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Please see below, an article from Brooks Macdonald providing a brief analysis of the key factors currently affecting global investment markets. Received this morning – 01/10/2024

What has happened?

While the China equity market was up again aggressively yesterday on the back of last week’s Beijing-government promised stimulus, what is interesting is there was a lack of follow through in broader equity markets around the world on Monday. Indeed, on Monday, despite the Chinese CSI300 equity index up a huge +8.48%, the UK FTSE100 and the pan-European STOXX600 equity indices both ended Monday’s trading session down around -1%. Over in the US, for much of yesterday it was a similar story for the US S&P500 equity index, with only a late rally leaving the index up +0.42% on the day (all in local currency price return terms).

Israel launches ground invasion into Lebanon

Israel has launched a ground invasion of Israeli forces into southern Lebanon. While Israel is seeking to frame the ground operation as limited and targeted, it is nonetheless a major escalation in the conflict between Israel and the Lebanon-based and Iran-backed Hezbollah militant group; keep in mind that Israel is now having to contend with intense fighting on two fronts, given the ongoing war against Hamas – another Iran proxy – in Gaza. While the Brent crude oil price, a little over US$71 per barrel currently appears to have brushed off this latest escalation, should the Middle East tip into a wider regional war, possibly directing bringing in Iran and if so, likely the US, that could change very quickly.

Japan’s new prime minister calls general election on 27 September

Following his win in the governing Liberal Democratic Party (LDP) leadership elections at the end of last week, Shigeru Ishiba, as Japan’s new incoming prime minister on Monday said he planned to call a snap general election to be held on 27th October. Justifying the decision, Ishiba said that “it is important that the new government be judged by the people as soon as possible”. As far as markets are concerned, during his leadership campaign, the 67-year-old Ishiba has expressed support for the Bank of Japan’s interest rate policy normalisation, hence the market’s initial reaction earlier this week to mark the Japanese yen currency higher and Japan equities lower.

What does Brooks Macdonald think?

The late rally in US equities yesterday appeared to be somewhat at odds with the latest speech from US Federal Reserve (Fed) Chair Powell who was speaking yesterday at the National Association for Business Economics (NABE) conference. In his speech, Powell signalled that the Fed was in no rush to cut rates, that the US economy was on a solid footing, and that the Fed would remain data-dependent, with interest rates not on any pre-set course. Despite this more cautious messaging, markets by the end yesterday continued to forecast material cuts to interest rates in the coming months – around 70 basis points of cuts across the last 2 Fed meetings of 2024 in early November and mid-December – that suggests there is a lot riding on the economic data, with the US non-farm payrolls on Friday this week especially key in the short-term.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

1^st October 2024

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Global growth tailwinds

For once, markets were preoccupied with non-US news last week – after China’s double shot of economic stimulus boosted Chinese (and European) stocks. Our verdict is that they will be impactful – just not quite the ‘bazooka’ levels of 2015-16. Markets seemed to ignore the second clause, with strong gains for stocks exposed to Chinese demand, including European luxury goods maker LVMH. The longer term implication is that Beijing’s loosening of financial conditions plugs what was a significant drain on global liquidity – benefitting markets all over. Slightly less positive was Shigeru Ishiba’s appointment as Japanese Prime Minister. He’s seen as a conservative candidate that might dampen Japan’s positive corporate reforms.

Interestingly, oil prices fell – the opposite of what you would expect in an environment of rebounding Chinese demand. This is a supply-side story: Libya’s fractured government approved a new central bank head, which should release the country’s huge supply potential. At the same time, Saudi Arabia will reportedly increase production to regain market share (as we thought it might). Lower oil prices should ultimately be pro-growth, supporting consumers and non-energy businesses.

Energy disinflation is especially important if China recovers from its malaise. Chinese disinflation was a key part of the ‘soft landing’ narrative (central banks cutting interest rates without a recession) that has underpinned market upside for most of this year. Without it, central banks will need another source of disinflation, and lower energy prices fit the bill. The current outlook is that a rebounding China should at least counterbalance a slowing US – but US growth might improve too, looking at recent data. The world’s two largest economies expanding at the same time would mean strong global growth, but it is too early to say for sure.  We will know more next week, when important US jobs data comes out. US news will then dominate markets again.

