantics.

Obviously the big risk event of the year was the pandemic. Pandemics are often flagged in tail-risk prediction exercises and were indeed included somewhere in our long list of risks for 2020. If we are generous to ourselves, we even recognised the reality of the risk early in the year, taking out risk-management positions in January and into February to protect against possible impacts of the virus as it started to spread beyond China. But, just like many investors, we underestimated the depth of impact it would have on society and on markets by the end of March.

In hindsight, our actions were too little and too early. The events of the first quarter challenged our previous philosophy: that constant and expensive tail-risk hedging is not a viable solution for portfolios. That view has now become more nuanced. While we still believe tail-risk management should be targeted to the real, or outsized, risks faced by any portfolio or client, we have evolved our commitment to researching such strategies with a lower cost of carry, or performance drag. We believe that some collection of these positions can become more structural in nature even if the components, or underlying trades, are more dynamically managed.

Finally we remained cautious on the markets, economy and virus for too long over the summer, an opportunity missed in what turned out to be a very strong second half of the year for our clients.

2020 will be a hard act to follow. What could put 2021 in the record books?

As exemplified by this weekend’s news in the UK, with a new strain of COVID-19 identified and much of the South-East placed under more restrictive measures, the virus will likely dominate the headlines for the months ahead.

However, there is optimism that the roll-out of vaccines will allow a broad reopening reasonably soon. While such a narrative is a sensible base case, and indeed we have exposure to asset classes that will benefit from this, we see tail risks to the optimism. First, it is sadly not inconceivable that the total number of deaths attributed to coronavirus will be higher in 2021 than for 2020. The social toll will continue to be heavy, and these deaths may come predominantly from emerging markets, where vaccine rollouts look to be slower and countries are experiencing new accelerations in case numbers. A third national lockdown in the UK cannot be ruled out, especially if vaccine distribution cannot meet optimistic targets.

UK politics looks set for more potential upheaval; betting markets attribute roughly a 35% chance of Boris Johnson ceasing to be prime minister in the next year, while a Scottish independence referendum remains conceivable. And that’s not to mention the state of the relationship with the EU, which could stay in the headlines through 2021. UK assets remain sensitive to these developments, but from here we are tactically positioned with a positive view on the pound as we see more upside potential than downside risk.

Beyond our borders, US-China relations remain the predominant geopolitical dynamic that will shape the next decade. When the virus has passed, we believe this topic will come back into focus for investors. Most of our team believe the relationship will either stay the same or mellow, but the path to escalation and even physical combat should not be discounted. Also in the Pacific area, our tail-risk scanning exercises again drew our attention to the possibilities of escalating tension on the Korean peninsula but also suggest that reunification talks accelerating are equally likely.

And finally…

Ten more grey swans for 2021 to consider:

1. The Hong Kong dollar breaks its peg against the US dollar, first established in 1983
2. A central bank-sponsored crypto currency goes mainstream, cratering bitcoin
3. Various new medicines or vaccines are developed for existing illnesses as a result of COVID-19 research, including a possible cure for the common cold and significant improvement in the fight against cancer, leading to the view, with hindsight, that the COVID period has actually improved our life expectancy
4. 2021 is the warmest year on record. This unfortunately wouldn’t really be a grey swan as the last five years have been the warmest five on record
5. Extreme weather events lead to poor harvests, shortages and food-price inflation. High food inflation feed social unrests in various countries, spooking markets and upsetting the consensus trade of long emerging-market equities
6. Brazil or Turkey default on their foreign bonds
7. Putin retires, creating a buying opportunity for the Russian ruble
8. Autonomous driving finally hits the big time, with a broad introduction in a major city
9. Long-lasting broad social unrest in the US in major cities, causing a correction in the S&P and US bond yields to fall below zero
10. The Pope announces the Catholic church will allow married and female priests in their clergy

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

Happy Christmas!

Stay safe.

Chloe

22/12/2020

Please see below interesting insight received from J.P. Morgan earlier this afternoon, which categorises the ‘winners’ and ‘losers’ following a challenging year for markets and industry.

