News

Please see today’s Daily Investment Bulletin from Brooks Macdonald, received this morning:

What has happened

Overnight, there are reports of explosions in the Iranian city of Isfahan, which is home to some significant centres of Iran’s nuclear program. According to The New York Times, two Israeli officials have said that Israel was behind the attack. The fear has been that the Middle East conflict might escalate further still, particularly since Iran had previously said they would respond to any attack. However, according to The Times this morning, Tehran has said that it does not plan an immediate military retaliation. As a result, while risk-aversion initially moved through markets in the wake of the news of the attack, some of these market moves have subsequently been pared back in the last few hours. As a case in point, the oil price initially surged to over US$90 per barrel before easing back a little, but it is still higher on the day currently.

Reaction to latest Middle East events

While details are still unfolding, it appears that the Israeli retaliation for Iran’s strike last weekend has so far been limited in its impact. The United Nations nuclear watchdog the International Atomic Energy Agency (IAEA) said in a post following the attack to confirm that there had been “no damage to Iran’s nuclear sites” but called for “extreme restraint” from both sides going forwards.

Fed speakers push-back on rate cut urgency

Before the latest Middle East escalation, markets on Thursday were focused on the latest US Federal Reserve (Fed) speakers to weigh in with their views as to the likely path for interest rates. Collectively, it appeared there was something of a push-back on the urgency to cut interest rates. New York Fed President Williams said, “I definitely don’t feel urgency to cut interest rates”, while Atlanta Fed President Bostic said, “I’m comfortable being patient”.

What does Brooks Macdonald think

The events overnight have put the geopolitical conflict ‘ball’ back in Iran’s court – what Iran chooses to do next will likely determine the broader regional and global impact – in particular, it will be key as to whether, if at all, Iran seeks to conduct another direct attack on Israel, or whether they revert to their previous playbook of using proxy forces instead. For markets, we appear to be entering a heightened phase of uncertainty and likely volatility, which is clearly not helpful. That said, the early assessment on the latest Middle East events overnight is that they appear to have been limited in scale, which explains why some of the risk-aversion market moves following the attack have seen some paring back at the time of writing.

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

Andrew Lloyd DipPFS

19/04/2024

Please see below, an update from EPIC Investment Partners analysing the latest global growth forecasts from the International Monetary Fund. Received this morning – 18/04/2024

On Tuesday, the International Monetary Fund (IMF) modestly raised its forecast for global economic growth, describing the world economy as “surprisingly resilient” in the face of inflationary pressures and changes in monetary policy. The IMF now anticipates a global growth rate of 3.2% for 2024, 0.1% higher than its January prediction, with growth in 2025 the same.  

Pierre-Olivier Gourinchas, the IMF’s chief economist, said that despite a string of economic crises, the data pointed towards a soft landing for the global economy, adding that the risks to the outlook remained broadly balanced. “Contrary to pessimistic forecasts, the global economy has demonstrated remarkable resilience, maintaining steady growth with inflation receding almost as rapidly as it escalated”, he noted.  

Leading the growth are advanced economies, notably the U.S., which has surpassed its economic activity from before the Covid-19 pandemic, along with the euro zone, which is showing robust signs of recovery. However, less optimistic prospects in China and other major emerging markets could pose challenges to global trade partners. 

China remains a significant concern due to its faltering property market, along with other potential risks such as geopolitical tensions leading to price surges, trade disputes, varying rates of disinflation among its key sectors, along with high interest rates. 

However, on the upside, looser fiscal policy, falling inflation and advancements in artificial intelligence were cited as potential growth drivers. 

As for inflation, the IMF projects a decrease in global headline inflation from an annual average of 6.8% in 2023 to 5.9% in 2024, and a further fall to 4.5% in 2025. Advanced economies are expected to reach their inflation targets ahead of emerging markets and developing economies. 

“As the global economy approaches a soft landing, the near-term priority for central banks is to ensure that inflation touches down smoothly, by neither easing policies prematurely nor delaying too long and causing target undershoots,” Gourinchas said. 