Will Chinese stimulus lead to long-term profit?

China unveiled significant policy stimulus last week, in a dramatic change from the week before. The People’s Bank of China (PBoC) will inject Rmb800 billion into its financial system, cut several policy rates and support house-buying. Shortly after that announcement, the politburo said it will pursue fiscal expansion to support consumption and “the driving role of government in investment”. Chinese stocks surged 15% through the week in response. This shift came a week after the PBoC declined to cut loan prime rates – a stasis which made global onlookers (ourselves included) conclude that Beijing had a strong hawkish bias. Chinese policy can be frustratingly unpredictable.

Last week’s PBoC announcement was reportedly put together just two days in advance, after high-ups became concerned about overproduction and deflation. The catalyst seemed to be officials in a major coastal province warning that they might miss the 5% GDP growth target. That shows how seriously the government takes GDP figures – even though the weakness was already clear from consumption and profit numbers (a weakness covered up by industrial production). Industrial profits are 17.8% down year-on-year, meanwhile.

The stimulus packages show Beijing’s intent – which is why stocks rallied so strongly. But it isn’t the ‘bazooka’ stimulus we saw in 2015-16. The deeper question is whether Chinese companies will be able – or permitted – to make long-term profits. President Xi has cracked down on excess profit-making many times over the years, and fears of intervention have stymied private sector activity. It’s notable that mortgage rates on second homes have been lowered, given Xi’s previous clampdowns on property speculation. The current signs are that profit-making will be encouraged, but the sudden change feeds into the ‘whack-a-mole’ policy approach we have come to expect from Beijing. The problem is what we said at the start: Chinese policy is frustratingly unpredictable.

Global liquidity is improving

Western central banks have started easing monetary policy. Interest rates have been cut in the US, UK and Europe, and markets expect more to come. Market expectations for Federal Reserve rate cuts are probably too optimistic, but the easing trend is clear and should boost global liquidity. Interestingly, broad global liquidity has been improving since 2022 – according to our friends at CrossBorderCapital. Their research suggests global liquidity fluctuates in long cycles, and this one has a way to run yet. That should support markets.

Fed easing is the lynchpin of this story. While we think the US economy is too strong to vindicate markets’ steep rate cut predictions, the Fed clearly has a dovish bias – and we should interpret its 2% inflation target more like a minimum. Asian central banks are also part of the story: the Bank of Japan and the People’s Bank of China have been detracting from global liquidity for a while, but those liquidity drains will probably be plugged. The BoJ basically capitulated to markets after Japan’s summer crash, promising not to raise rates in times of stress. The PBoC, meanwhile, has just announced significant stimulus measures.

 Greater money supply means greater demand for risk assets. It should eventually boost global growth and risk appetite too, but the benefits aren’t evenly spread. Long-term bonds could actually underperform on a relative basis¸ since the ‘term premium’ (the extra returns demanded for long-versus-short lending) goes up when investors want to buy riskier assets instead. More liquidity can also be accompanied by pockets of volatility, like we saw in the summer sell-offs. The main takeaway from August’s sell-off, though, was encouraging. Volatility was extremely short-lived, because there is plenty of money around. That should continue to be the case.

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

Andrew Lloyd

30/09/2024

Please see below the Daily Investment Bulletin from Brooks Macdonald, received on 26/09/2024:

What has happened

Equity markets looked to be running out of steam for the most part yesterday. That changed however when, after hours, US semi-conductor manufacturer Micron Technology published better-than-expected results. The Micron news fired-up after-hours equity futures markets and has fed through into better equity market performance overnight in Asia and also coming into this morning in Europe.

UK gets an OECD growth upgrade

Yesterday saw a decent upgrade to the UK’s economic growth outlook from the ‘Organization for Economic Co-operation and Development’ (OECD). In its latest global economic outlook, the OECD now sees UK real (constant prices) Gross Domestic Product (GDP) calendar-year growth at +1.1% this year, followed by +1.2% in 2025 (and up from old estimates of +0.4% and +1.0% respectively previously back in May). The cumulative size of the OECD upgrade to their UK outlook over the next two years is the most of any G7 (Group-of-7 advanced economies) country.

