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EPIC Partners: Daily Update – China’s Fork in the Road / Easter Eggs Bid Only

Please see below an article from EPIC Partners providing their daily round-up on markets, which was received late this morning (26/03/2024):

At the China Development Forum, the IMF’s Managing Director Kristalina Georgieva said she believes the world’s second-largest economy faces “a fork in the road”, whether to stick to its tried and tested policies that have worked in the past to a lesser or greater degree, or push for high-quality growth.  

Georgieva added that: “With a comprehensive package of pro-market reforms, China could grow considerably faster than a status quo scenario”. The IMF believe these pro-market reforms could unleash a 20% expansion of the real economy over the next 15 years, which in today’s terms would equate to adding USD3.5tn to the Chinese economy. The IMF also upgraded its estimate that China’s economy will grow 4.6% in 2024, 0.4% point higher than its last forecast in October, and 0.4% below China’s own forecast. 

However, Georgieva also warned that China had pressing near-term challenges, including transitioning the property sector on to a more sustainable footing and reducing local government debt. In order for this to happen China needs to take “decisive steps” to complete unfinished housing stranded by bankrupt developers and to reduce risks from local government debt she said. In doing so, China could “accelerate the solution to the current property sector problems and lift up consumer and investor confidence”. She went on to say that: “A key feature of high-quality growth will need to be higher reliance on domestic consumption”, adding that this “depends on boosting the spending power of individuals and families”.  

Finally, as we approach Easter, the price of your Easter eggs next year might be a lot higher than the ones you bought this year. Cocoa futures are up 50% this month alone and have more than doubled since the turn of the year. The combination of aging trees, diseases, bad weather and demand has combined to create the largest shortfall seen in the cocoa market in more than sixty years.  

On Monday, cocoa futures closed at nearly $10,000 a ton, up 8% from Friday’s close, up 250% in the last few months, making it more expensive than copper.

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

Carl Mitchell – DipPFS

Independent Financial Adviser

26/03/2024

Team No Comments

Tatton Monday Digest

Please see below article received from Tatton this morning, which provides a positive update on global markets.

Overview: Stick to the Plan

Brighter days for markets; returns were strong across the board last week, thanks to central bank messaging.

The Bank of England (BoE) “has done its job” according to Governor Bailey, and “we are not seeing a lot of sticky persistence” in inflation. Markets are pricing cuts in July, with rates settling at 3.5% in 24 months. If the BoE moves rates in line with economic activity, though, it would mean rates between 3% and 3.5% in around 18 months on our calculations.

The hawkish Monetary Policy Committee members are less hawkish now that inflationary behaviour has dissipated. Recent data shows more money is being spent, but the rise is slow. It vindicates the BoE’s wait-and-see approach. Comments suggest MPC members now fear low growth more than inflation, which could mean a rate cut in May if April inflation is lower than 2%, as expected.

The ECB could join in, after telling us that “rate cuts are coming”. Manufacturing confidence is low, and Switzerland cut rates during the week, supporting the notion of an ECB cut. The Bank of Japan actually raised rates, but markets acted like they cut (see article below). There was weakness in China – the heart of global disinflation – which led to falling Chinese bond yields and possible policy giveaways from Beijing. 

The Federal Reserve said it was still expecting to cut rates, despite US inflation picking up. There is a growing confidence that the US economy is balanced, despite continued economic strength. But strength is a complication for chairman Powell’s plan. The Fed expects 2.1% real growth and 2.4% inflation in 2024, but things will have to slow from here to achieve that – and current activity is rising.

Central banks feel vindicated in sticking to their plans: inflation is down and activity is not too bad. For the Fed specifically, this might be overconfidence, but that will be good for company profits in the short-term. Our only worry is that, if inflation does move higher, the nice rate cut narrative might shift suddenly.

Japan’s rates are go – and markets up with them

The Bank of Japan (BoJ) raised interest rates for the first time in 17 years last week. The hike, from -0.1% to a range between 0% and +0.1% might seem tiny, but it is big and symbolic for the Japanese. The BoJ becomes the last central bank to end negative rates, curtailing the era of no payouts for Japanese depositors. 

Markets reacted unintuitively. The value of the yen fell sharply, the currency now at ¥151 on the dollar. Bond yields also fell, with Japanese 10-year yields now well below the 1% peak from October. Equities rallied too, and the Nikkei 225 up over 20% year-to-date. All of these are the reverse of what you would expect when Japan’s monetary policy is finally tightening. 

Markets acted like the BoJ cut rates instead of hiked them, because the decision came with dovish signals. Japanese inflation is now barely above the bank’s 2% target and trending down, so BoJ governor Kazuo Ueda has said borrowing costs will not go up sharply. Market positivity – which pushed the Nikkei past its 1989 asset bubble peak only last month – should help stave off a return to deflation.

Japan’s goods, services and labour are extremely competitive after decades of stagnation. There have been corporate structural changes in the last decade which will help take advantage of that too – resulting in the biggest wage increase since 1992. Structural changes, the third arrow of the late Prime Minister Shinzo Abe’s “Abenomics”, have finally hit home. This will likely mean stronger inflation and nominal growth, even if still low compared to the world.

Thankfully, the BoJ is keeping rates low relative to the expected growth, with real (inflation-adjusted) rates still negative. It refuses to do much in the face of inflation, and Japan’s economy should benefit.

Neom and the Saudi Line

Saudi Arabia wants to create the future of sustainable living in Neom, a futuristic megacity featuring “The Line”, a linear ‘smart city’ with no cars or fossil fuels. There is understandable cynicism in the West, considering the country is the world’s largest oil exporter and currently imports 80% of its food. Critics have called it “greenwashing” or purely PR, similar to Saudis’ extensive sports investments.