“At the same time, as central banks take a less restrictive stance, a renewed focus on implementing medium-term fiscal consolidation to rebuild room for budgetary manoeuvre and priority investments, and to ensure debt sustainability, is in order,” he added.

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

Alex Kitteringham

18^th April 2024

Please see the below article from Brewin Dolphin detailing their key takeaways from global markets. Received yesterday 16/04/2024.

The week before last saw stocks giving up some of their recent gains despite a late flourish following the U.S. employment report. The report showed strong jobs growth, substantially driven by increased immigration, which seems to be facilitating a renaissance in non-inflationary growth (what economists call a supply-side expansion).

Last week, however, they held their ground, lingering near their heights, but considering some of the news markets had to digest, that could be seen as a sign of strength.

U.S. inflation is high (again)

U.S. inflation data for March was released last week and was well above the rate consistent with hitting the inflation target. Sometimes, the inflation data is distorted by volatile food and energy prices, so we can look at core inflation instead, and if we are concerned about the distorting impact of shelter inflation then we can strip that out, too. The problem is that in all the various ways in which consumer price index (CPI) statistics are modified to make them seem more representative of underlying price pressures, they still seem to conclude that inflation during March was too high to be consistent with hitting the inflation target.

How has this impacted the markets? Well, over many weeks, we have been commentating on the market’s slowly evolving views on the number and timing of interest rate cuts this year. Readers may recall there was a time when markets were discounting seven interest rate cuts by December 2024. This was difficult to comprehend and implied that a majority of investors foresaw a significant recession and a material undershoot in inflation. Instead, the economy has continued to grow, and inflation has proven stubborn. As of the week before last, the implied interest rate cuts by the end of this year have reduced to one or two.

Unlike the fickle market, the Federal Reserve members have remained consistent in their forecast of three interest rate cuts during the year. So, whilst the magnitude of the change in market expectations is significant, so is the fact that the markets saw the Fed as too hawkish and now see it as too dovish.

Various members of the Federal Reserve have spoken since the last Fed meeting, and most have acknowledged the persistence of inflationary data is a challenge to the current expected trajectory of rates. Some still believe they will happen while others are more circumspect. Fed chair Jay Powell seems more convinced than most that the Fed’s economic projections make sense. Should he be?

How should the Fed set interest rates?

Broadly, the Fed is assumed to set its policy in either a restrictive or an expansive setting depending on whether the economy is operating above or below its potential capacity. A restrictive policy would mean interest rates above a neutral level, whereas an expansive policy would mean rates below neutral. The challenge, however, is that the neutral rate is uncertain and changes over time.

Jay Powell said a couple of weeks ago that the neutral rate “doesn’t really matter” for policy today. Bloomberg ambushed former treasury secretary Larry Summers with this statement, and he pushed back against it, saying it was like driving a car by feel without looking at the speedometer. He didn’t have the context of Powell’s remark, which was that the neutral rate is unknowable, but the Fed is confident it is below the current rate. So, he just meant knowing exactly what the neutral rate was doesn’t matter for policy today.

But to continue Summers’ analogy, should the Fed be driving based upon a speedometer they believe is faulty (a neutral rate estimate they know is wrong) or by feel (taking other evidence that the economy is speeding up or slowing down)? Driving by feel can sound a lot like being data-dependent, and despite the enormous resources that go into trying to forecast the economy, given the well-known inexactness of economic forecasts, it could be wrong to place too much faith in the models and ignore other evidence that the economy might be operating above capacity.

Persistence in inflation would be one factor. Strong jobs growth

is another, alongside the strength in consumer spending. There is evidence of banks loosening lending standards (slightly). Nothing is definitive but there seems to be enough to at least challenge the assumption that policy is restrictive.

So, are U.S. interest rates restrictive?