Sabre-rattling

Investors were reminded that geopolitical risk continues to stalk markets – China yesterday launched an InterContinental Ballistic Missile (ICBM) test into the Pacific Ocean, its first public test of such a missile in international air space in over 44 years, since May 1980. Designed to carry a nuclear payload, a US Pentagon spokesperson later said the US had been given “some advanced notification” by China. The timing of the launch, signalling China’s modernisation of its nuclear capability, was thought to intentionally coincide with the start of the latest UN General Assembly meeting, and ahead of a planned telephone call between China and US presidents Xi and Biden expected in the coming weeks.

What does Brooks Macdonald think

The flipside to the OECD’s better UK economic growth outlook yesterday was stickier inflation pressures. The OECD forecasts UK core inflation (excluding energy and food prices) running at +3.7% this year, and +2.8% next (up from +3.3% and +2.5% respectively back at its May estimates). Those price pressures underscore why the Bank of England has been at pains lately to signal that it will need to move somewhat cautiously on any further interest rate cuts over the coming months.

Bloomberg as at 26/09/2024. TR denotes Net Total Return.

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

Charlotte Clarke

26/09/2024

Please see below, an article from Brewin Dolphin which summarises the latest news impacting global investment markets. Received last night – 24/09/2024

Last week was a central bank week for September, with the Federal Reserve (the “Fed”), the Bank of England (BoE) and the Bank of Japan (BoJ) all setting rates as the week wore on.

There were few surprises with the Fed cutting rates, and the BoE and the BoJ remaining on hold. The nuance was in the size of the moves, detail of any forecasts and the tone of the commentary.

Powell goes large

The Fed cut rates by 0.5%, which was technically a surprise. Less than 10% of respondents to Bloomberg’s poll expected such a large cut.

Why was this? Well, September’s jobs report was mixed, and since then, the inflation data had been marginally hot.

The Fed doesn’t hold speeches during the week and a half before its meeting and the market wasn’t prepared for a 0.5% cut. But you may recall from our update a couple of weeks ago, that our sense was that conditions justified a 0.5% cut, given there’s now evidence to support the Fed’s assertion that interest rates are restrictive.

Therefore, there was an opportunity for the Fed to take a meaningful step towards reducing the restrictiveness of rates, and to do so without suggesting that the economy is in dire trouble or implying that we can expect a series of sharp interest rate cuts from here on.

In fact, Fed Chairman Jerome Powell made these points explicitly when he referenced the weak tone of the ‘Beige Book1 ’ (which we discussed a few weeks ago). He said that “nobody should look at 50 basis points and say this is the new pace”.

How has the decision landed?

Powell’s message has been received. The market has now gone from expecting a quarter point in September and a half point in November, to getting a half point in September and only expecting a quarter point in November. Beyond that, there’s been very little change in interest rate expectations. However, longer-term bond yields are actually a little bit higher than they were prior to the announcement.

This shows that the Fed’s stance hasn’t changed very much, despite the significant change in rates. Its rough assessment of long-term interest rates (communicated through the so-called ‘dot plot’) spans a range from 2.4% to around 3.8%. This suggests rates will be coming down over the coming months, but it’s hard to know exactly how much they’ll fall.

Equities sold off on the day of the announcement. Were investors disappointed? Not really. Where there’s so much anticipation around a data release, we often see volatility over the next day or so as an elaborate dance of position taking and profit taking takes place.

Is the U.S. economy sliding into recession?

The consumer activity slowdown that took place in July and August was tangible and although it was first flagged by consumer-facing companies, it eventually became evident in the economic data. But the current tone of companies suggests that activity levels have stabilised, and no longer continue to slide. The latest example came from the payment companies at some of the conferences held a couple of weeks ago – Goldman Sachs held a technology conference and Barclays held a financial services conference. The overall message is that consumer spending is also very consistent.

What about the UK?

In the UK, last week saw the BoE keep interest rates unchanged. It did so off the back of the latest inflation data, which was pretty uneventful. So, is inflation under control in the UK?