The highly unusual nature of the Covid-19 recession has created stark differences between winners and losers. From a macro perspective, service sectors have suffered disproportionately from social distancing restrictions. But this misfortune has benefited some manufacturers as households have diverted spending from experiences to goods (Exhibit 1). This has also affected regional performance as countries with a high weight to services, and tourism in particular, have generally lagged their more manufacturing-heavy counterparts.

Exhibit 1: People have spent where they could
US goods and services consumer spending
Nominal index level, rebased to 100 in January 2018

Market performance was similarly bifurcated for much of 2020, as companies with a technology/online tilt benefited not only from their ability to grow earnings when most other sectors saw huge pressure on profits, but also from the decline in the discount rate used to calculate the present value of those future earnings streams (Exhibit 2). In the summer, the gap in valuations between growth and value stocks reached levels not seen since the technology bubble.

Exhibit 2: Growth stocks benefitted from the shifts in spending in 2020
MSCI World Growth and Value price returns
Index level, rebased to 100 in January 2020

Progress towards a vaccine has already changed this narrative as we move into 2021. On the day that the news broke of an effective vaccine, global value stocks experienced their best day relative to growth stocks since records began. The key question for next year is how confident we can be that this shift from the winners to the losers will be sustained.

Valuations alone might suggest there is more room for this rotation to run. Despite the very strong bounce in 2020’s laggards, such as financials and energy, since the vaccine announcement, both sectors still lag broad indexes substantially year to date. Cheaper valuations are also seen in regions such as the UK and Europe that are more tilted towards value sectors, while US indices look relatively more expensive given the ‘big tech’ tilt.

There may come a point at which we are looking at a more meaningful outperformance of value vs. growth. But a precursor to that, in our view, would be higher interest rates and a steeper government bond yield curve, which would be a headwind to growth stocks and would help financials within the value style. This scenario would require a greater acceleration in nominal GDP and a more rapid tapering of central bank asset purchases than we have in our core scenario. With interest rates capped by the burden of debt, we see this outcome as an upside risk rather than our central projection.

For now, we believe the key to successful allocation across equity market sectors – and therefore across regions – will be to differentiate between secular and cyclical tailwinds and headwinds. For growth sectors, the Covid-19 recession has been the catalyst for many years of technological advancement and adoption to be condensed into a few quarters. We are confident that companies will allocate a greater portion of their resources towards technology going forward, and see many beneficiaries from this secular shift, including areas profiting from advancements in semiconductor technology and the adoption of cloud computing. In other cases, though, growth stock valuations appear to assume that behaviours will permanently reflect a Covid-constrained environment. Investors must ensure that the price they are paying for any company reflects an earnings outlook and market share that can be achieved in a post-Covid world, not just the highly unusual environment of this past year.

The same debate of cyclical vs. secular can be used when assessing the opportunities in value. In very simple terms, we expect companies and countries that have suffered most during the pandemic to be the biggest beneficiaries of a vaccine. Yet medical developments cannot remove all of the headwinds for every company. Take the energy sector, for example. An improvement in the economic outlook should clearly help to put upward pressure on oil prices as demand normalises, and energy stocks should benefit accordingly. But secular headwinds remain as the world transitions away from dependence on fossil fuel towards renewables. Careful stock selection will still be required.

In sum, progress towards a vaccine requires a much more balanced approach across styles, sectors and regions for next year. We expect the significant pressures on the Covid-19 laggards to ease, which in turn should catalyse a rotation across markets. But just as we avoided advocating an ‘all-in’ approach to growth in 2020, we do not see the year ahead as the time to allocate indiscriminately towards only the cheapest stocks. A vaccine will be a major step forward, but it will not cure all ailments.

We will continue to publish market analysis as vaccines are approved and rolled out in 2021. Please check in again with us shortly. Happy Christmas.

Take care.

Chloe

21/12/2020

Please see article below from AJ Bell received yesterday – 20/12/2020.

The outlook for FTSE 100 dividends in 2021

The blue chip index’s dividends are expected to rebound 18% after a 20% drop in 2020

Thursday 17 Dec 2020 Author: Russ Mould

It is unlikely that too many investors will make listening to more announcements from regulators one of their New Year’s resolutions, but no-one could accuse the Prudential Regulation Authority (PRA) of playing Scrooge, at least not this December.