For what it’s worth, there is a variety of estimates of the level of the neutral rate, with most being around 1%, but some are as high as 3%. At the same time, inflation itself is really an expectation rather than a known fact, and so this too could probably vary between say 1% and 3%. This may indicate that policy is restrictive, but it’s certainly quite possible that it’s not. The empirical evidence of a strong economy with high inflation might top the scale a bit in favour of the latter.

The counterargument is that policy is restrictive but operates with what economist Milton Friedman called long and variable lags, so even though the economy is strong now, it’s likely to slow down in response to tightening that took place last year. This means what a central bank should do is change policy in anticipation of changes in the economy. Fortunately, most central bankers are self-aware enough to recognise their forecasts are not accurate enough to do this.

Bernanke and the Bank

Ironically, on Friday, former chair of the Federal Reserve Ben Bernanke’s recommendations to the Bank of England were published. The Bank had asked him to review its forecasting approach. He has recommended abandoning fan charts, which show the range of possible outcomes for a variety of economic metrics. Fan charts can convey the inexactness of forecasts in a helpful way. They would highlight that while you expect the economy to weaken, there is a chance that it strengthens, and vice versa. It likely discourages central bankers from setting policy in anticipation of changes in the economy because very often, those forecasts are wrong.

To be fair, his suggested alternative is to have a central forecast and some alternative scenarios. This may work as well, but equally, may be open to criticism for being vague and inexact. The other specific change would be the nature of the forecasts, which are currently based upon the market’s expectations of how policy will evolve. This can be confusing because sometimes, the central bank seems to be forecasting how the economy will evolve based upon interest rate changes it doesn’t intend to make!

Enough eco-waffle – why does this matter?

Changes in expected interest rates drive changes in bond yields and prices. The U.S. CPI and strong data out of the UK have seen UK bonds underperform.

According to textbooks, they should also drive equity valuations, but often they don’t. The textbooks would suggest that investors buy stocks based upon a valuation model that includes bond yields as an input – thus when yields go up, stock prices should come down. This should particularly affect stocks with longer-term growth prospects, as these are long duration assets (as discussed last week).

This relationship is not very reliable though, as investors generally buy stocks because they have excess savings, and those savings contribute to a pool of global liquidity, which drives financial markets.

But interest rates will influence the returns earned by investing in certain industries. Banks earn more when interest rates are higher. It should add to their net interest margins (the difference between what they earn on loans and what they pay on deposits).

Another inflation hawk

Friday marked the real start of the first quarter earnings season, with a host of banks kicking things off. Focus as ever was on the sage words of Jamie Dimon of JPMorgan Chase. He cited inflation 21 times in his chairman’s letter and named required investments in climate transition, restructured supply chains, more military spending, and higher healthcare costs as reasons to fear inflation will be “sticky” (persistent) and interest rates may stay higher than expected.

Another sector that is interest rate sensitive is real estate, which is likely to underperform if interest rates stay higher for longer because the sector is leveraged and will suffer an increased cost of debt.

Short duration assets are less impacted by changes in interest rates. Energy would be an example of a short duration asset (again discussed last week). That’s not the reason it’s performing well at the moment (which is of course the strength in the oil price), but it helps.

Changes in interest rates affect exchange rates too, and the dollar rose on the strength of the CPI report. In response, the Japanese Ministry of Finance employed vague threats of intervention to try and support the yen. These may not have been idle threats as the yen was rallying sharply at the time of writing on Friday.

The pound has been overshadowed by the inflation-boosted dollar and short-squeezed yen. Despite this, there was more evidence of a cyclical upturn in UK economic activity. The British Retail Consortium (BRC)’s retail sales survey suggests that March will see retail sales volumes expanding. The Royal Institution of Chartered Surveyors (RICS) house price balance suggests that house prices will continue to rise over the coming months. Friday’s UK gross domestic product (GDP) report showed modest expansion, enough to confirm the recession (such as it was) is firmly behind us and that once March’s data are confirmed, the first quarter of growth this year should be ahead of the Bank of England’s forecasts.