The consumer price index (CPI) recently declined to the BoE’s target rate but has been picking back up a little, while CPI including owner occupier’s housing costs (CPIH), which is arguably a fairer measure of inflation because it includes housing costs, is still running around 3%. Forward indicators of housing costs suggest that spread should narrow, but the main issue remains whether services inflation and wages slow.

Like the Fed, the BoE will want to do enough to restrain economic activity without completely strangling the economy. A sign they might be winning that battle was the decline in median inflation, which suggests that, aside from the very volatile anomalies, general price growth has started to slow.

Meanwhile, retail sales data released on Friday morning painted a picture of consumer strength. A significant element of this will be driven by the catch-up spending of consumers stuck indoors by the dreadful weather in May and June. However, a backdrop of tax cuts, rising benefits, a rising national living wage and increasing pay settlements will also be helping on the spending front.

A slight concern is the consumer sentiment survey from market research company GfK, which was released on Friday morning. This suggests there has been quite a sharp slowdown in confidence among shoppers. So far, this is not corroborated by other sources but it’s worth monitoring. The last month, in particular, has seen a lot of briefing and speculation around possible budget changes, none of which paint a particularly upbeat picture. However, clothing retailer Next reported that consumer activity is very stable at the moment, which struck a similar tone to the American payment companies.

Please continue to check our blog content for the latest advice and planning updates from leading investment firms.

Alex Kitteringham

25^th September 2024

Please see the below article from EPIC Investment Partners detailing their thoughts on China’s recent ploys in an attempt to stimulate their economy. Received this morning 24/09/2024.

In a bold move to revitalise its flagging economy, China unveiled a sweeping package of stimulus measures. People’s Bank of China (PBoC) Governor Pan Gongsheng, in an unusual public briefing this morning, announced a series of decisive actions aimed at boosting growth and combating deflationary pressures.

Pan revealed plans to reduce the reserve requirement ratio (RRR) for banks by 50bps in the near term, with the possibility of a further 25-50bps of cuts by year-end. The PBoC will also lower the 7-day repo rate by 0.20% to 1.50% and hinted at a potential 0.20-0.25% reduction in the loan prime rate. The RRR cut alone will inject CNY 1tn of liquidity into the banking system.

The troubled property sector received particular attention. The PBoC lowered mortgage down payments for second homes to 15% from 25%, easing previous restrictions. Furthermore, Pan outlined plans to extend existing support measures for the sector by two years and reduce interest rates on current mortgages.

To shore up the stock market, policymakers announced a CNY 500bn fund to support brokers, insurance companies, and funds in purchasing stocks. An additional CNY 300bn will aid companies in conducting share buybacks.

The stimulus package sent ripples through global markets, with China’s CSI 300 index surging 4.3% – its best performance since July 2020. Hong Kong’s Hang Seng index rose 4%, while European markets also rallied. China’s 10-year government bond yield hit a record low of 2% during Pan’s address.

Markets interpreted these measures positively, particularly as they were announced in tandem. However, disappointment lingered over the lack of fiscal stimulus, suggesting the PBoC may be struggling to convince the central government to implement a larger fiscal deficit.

The timing of the announcement is noteworthy, coming shortly after the US Fed’s interest rate cut, which narrowed the differential between US and Chinese rates, giving the PBoC more room to manoeuvre.

As China grapples with a prolonged property sector slowdown, weak consumer sentiment, and persistent deflationary forces, all eyes are on Beijing to see if this stimulus salvo can reignite the world’s second-largest economy. While the effectiveness of these measures remains to be seen, China is clearly taking key steps to regain economic momentum.

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

Alex Clare

24/09/2024.

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Central bank pivot 2.0

The US Federal Reserve’s 50 basis point interest rate cut was last week’s biggest story, and markets took it well. It was portrayed as a surprisingly large cut, but markets had already priced in a high chance of a big cut. Markets also predicted the Bank of England holding rates steady, but are now confident of a November cut to UK rates. The trajectory is down on both sides of the Atlantic – but the implied pace of cuts is notably quicker in the US.