Granted, the PRA may have wounded a few income-seekers’ portfolios with its declaration in late March that the Big Five FTSE 100 banks should not pay dividends (or run any share buyback programmes) in calendar 2020.

The lenders responded immediately by cancelling their planned final payments for 2019, keeping £9.2 billion in cash on their balance sheets. Further possible distributions have been withheld, to deprive income seekers of a further £6.5 billion, based on the payments made for the second and third quarters in 2019.

However, the PRA has now relented and granted permission to Barclays (BARC), HSBC (HSBA), Lloyds (LLOY), NatWest (NWG) and Standard Chartered (STAN) to return to cash to shareholders in calendar 2021.

While caps and limits are in place, this still represents good news for those investors who are seeking income from UK equities. The consensus analysts’ forecast of a combined £5.4 billion in dividend increases from banks underpins the estimate of an aggregate £10.9 billion improvement in the FTSE 100’s payout for 2021 to a total of £70.8 billion.

That £70.8 billion figure is, in turn, enough for a 3.8% dividend yield on the FTSE 100. While it is not up there with the 4.5%-plus analysts were hoping for a year ago (and that after a 15% fall on the FTSE 100 to add capital insult to income injury), it may help to provide some sort of valuation support for the headline index.

Banking on the lenders

However, not everyone will be convinced that the 3.8% yield number is reliable, or sufficient compensation given the potential risks that come with the UK market, in terms of Brexit, the ongoing pandemic and the potentially brittle nature of the economic upturn, given the degree of support that the Bank of England and the Government are having to pump in to try and keep the show on the road.

Analysts are not expecting 2021’s profits or dividends to return to the pre-pandemic levels of 2018 or 2019, to suggest they are not going overboard. But four fifths of 2021’s expected £10.9 billion increase in overall FTSE 100 dividends is forecast to come from just three sectors, the form of financials, miners and consumer discretionary. All of this trio could do with an economic tailwind if they are to live up to such expectations.

If the economy offers little or no assistance – or even hinders – then these forecasts could find themselves exposed to the downside. Moreover, the banks must still contend with the margin-crushing effects of the Bank of England’s zero interest rate and quantitative easing policies, while the Government’s apparent desire to increasingly use them as a tool for lending and keeping debt off its own balance sheet adds to the risk of weaker returns and higher loan provisions.

Concentration risk

Helpfully for those of a nervous disposition, only one of the big five – HSBC – is forecast to be among 2021’s top 20 dividend payers by value within the FTSE 100. Barclays is the next lender in the forecast rankings, at 21st.

Nevertheless, investors must again assess the concentration risk which has dogged those who have sought income from the UK stock market for some years. Ten stocks are forecast to pay dividends worth £32.3 billion, or 54% of the forecast total for 2020. The top 20 are expected to generate 75% of the total index’s payout, at £44.8 billion.

Anyone who believes the UK stock market is cheap on a yield basis, and is looking to buy individual stocks, glean access via a passive index tracker or even buy a UK equity income fund, needs to have a good understanding of, and strong view on, those 20 names in particular.

Please continue to check back for our latest updates and blog posts.

Charlotte Ennis

21/12/2020

Please see below investment bulletin from Brooks Macdonald received today – 18/12/2020.

What has happened

The swinging of the risk pendulum continues with positivity around Brexit, Stimulus and Vaccinations driving markets to fresh all-time/post-pandemic highs yesterday. The feeling of seasonal goodwill faded somewhat as we came into today, however.

Brexit…

This week has been characterised by reports that both the EU and UK legislative bodies were being prepared for an extraordinary series of sessions to ratify a Brexit deal. Overnight however UK PM Johnson and EC President von der Leyen both had a call which concluded that ‘differences remain’. Sterling, after being on a strong run but still within its tight 1.09-1.11 range versus the Euro, is feeling downbeat as investors get increasingly tired of trying to interpret policy from bluster. A new deadline is appearing from the EU to force negotiations to a conclusion with the European Parliament’s Conference of Presidents saying that they would organise an extraordinary session of Parliament as long as an agreement was reached on Sunday. The stakes are high enough on both sides that no one is going to walk away from a compromise reached on Monday morning, but time is very tight and not much Brexit no deal planning can take place within industry given Christmas’s immediacy.