The important rule when using forecasts is summed up in a brilliant piece of wisdom attributed to economist John Maynard Keynes:

“It’s better to be roughly right than precisely wrong.”

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

17/04/2024

Please see below, Tatton Investment Management’s ‘Monday Digest’ received this morning, 15/04/2024.  

What the return of volatility tells us

Equities were fairly stable in the US and UK last week, despite bond yields moving higher. Europe was the opposite: stocks fell despite falling yields. We might have thought bond volatility would hurt risk assets more than it did.

American investors still seem to be in “buy-the-dip” mode. Stronger growth and inflation signals have been hitting equity prices (since inflation holds back interest rate cuts) and core US CPI rose to 3.8% year-on-year last week. US Treasury yields broke above 4.5% for the first time since November, and the probability of a June rate cut fell to just 30%. But markets are happy enough about growth that they don’t seem to mind rates staying high – hence equities keeping pace.

US growth is still lopsided, though. The outlook for small business profits is reportedly the worst it has been in 10 years, and firms are worried about returning inflation. Manufacturers are thankfully feeling better, and overall profits are on the rise thanks to strong pricing power.

Analysts have been raising their forward profit estimates for the S&P 500 at a 10% annualised rate for most of this year, compared to a 6% historical average. Much of that is concentrated on the Mag-7 – US tech behemoths – whose profits are expected to jump 38% year, compared to a 2% fall for the rest of the index. That being said, the also-rans’ profit estimates have risen 6% since last May. Uneven distributions aside, growth is broad enough to worry the Fed. No one thinks they will raise rates, but if CPI keeps rising idea might be tested.

Europe has the opposite problem, which is why the ECB has finally promised rate cuts in June. Labour markets are tight either side of the Atlantic, but European companies are hurting, as shown in stock markets. Manufacturers are still battling energy costs and – according to a European Commission report – are suffering from Chinese ‘dumping’.

Europe might have to impose tariffs, like the US, but will struggle considering how much it exports to China. Then again, China is struggling with domestic demand too – not a surprise considering President Xi’s philosophy frowns upon individual consumption.

Thames Water investable, but badly priced

Thames Water is in a standoff. It says it needs investment, but the pension funds that own the company say they cannot give it unless regulations that limit prices and payouts are changed. The stakes were raised two weeks ago when its parent company, Kemble Water Finance, defaulted on £1.4bn worth of debt. Shareholders say the utility company is “uninvestable” in the current environment. We disagree. It is investable; they just paid the wrong price when they bought it from Macquarie in 2017.

Kemble cannot pay its debts because the regulator, Ofwat, has blocked dividend payouts from Thames Water. But the default might push Thames Water into Special Administration, meaning a write-down of the operating company’s £15.6bn net debt. Shareholders recently rejected a planned £500mn equity injection, demanding Ofwat approve a 56% real price increase by 2030 and allow dividend payouts again.

A Financial Times article last week argued that Thames Water’s nosediving equity value – from a £5bn purchase in 2017 to practically zero now – shows that the Capital Assets Pricing Model (CAPM) pension plans used to value the utilities company is faulty. But focus on CAPM’s failings is misleading. The problem is that key information about the asset was misrepresented or ignored. Models give conclusions based on the information you input. No model can give you the right conclusions if you input the wrong information.

Macquarie deserves some blame, taking £2.7bn worth of dividends when it owned Thames Water from 2006 to 2017, loading it with debt and underfunding infrastructure updates in the process. But the pension funds should have done their due diligence too.

They assumed prices would scale with inflation – when in reality people don’t like paying more for water when other prices are spiralling. Low-returning assets like utilities can only compete with other investments if they are highly leveraged. But for public services, leverage and shareholder payouts are always political.

If pension funds had appreciated this and known what they were buying, they wouldn’t have paid anything near what they did. Nationalisation or tight regulation are always likely for crucial public utilities with little private investment value. Asset values should reflect that.

Gold as a currency alternative?