That might seem strange, given the US’ continued outperformance. But US wage inflation is now falling quicker than elsewhere, and Fed chair Powell said the 50bps cut was a ‘catch up’ – making up for not cutting last time – rather than an omen. Markets agreed, and are again confident that the Fed has pulled off a ‘soft landing’ (lower rates without recession). We doubt that the decline in rates will be as quick or as smooth as markets are currently predicting, though. True the Fed is more worried than other central banks about unemployment, but recent data has been better and rate cuts (both actual and expected) will themselves support the economy. Lower mortgage rates are already encouraging builders, for example.

Markets seem as overconfident about rate cuts as they were for ‘Pivot 1.0’ last year. Bond yields could therefore rise from here. While that could hamper stock valuation metrics, it should also mean higher profit growth – not a bad balance for risk assets.

Less positive was the People’s Bank of China (PBoC) unexpectedly holding rates high, despite clear economic weakness. Markets thought a big Fed cut would give the PBoC room to loosen policy, but it is keeping financial conditions incredibly tight – with historically weak money supply growth. Beijing clearly has a tightening bias and is willing to let domestic demand suffer in response. That means China will keep exporting disinflation – which is good for keeping global inflation down, but bad for supporting global growth. We will have to watch China’s policy developments closely, given its fraught political history.

Oil fragmentation and its impact on Saudi Arabia

Saudi Arabia is the world’s biggest oil exporter and the de facto head of the OPEC price cartel, but market fragmentation is challenging its global dominance. The creation of OPEC+ (with 10 additional nations including Russia) strengthened the bloc’s ability to manage global prices, but the US has now become the world’s largest oil producer, and there is increased competition from non-traditional producers like Brazil, Angola and Nigeria.

Sanctions on Russia and Iran have also redirected – rather than removed – oil flows. China is now a critical market for Saudi oil (the Kingdom accounts for 15% of China’s oil imports) but its economy is weak and it increasingly buys discounted Russian or Iranian oil.

The world needs to transition away from oil over the long-term, which is why Saudi Arabia is pursuing an ambitious economic restructuring plan called Vision 2030 – with investments estimated to be worth $1.25tn. But the plan’s success depends on current oil revenues, which are under pressure. The IMF estimates that Saudi Arabia needs $96.20 per barrel to breakeven with fiscal expenses, well above the current price.

If the Kingdom pressured OPEC+ to collectively cut production or tries to regain market share by flooding supply at lower prices – as it has done in the past – that would worsen its fiscal deficit and endanger its long-term structural investments. A global growth rebound would help, but the US economy is slowing and Chinese demand has been weak for a long time. Saudi Arabia’s two biggest challenges pull it in opposite directions: market fragmentation calls for oversupply to regain market share; the green transition calls for undersupply to inflate current prices. Fiscal challenges might force the Kingdom to increase supply regardless.

Insight: Yield Curve Un-invertigo

The US yield curve is a plot of government bond yields across different maturities. Finance people call it ‘normal’ when it slopes upwards – since bond holders generally want higher fixed interest if fixing their coupon income over the longer-term – and ‘inverted’ when short-term yields are higher than long-term. A common definition calls it inverted when 2-year treasury yields are higher than 10-year yields, and on that basis it was inverted from July 2022 until the start of September. Since then, it has “un-inverted”.

This is significant because an inverted yield curve is an historically reliable recession predictor – since it suggests returns (i.e. growth) will be lower in the future. But un-inversion unfortunately doesn’t indicate no recession. For starters, the common 10-2 definition is rather arbitrary, and the yield curve is still inverted if you use 3-month yields as a starting point rather than 2-years. Moreover, the yield curve often un-inverts (on the 10-2 definition) just before a recession. That’s why some analysts have sounded the alarm over the recent un-inversion (along with some employment-based recession indicators).

We don’t think a US recession is imminent, however. There are well-known problems with using the yield curve as an indicator at the moment – mostly centred around the distorting effects of central banks’ bond-buying (and now selling) programmes. The yield curve certainly tells us that short-term interest rates will fall sharply in the next two years, but that itself should support growth. It’s a sign that investors expect a ‘soft landing’ (rates falling and growth re-accelerating without a recession in between). But the yield curve’s relatively shallow incline (past two years) also suggests a lack of confidence in long-term growth. This fits with what a host of indicators are telling us, and it points to decent – but perhaps underwhelming – returns in the months ahead.

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

Andrew Lloyd

23/09/2024