US Stimulus Talks

It wasn’t all gloom and doom yesterday with stimulus talks progressing albeit at a slow pace. Senate Majority Leader McConnell and the White House said that a deal was close as a government shutdown at midnight tonight looms. There appears to be little appetite for last minute brinkmanship on this given the change of guard at the White House but also the precarious economic situation caused by COVID. The current bill is $900bn which contains a large number of the previously discussed measures but predictably excludes state and local aid. One fly in the ointment could be Pat Toomey, a Republican senator from Pennsylvania, who has sought to insert a provision in the stimulus legislation that would prevent the Fed from automatically reviving some several emergency credit facilities that are due to expire at the end of the year. Without this provision the presumed Treasury Secretary Yellen could have restarted the facilities without Congressional approval. One to watch

What does Brooks Macdonald think

It is rather disappointing that the two pieces of unfinished business remain unfinished as the Daily Investment Bulletin packs up for Christmas but it is in many ways apt given how Brexit and post-May US Stimulus have taken up many column inches with little legislation to show for it. Next year will be dominated by the interplay of vaccines reopening economies and short term economic restrictions and hopefully one of the above will be sorted for our return at the start of January…

Source: Bloomberg as at 18/12/20

Please continue to check back for our regular blog posts and updates.

Charlotte Ennis

18/12/2020

Please see below article recently published by the Head Economist of Commercial Banking at JP Morgan. It focuses on the disruptive effect that the pandemic has had on markets and industry this year, with a positive reflection on how adaptable the economy has proven to be.

Spring shutdowns brought economic shocks: In March, the pandemic abruptly ended the longest U.S. economic expansion in history. However, the economy showed its underlying strength in the face of an unprecedented crisis that immediately produced:

• Headline unemployment of 15%-20%, the highest since the Great Depression.
• Workplace closures keeping approximately 50 million workers at home.
• A 15% contraction in the nation’s economic output, marking the worst quarter in U.S. history.

Fortunately, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) likely prevented the sharp contraction from becoming a prolonged financial crisis.

• Low interest rates allowed Congress and the administration to authorize the release of up to $4.7 trillion of deficit-financed relief spending while the Federal Reserve’s asset purchase program helped bond markets absorb the surging federal deficit without crowding out private lending.
• The Paycheck Protection Program kept workers on the payrolls of businesses temporarily shut down by the pandemic, likely stemming the tide of layoffs.
• With inflation falling just short of the Federal Reserve’s 2% target, there was little obstacle to dropping the short-term interest rate target to zero, making credit available to struggling businesses.
• Stimulus spending created a $2.5 trillion jump in retail bank deposits as the household savings rate rose from 8% to 33%.

Over the summer, the economy proved adaptable: Daily life may have been severely disrupted, but most economic activity soon adapted to the new normal.

• The pandemic struck at a time of maturing e-commerce and telecommuting technologies, allowing large segments of the economy to continue operating safely.
• Some sectors, like residential construction, capital goods production and real estate saw strong growth following the COVID-19 contraction with new home sales up 50% over pre-pandemic levels.
• Trade flows also saw a rapid recovery, with imported consumer goods leading the way. Steady demand from American consumers helped stabilize Asia’s industrializing economies.
• U.S. aggregate output moved within four percentage points of regaining its pre-pandemic trajectory, a remarkable rebound considering COVID-19’s ongoing disruptions.

Autumn came, and some sectors were still struggling: Booming real estate and capital goods markets may have obscured more persistent weaknesses in the economy.

• Air travel remained significantly depressed as passengers continued to delay trips, creating a ripple effect through the hospitality and tourism industries.
• Energy exploration has fallen sharply along with oil prices. The North American rig count has dropped by more than half over the past year.
• However, the unemployment rate fell to 6.7% in November, down from spring’s double-digit levels. COVID-19 vaccine approvals could likely speed this trajectory.

Winter could bring crosscurrents: COVID-19 cases are rising with the possibility of further state and local shutdowns that could reverse some of the year’s economic gains.