Gold has been one of the best performing assets of 2024. This is strange for a so-called safe haven asset. Returns on cash – interest rates – are high, and the stock market rally proves investors aren’t running scared.

That is in the West at least, but gold’s reputation as a cash alternative is arguably stronger in emerging markets. Zimbabwe just announced a gold backed currency, and the central banks of India and China are buying bullion reserves to protect against Russian-style sanctions. Chinese and Indian middle classes are a big source of demand.

Wealthy Chinese in particular are increasingly buying bullion as a means of shielding assets from an overzealous government. Economic malaise, stock market volatility and the dire state of China’s property market are driving more citizens toward physical gold.

The People’s Bank of China is indirectly (and directly) supporting demand. It has been maintaining a stable exchange rate against the US dollar despite selling pressures on the renminbi. The PBoC holds a loose dollar peg by setting a target exchange rate every day and allowing a 2% trading band around it.

Keeping a stable rate against the dollar helps Chinese citizens buy gold because the precious metal is priced in dollars. But that could be about to change. The PBoC has consistently been letting the renminbi get closer to the upper bound of its 2% range. The last time that happened was before the sharp renminbi devaluation of 2015. A devaluation against the dollar now would make sense too: it would boost Chinese exports and maybe spur some life into a deflationary economy.

For now, Chinese savers worried about a devaluation will be even more likely to buy physical gold. So, the longer the PBoC maintains its current exchange rate, the longer gold’s rally has left to run. If it does devalue, gold prices would struggle to climb higher.

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

Charlotte Clarke

15/04/2024

Please see below, an update from EPIC Investment Partners following the European Central Bank’s recent policy decision to hold interest rates at 4%. Received this morning – 12/04/2024

Yesterday, as the vast majority of the market had expected, the European Central Bank (ECB) held interest rates at 4% for the fifth consecutive meeting. However, in a more dovish tone, the central bank indicated that as inflation cools, rate cuts could come as soon as June. In the accompanying statement, the council, for the first time, said that while the ECB would remain data dependent, cuts are dependent on economic projections, confirming that inflation is steadily returning to the 2% target. 

While the ECB clarified that its decisions are not “pre-committing to a particular rate path,” President Christine Lagarde also highlighted the likelihood of revising rates in the upcoming months. “In April we will get more information and data,” she said. Adding that “a few” members of the Governing Council are already confident about the inflation trajectory.  “But in June, we know that we will get a lot more data and a lot more information” she continued. 

She went on to say that: “Inflation is expected to fluctuate around current levels in the coming months and to then decline to our target next year. We’re not going to wait until everything goes back to 2% to make the decisions that will be necessary in order to make sure that inflation returns to 2% sustainably at target in a timely manner.” 

Lagarde was also at pains to emphasis that the ECB’s rate decisions are independent of the Fed policies, despite the significant economic interactions between Europe and the United States. “The United States is a very large market, a very sizable economy, and a major financial centre, all of which naturally impact our deliberations” Lagarde said. She went on to say that while “multiple channels through which influence can be exercised” the ECB was “not Fed-dependent”.  

Ahead of yesterday’s announcement, markets had already been predicting that the first EU rate cut could come in June, at around 75%. At the time of writing that is now priced at 90%.

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

Alex Kitteringham

12^th April 2024

Please see article below from Evelyn Partners detailing their thoughts on the US CPI inflation announcement for March 2024, received yesterday afternoon 10/04/2024.

What happened?

US March annual headline CPI inflation rose at 3.5% (consensus +3.4%) and compares with +3.2% in February. On a monthly basis, CPI rose 0.4% (consensus +0.3%), compared to an increase of 0.4% in January.

Turning our attention to the core figure, which excludes volatile food and energy prices, the annual number came in at 3.8% (consensus 3.7%), compared to 3.8% in February.  In monthly terms, core CPI increased 0.4% (consensus 0.3%), which compares to 0.3% in February.

What does it mean?

March’s inflation report came in slightly above forecasters expectations with headline CPI re-accelerating slightly to 3.5%. However, core inflation remained unchanged, with today’s figure of 3.8%. Base effects proved a slight headwind to today’s release with March 2023’s headline monthly print of 0.1% falling out of the annual comparison. However, these base effects become more favourable next month and could help to reverse some of March’s acceleration in the annual inflation rate.

The index for shelter continued to remain resilient rising by 0.4% on the month. However, on an annual basis shelter inflation has slowed to 5.7% from its peak of 8.2% in March 2023. The monthly index for energy remained positive for the second consecutive month, having been falling for the previous four months as rising oil prices fed through to gasoline. However, on an annual basis energy inflation is running at an acceptable 2.1%.

There was some encouragement for households in the data, when it came to food prices, with the index increasing on the month by just 0.1%. On an annual basis the food inflation basket is now running at just 2.2%. Additionally, core goods shrank by 0.2% on the month, with both used and new cars driving this deceleration.

Turning to the labour market, March’s non-farm payroll figure of 303k looks solid when compared to the 10-year average of ~180k, taken from up to the end of 2019 before the pandemic distorted the data. Other measures of hiring outside of the payroll report also corroborate a healthy labour market. For instance, the latest February job openings (from the JOLTS survey) reported earlier this week came in at 8.8m, down from a peak of 12.0m in March 2022, but it is still significantly up from a pre-covid level of around 7.0m at the end of 2019. Essentially, the demand for available workers (employed plus job openings) is running around 2m higher than the supply of workers (employed plus unemployed). This labour supply gap supports wage growth which is currently growing at an annual rate of 4.1%. The risk is that while wage growth remains strong, the US economic resilience we’ve seen over the last year will continue, making it more challenging to return inflation back to the Fed’s 2% target.

Market interest rate expectations have moved substantially over the last three months. At the start of the year, futures markets anticipated the Fed would start cutting rates in March and make at least six 25 basis point rate cuts this year. Since then, optimism has been reined in, with markets now expecting the base rate to end 2024 at 4.85% with the first of these cuts now expected to materialise in July. This means markets are now pricing in less rate cuts than the Federal Open Market Committee who forecasted three cuts for 2024.

Immediately following the report US equity futures gained fell 1% while 10-year treasury yields rose 15 basis points.

Bottom Line

Although today’s inflation report was slightly warmer than expected, it is unlikely hot enough to warrant the FOMC to shift away from cutting rates later this year, which markets currently expect to start occurring during the summer. However, as recent inflation prints have pointed to a slowing path back to the Fed’s target of 2% we could see fewer rate cuts this year than the three currently forecasted by the FOMC at their latest meeting.

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

Charlotte Clarke

11/04/2024

Please see below, Tatton Investment Management’s ‘Monday Digest’ which summarises all the key factors currently affecting global markets and economies:

Overview: Bumpy start to the quarter

Last week saw 2024’s first real bout of volatility. The S&P 500 had its biggest one-day percentage range in over a year on Thursday. This came after two extremely strong quarters for investors. Indeed, we suspect it was a response to the bull run, and the valuation gap between large and small caps it made.

Commentators attributed it to more headline-grabbing news, like Israel-Iran tensions and the sharp increase in oil prices. It could also be down to asset reallocation from big investors though, as tends to happen at the start of the quarter.

If so, that would mean investors moving away from the US mega-caps that have dominated for so long. Small and mid-cap profits and expectations actually fell over the last year, despite strong US growth. As a result, small and mid-caps are trading at valuations around their historical average price-to-earnings ratio, while the S&P 500 is trading well above. This seems logicical, given small and mid-cap earnings have fallen about 11% since 2023, while large caps’ have climbed 8%. However, this still leaves a 20% unexplained valuation gap between the two stock market segments.

Part of that is about the difference in available financing – since higher interest rates usually hurt smaller or riskier companies more. Small caps will struggle to get capital before rates fall, but 2024 rate cuts keep being pushed back thanks to the resilient US economy. Jobs and wages are still growing, and nominal growth around 5% looks set to stay.