• Cases were increasing going into the holiday period, suggesting that new restrictions on high-risk settings could be coming.
• However, optimism surrounding potential vaccines is growing. If approval and distribution run smoothly, some experts say the pandemic could be contained as early as the first half of 2021. This could make dislocations from any wintertime shutdowns temporary.
• A sustained rise in household savings implies that consumers are holding nearly $1 trillion in pent-up demand awaiting full reopening of the economy.  
• The forward-looking equities market appears to be pricing in a return to normal next year. Investors are confident that historically high profitability and strong global growth will resume driving the market in 2021.

The bottom line

So far, COVID-19’s economic impact hasn’t resembled a typical recession. Though GDP has rebounded close to pre-pandemic levels, the job market still has significant ground to cover. A full economic recovery likely won’t be possible until an effective vaccine is widely distributed and the virus is contained.

We will continue to study market analysis with a keen interest as we enter the New Year. Please check in again with us soon.

Happy Christmas. Stay safe.

Chloe

18/12/2020

Please see below weekly commentary received from Brooks Macdonald yesterday afternoon. The article provides market analysis as Brexit and US Stimulus deadlines pass with no significant progress made.

Brexit and US Stimulus deadlines pass without meaningful change

The Collins Dictionary defines a deadline as ‘a time or date before which a particular task must be finished or a particular thing must be done.’ With US Fiscal Stimulus and Brexit talks both hurtling through yet another pair of ‘deadlines’ at the end of last week, one can’t help feeling the 2021 edition needs some updating. 

Yesterday UK Prime Minister Johnson and European Commission President von der Leyen held a call followed by a joint statement confirming that the negotiating teams would continue to talk over the coming weeks. There were no new deadlines set but frankly with two and a half weeks to go until the end of the transition period, there really isn’t a need for manufactured urgency. The tone at a leader level is very much that both sides remain far apart but even if a deal is close this will be the language until the last moment. After a torrid week for sterling and UK domestic equities, we are seeing both bounce today but remaining below levels seen a few weeks ago when more hope was baked into UK sensitive valuations.

Congress is set to debate split stimulus bills as lawmakers attempt to break the deadlock

The big question this week will be whether the US can get a fiscal package over the line ahead of Christmas. In an attempt to break the deadlock, there are two bills going to Congress today – a $748bn package which contains the less contentious areas and a separate c. $160bn bill with the thorny topics such as state and local aid¹. House Speaker Pelosi and Treasury Secretary Mnuchin are set to talk yet again to try to reach a compromise position.

This week sees the last Federal Reserve and Bank of England policy meetings of 2020

This week we see the final meetings of the Federal Reserve and Bank of England rate setting committees. The markets are not expecting any meaningful change in the US but for the language around quantitative easing to be ‘enhanced’ as the bank releases its latest Summary of Economic Projections. In the UK a similar meeting is expected, especially after the additional Quantitative Easing announced in the November meeting. 

Despite Christmas being just around the corner, there are some major macroeconomic events for investors to navigate through this week. Optimism has grown today around both US stimulus and Brexit, although this is from the low base set last Friday. The second half of December is traditionally a lower volume period for equities however, with COVID-19 restrictions changing working norms and the macro diary packed, the wind down will likely be delayed a further week. 

We will continue to publish market updates throughout the festive period, so please check in again with us soon.

Take care.

Chloe

15/12/2020

Please see below update received from Brooks Macdonald this afternoon, which comments on the markets’ reaction to political developments in the US as well as ongoing Brexit negotiations in the UK.

What has happened

After starting somewhat moodily, markets gradually recovered ultimately ending in positive territory with the US close. Whilst US Fiscal Stimulus pre-Christmas is still up for debate, constructive comments from the Republican Senate leadership helped support risk appetite.

US Stimulus

Senate Majority Leader McConnell urged both sides to set aside their top priority demands which had generated sticking points earlier in the year. Both parties are acknowledging that this is stage one of the negotiations with another package inevitable when the new administration enters the White House. It’s within that context that the narrative has shifted to ‘pass those things that we can agree on’ in the words of Mnuchin. Treasury Secretary Mnuchin presented a $918bn bill to House Speaker Pelosi so there is a suggestion that we are getting closer to a headline figure on the package. Below the surface there are quite a few differences however, including unemployment insurance where the bipartisan bill backed by Pelosi allocates $180bn with Mnuchin’s White House bill containing just $40bn. Markets have taken the language of compromise, backed by actions, positively however and this has been enough to shrug off the European risk with Brexit.

Brexit

The contentious provisions in the Internal Market Bill were withdrawn by the UK Government yesterday after an agreement in principle was reached around the Northern Ireland arrangements. This draft agreement is yet to be published but these talks, led on the UK side by Michael Gove, have been running in tandem to the main trade talks. This has removed a key point of contention between the EU and UK with the former suggesting that the provisions meant the UK could not be trusted. This improved backdrop is the context for UK PM Johnson to meet EC President von der Leyen over dinner tonight to discuss the Brexit impasse.

What does Brooks Macdonald think

Both sides have played down the odds of a deal and have sounded cautious without entirely snuffing out hope. Is this theatrics or managing expectations ahead of a dinner that shows ‘both sides tried’ – who knows. That said, yesterday was a positive day for Brexit developments as the dropping of the Internal Market Bill provisions (and promise not to include similar measures in the Taxation Bill) does suggest a continued softening of the UK’s position ahead of the crunch dinner tonight.

We will continue to monitor the markets’ performance as we edge closer to the end of the Brexit transition period on the 31^st December. Please therefore, check in again with us soon.

Stay safe.

Chloe

09/12/2020

Please see below this week’s Monday Market Update from Blackfinch Investments – received today 07/12/2020.

Blackfinch Group – Monday Market Update

Issue 20 | 7th December, 2020

UK COMMENTARY

• The COVID-19 vaccine developed by Pfizer in conjunction with BioNTech was granted authorisation for use in the UK by regulators, with the first doses expected to be rolled out imminently
• The FTSE 100 hit its highest level since March thanks to a solid performance in pharma, mining and energy stocks
• House purchase mortgage approvals increased to 97,532 in October, from 92,091 in September, beating the forecast of 84,000, helped by the stamp duty holiday which has turbocharged the housing market
• Nationwide house price index rose 0.9% in November from October. The year-on-year increased quickened to 6.5% from October’s 5.8%.
• The UK was lifted out of ‘lockdown 2.0’ leading to many UK department stores experiencing a mini boom as shoppers rushed back through their doors. Meanwhile Arcadia group fell into administration, putting 13,000 jobs at risk.
• Tesco surprised markets by deciding not to accept its £585m of business rates relief from the government. Many of its peers followed suit providing a c.£2bn saving to the public purse.
• The manufacturing Purchasing Managers’ Index (PMI) rose to a 35-month high of 55.6 in November (revised up from the ‘flash’ reading of 55.2), up from 53.7 in October. PMI has now signalled expansion (i.e. above the 50.0 level) for six successive months.
• PMI appears to have been boosted by the stockpiling of critical inputs and increased demand from the EU ahead of the UK-EU transition arrangement deadline on 31st December
• Private new car registrations in November were 32.2% lower than in November 2019 caused by the second lockdown. They were up 0.6% year-on-year in October.

US COMMENTARY

• Both the Dow and S&P posted their best November returns since 1928 as hopes around vaccines and a stimulus package assisted sentiment
• US jobless claims fell from 787,000 to 712,000 undershooting the 775,000 consensus estimate. Continuing claims also fell to 5.52m from 6.09m, lower than forecasts of 5.8m. However, 245,000 jobs were added in November compared 638,000 on the previous month and it was the fifth month in a row employment has fallen in the US.
• This mixed jobs report added weight to the argument that further financial assistance and stimulus is needed to help the US economy
• A bipartisan $900 billion relief package bill has been put forward but is it unlikely to get much support as too many discrepancies exist
• Moderna has applied to the US Food and Drug Administration for emergency use authorisation for its COVID-19 vaccine

ASIA / AUSTRALIA COMMENTARY

• China’s Caixin manufacturing purchasing managers’ index (PMI) jumped to 54.9 in November, from 53.6 in October; the consensus forecast was for a reading of 53.5
• Australia’s economy expanded 3.3% quarter-on-quarter in September after a 7% quarter-on-quarter contraction in the June quarter

GLOBAL COMMENTARY

• The Organisation for Economic Cooperation and Development (OECD) now predicts that global Gross Domestic Product (GDP) will contract by 4.2% this year, which is an improvement on the previous forecast of -4.5%. At the same time, it lowered its 2021 forecast to 4.2% from 5%.
• OPEC+ ministers agreed to withdraw previous output cuts by no more than 500,000 barrels a day each month, starting in January, with production hikes subject to review each month helping to push up oil prices

COVID-19 COMMENTARY

• In the UK, cases and hospitalisations continue to fall, with some of the hardest-hit parts of the country reporting a halving in new cases since the second national lockdown began on November 5th
• The US reported 100,000 COVID-19 hospitalisations for the first time

Please continue to check back for our latest blog posts and updates.