Fed members are playing down the prospect of rate cuts soon. Not only is growth still strong, but the Fed doesn’t want to be seen as partisan in an election year – especially so considering they still hold massive amounts of US treasury debt. This has already created distortions they have had to clean up.

There are good reasons to think small and midcap equities could catch up and outperform US mega-caps. If recession risks fade and rates do start to come down, smaller companies will find it easier to borrow and their risk premia – the return investors demand for a given level of risk – should come closer to that for large companies. The only way this wouldn’t happen is if people think US growth will stay top-heavy, which is unlikely if rates fall and the recovery goes ahead.

The risk is that rates go higher rather than lower, though. Although it might be a good long-term view, rational investors could be in for a rocky ride.

March Asset Review

Global stocks gained an impressive 3.3% in sterling terms through March, capping off an impressive 9.2% rally for Q1 2024. Falling volatility was a key theme of the month and quarter. It tells us investors’ appetite for risk assets has increased – evidenced by the fact virtually all major stock markets were positive.

Markets appear convinced of “immaculate disinflation” – lower price pressures but growth staying decent – and central bankers now seem to be reading from the same page. The Bank of England and the US Federal Reserve both said last month that interest rates will likely be cut by the summer. That led to a 0.9% pick up in global bond prices (the inverse of yields) in March – contrary to the virtually flat trend overall for Q1.

Underlying the -0.1% return for bonds in Q1 is the fact that markets are now pricing in significantly fewer rate cuts for 2024. But it shows how good markets feel, given stocks have roared ahead anyway. Since the late October trough, global stocks have jumped 20% in sterling terms.

UK stocks finally caught up in March too, beating all other regions with a 4.8% jump. BoE messaging and brighter growth prospects were key, but so too was the rally in oil prices, as the FTSE 100 features several big energy companies. Brent crude quietly rose to a five-month high of $90 per barrel.

Europe beat expectations too, rallying 3.7%. China was on the lower end, gaining just 0.8% on the month and finishing Q1 down -1.5% in sterling terms. Chinese stocks improved into the end of March, though, thanks to policy support and stronger business sentiment.

China’s long underperformance might be ending, but that could well mean its disinflationary impulse ends too. If it starts exuding inflation instead, that could hurt markets’ rosy view of the world economy. Let’s hope that view isn’t too good to be true.

Oil breaking higher

Oil prices have had an impressive but underappreciated rally this year: Brent crude is up more than 17% year-to-date, to its highest level since October. Back then, weak global demand preceded falling prices into the end of 2023 – contributing to market excitement around disinflation. The current oil rally therefore threatens to undo some of the progress on inflation.

Middle Eastern tensions and Ukrainian strikes against Russian refineries are constraining supply, but OPEC+, led by Russia and Saudi Arabia, is sticking to its production cuts of 2.2 million barrels a day until June. The cartel’s discipline and cohesion in the face of sharply higher prices has been surprising.

There are also suggestions that Russia’s underproduction is down to a lack of expertise or capacity, following the departure of Western oil companies. Russian production is running significantly below quota, with little sign of improving.

Demand has been strikingly strong, too. Oil inventories declined January, a month they usually build, and demand is way ahead of estimates. The growth recovery in China and the continued resilience of the US consumer are two key factors.

Technical factors could support oil too. History suggests the break above $90 per barrel might mean speculative trading, and spot prices have gone higher than future delivery. There is clearly price momentum and speculation, which seems likely to support prices for now.

The rally doesn’t fit with markets’ overall disinflation story, and if rates fall and growth recovers as expected, it should mean even more oil demand. On the other hand, the very dynamic US production could fill some of the supply gap, and OPEC might allow more production if Russia is lagging. The cartel doesn’t want to crush demand with too high prices.

Speculative rises can often fizzle out too, especially in the era of AI-related high frequency trading. Brent might reach $100, but anything beyond that will be hard to maintain.

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

Andrew Lloyd DipPFS

8^th April 2024