Charlotte Ennis

07/12/2020

Please see below AJ Bell article received yesterday morning which provides a market commentary relating to the dollar’s 9% fall since Donald Trump’s inauguration on the 20^th January 2017.

It wasn’t always easy to understand what US president Donald Trump wanted, but at least he was consistent about the dollar. He spent much of his four-year tenure in the White House complaining about how the greenback was too high and ultimately he got his way, even if he may have finally come around to the view in 2020 that a rising currency was a back-handed compliment from markets about the relative strength of the US economy.

The dollar has fallen 9% since his inauguration on 20 January 2017, using the trade-weighted basket of currencies that makes up the DXY (or ‘Dixie’) index as a guide, and now trades at a two-and-a-half-year low.

A loss of value in the globe’s reserve currency, and a major haven asset, has potential implications for a range of markets, and not just foreign exchange.

Gloomy greenback

There are multiple possible reasons for the buck’s case of the blues. First, the president regularly railed against the US Federal Reserve’s monetary policy, arguing that chair Jay Powell and the Federal Open Markets Committee were running it too tight.

Whether they listened to the president, heeded stress in the financial markets in autumn 2019 or took other data on board, Powell and colleagues had begun to push through interest rate cuts even before the global pandemic pulled the rug from under the US economy in 2020.

Second, the president’s trade war with China unsettled markets and seemed to bring no great economic benefit. The US trade deficit has surged back toward its all-time high, with the result that dollars are flowing out of America to pay for the overseas-produced goods that consumers are sucking into the country.

In some ways this can be seen as a good sign. In 1960, economist Robert Triffin argued that America would always have to run a trade deficit, and hand out more than dollars than it received, to ensure the world had enough of the reserve currency to go around.

The alternative would be a painful liquidity squeeze on the globe’s economy and financial markets alike as dollars flooded home.

Third, the markets’ latest round of optimism that the pandemic may soon be over and a global economic recovery underway, following the vaccine announcements from Pfizer-BioNTech, Moderna, and AstraZeneca and the University of Oxford, means that perceived havens such as the dollar are less in demand.

Finally, and perhaps most fundamentally, Trump oversaw a huge increase in the Federal deficit. When he took office America’s national debt was $18.9 trillion. It began to surge even before the pandemic and has soared in its wake to $27 trillion. Although Republicans and Democrats have failed to agree upon another round fiscal stimulus, the debate centres on the degree of further borrowing, not whether there should be further debt creation or not.

This argument is not unique to America – something which may be sparing the dollar a few more blushes – but it will surely continue a trend of ever-higher government debt ceilings.

That dates to the early 1970s, when Richard Nixon took America off the gold standard so he could pay for welfare programmes and the Vietnam War, but the trend is clearly accelerating.

Remember that Moody’s downgrade of America’s credit rating, and summer of turmoil in financial markets, came after 2013’s debt ceiling suspension, when the limit was $16.7 trillion. It had taken America 237 years to get there but Uncle Sam has taken just seven years to overspend by a further $9.3 trillion.

Road to ruin

Anyone who takes the view that American debt is not a sustainable path will be wary of the dollar.

Anyone who feels that Covid-19 can be contained, and the world builds a reliable recovery, will also fight shy of the buck. Triffin’s theories imply that a weak dollar is the natural result of a strong US economy and robust global trade flows – both of which would logically benefit emerging markets and commodities, asset classes that traditionally do well when the dollar is weak.

The dollar is likely to hang tough for a while yet, not least as suitable candidates to replace it as the world’s reserve currency are in short supply.

China’s renminbi is not fully convertible, a return to gold will impose disciplines which no politician or central banker will accept (or can afford) and cryptocurrencies do not have universal acceptance.

But any attempt to reset currencies and debts could yet be spearheaded by central bank-backed digital currencies, a trend which must be closely watched.

We will keep an eye out for updates on the value of currency as the new President-elect, Joe Biden, takes office in January 2021. Please check in again with us soon.

Stay safe.

Chloe

07/12/2020

Please below the latest ‘Markets in a Minute’ update from Brewin Dolphin – received last night 01/12/2020

Markets in a minute: Equity rally pushes global markets to record highs

01 . 12 . 2020

It’s been an historic week for equity markets as numerous indices hit all-time highs. In the US, the Dow passed the 30,000 level for the first time and the Russell 2000 index of small cap firms also hit a new record. Japan’s Nikkei hit a 29-year high and the MSCI Global Index hit its highest level ever. Here in the UK, the FTSE100 enjoyed its best month since 1989, rising by 12.4%. The rally has been prompted by positive vaccine news and high hopes of a return to normal in 2021, plus Donald Trump finally appeared to accept his defeat.

Last week’s markets performance*

• FTSE100: +0.25%
• S&P500: +2.27%
• Dow: +2.12%
• Nasdaq: +2.95%
• Dax: +0.46%
• Hang Seng: +1.67%
• Shanghai Composite: +0.90%
• Nikkei: +4.37%

*Data for week to close of business on Friday 27 November.

Stocks fall as investors take some profits

Global markets were largely down at the start of the week, with US indices retreating from their highs. The Dow fell by 0.91% while the Nasdaq closed down just 0.06%.

Here in the UK, the FTSE100 fell by 1.59% with most of that fall occurring in the last hour of trading.

This is a classic sign of profit taking; when investors look at their portfolios at the end of the month and see big gains in equities and relatively lacklustre performance from other assets such as bonds and cash, it is typical for many investors to cash in some profits, leading to a downturn in prices. The next question is whether we will see a classic ‘Santa’s rally’, the phenomenon that sees shares rise in most years in the run-up to Christmas.

Black Friday sees online sales surge

Digital sales rose by almost 22% on Friday compared with last year, with Covid-19 leading shoppers to spend around $9bn online instead of going into physical stores. Another interesting aspect is that 40% of those sales were booked over smartphones, highlighting two secular trends that we think are here to stay, even as the pandemic fades over the next couple of years.

Property boom

UK mortgage approvals hit a record high in October, reaching their highest levels since 2007 as buyers rush to complete purchases before the government’s temporary stamp duty holiday ends next Spring. The news comes despite rising unemployment and falling economic activity.

There were 97,500 mortgages for home purchases approved in October, up by a third compared to February, before the pandemic started. Economists expect the mini boom to continue until the stamp-duty break ends in March, as new working habits prompt more people to trade up or move out of towns as they envisage working from home more often, even after the pandemic.

After that point, the consensus is for activity to begin reflecting the economic fundamentals, as rising unemployment and mortgage rates take their toll and the cautious attitude being exhibited by consumers on the high street spreads to the housing market.

Source: Bank of England
Data: 30/11/2015-31/10/2020

Households repay credit and loans

Data from the Bank of England showed signs of a slowdown in consumer spending, with households repaying a net £600m of consumer credit in October. That means consumers are repaying more in loans and credit cards than they are borrowing. In contrast, consumers were borrowing roughly £1bn a month before the pandemic.

This is important because consumer borrowing tends to form the basis for most economic recoveries. This time, however, a vaccine and return to the office may do the trick instead, helping bolster spending in suffering town centres.

Interest rates

There is an expectation that interest rates will stay close to zero for some time, but beyond the next few months, rates in the UK and US could begin to diverge.

For the immediate future the outlook looks like it should improve for the UK as it emerges from lockdown, while the US remains vulnerable to further tightening measures. The US economy has remained resilient so far, even according to high frequency data, but the latest initial jobless claims showed rising claims for the last two weeks, while consumer sentiment exhibited worries over the outlook for the employment, which may keep rates low in the US and help push the case for more monetary and fiscal stimulus.

This week’s ‘Markets in a Minute’ from Brewin Dolphin focuses on this week’s market rally which has been prompted by positive vaccine news and the hopes of a return to normality during 2021.

Please continue to check back for our regular blog posts and updates.

Charlotte Ennis

02/12/2020