But at a top estimated cost of $1 trillion ($500bn on the low end), Neom would be by far the most expensive publicity stunt in history. There are more cost effective ways of improving image that Riyadh is already pursuing – like forcing international companies to set up Saudi headquarters or joint ventures in exchange for government deals. Many big names have already done so, and more are sure to follow.

The huge sums and coordinated policies tell us Crown Prince Mohammed bin Salman is serious about diversifying the Kingdom away from oil exports. It obviously has an interest in promoting oil, but the nation’s long-term interests are to no longer rely on the industry. 

Part of the ‘Saudi Vision 2030’ campaign is about aligning Saudi Arabia – which has a higher GDP per capita than several European nations – with global economic and financial institutions. Its links to the global economy are currently one-track, and there are opportunities in diversifying them. 

That requires upfront capital, and Riyadh is certainly willing to spend it. Not only might the Kingdom’s massive reserves be put to work for global companies, but the domestic stock market – including the world’s most profitable company Saudi Aramco – might be opened up too. It means a reallocation of capital towards newer, hopefully productive, areas. Opportunities are there, but risks of congestion and misallocation are too.

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

Chloe

25/03/2024

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Brooks Macdonald: Daily Investment Bulletin

Please see today’s Daily Investment Bulletin from Brooks Macdonald:

What has happened

Dovish messages from central banks continued to led risk assets higher. In the US, the S&P 500 and the NASDAQ gained +0.32% and +0.20% respectively. The small-cap Russell 2000 index continue to outshine large-caps, surging by 1.14% to reach its highest point in nearly two years, while the Magnificent 7 suffered a decline of -0.43%, due to Apple’s notable drop of -4.09% following the initiation of an antitrust lawsuit. In contrast to the buoyancy seen in Western markets, Asian equities experienced a downturn, with Chinese stocks bearing the brunt of the losses. Hong Kong’s Hang Seng index fell by -2.16%, Hang Seng Tech index plummeted by -3.55%, and the Mainland Chinese CSI 300 index was down by -1.1%.

Bank of England holds rate steady

The Bank of England holds interest rate but the key takeaway from the policy decision meeting was that rate cuts might come sooner than expected. This change in sentiment comes as some hawkish BoE officials have retracted their previous support for rate hikes, and Governor Andrew Bailey has expressed a more sanguine view of the economic forecast. The markets are now pricing in a roughly 70% probability of a rate cut in June, with expectations fully set for a move by August. With headline inflation set to move below 2% from April, further calibration in the BoE’s policy message is likely in its May meeting when it will also publish updated forecasts. There are thoughts that May cut might be too soon because April inflation numbers will not be available until after the meeting. Nevertheless, Governor Bailey has suggested that inflation does not need to fall below 2% for the central bank to consider easing its policy.

What does Brooks Macdonald think

Bank of England’s messaging largely echoed what was communicated by the Fed earlier in the week. The persistently dovish tone from global central banks bodes well for risk assets, with the FTSE 100 index currently trading at the highest point since one year ago and edging close to the all-time-high level achieved in Feb 2023. This risk-on sentiment is also particularly beneficial for small and mid-cap stocks which have outperformed their larger counterparts for two consecutive days. It is important to highlight, however, that this wave of optimism did not extend to Chinese equities, which retreated today, as the negatives of domestic economic woes outweighed the positives of easy monetary policy.       

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

22/03/2024

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Evelyn Partners: March Bank of England MPC Decision and Feb CPI

Please see below, an update from Evelyn partners detailing the March inflation figures and Monetary Policy Committee meeting outcome. Received today – 21/03/2024

What happened?

The Bank of England (BoE) held the base rate at 5.25% at their meeting today. This was consistent with market expectations and marks the fifth consecutive meeting where rates have been held at this level.

There was, however, a notable shift in the committee votes, with nobody voting to increase interest rates. Eight members voted to hold the base rate at 5.25%, with Jonathan Haskel and Catherine Mann dropping their votes for higher interest rates, while Swati Dhingra continued to vote for a 25 basis point cut.

This follows February’s CPI print (released Wednesday), which came in slightly softer than expected at 3.4% year-on-year (vs consensus of 3.5%). Core CPI, which better reflects domestic price pressures, was reported at 4.5% year-on-year (vs consensus of 4.6%).

What does it mean?

As anticipated, the BoE held the base interest rate at 5.25%. But today’s change in votes signals that we are getting closer to interest rate cuts. Haskel and Mann, longstanding hawks, dropped their votes for higher rates, making this the first meeting since September 2021 with no votes for higher rates.

Moreover, the softer than expected February inflation print should give the monetary policy committee (MPC) more confidence that inflation is on the right track. CPI rose by 3.4% in the 12 months to February 2024, down from 4.0% in January. The largest downward contributions to the CPI annual rate came from food, and restaurants and cafes, while the largest upward contributions came from housing and household services, and motor fuels. Although the services component of CPI remains elevated at 6.1% year-on-year, and the MPC will want to see more progress on this measure before they commit to a rate cutting cycle.

On the growth side, the data is showing tentative signs that UK economic growth might be turning the corner. The UK composite PMI reading for March was 52.9, marking the third month in a row above 50 (50 signals expansion vs the previous month). This implies that the technical recession experienced in the second half of 2023 is now over.

Today’s meeting doesn’t seem to have materially changed the calculus for money market traders, although the probability of a June rate cut has increased to 70% from 50% at the start of this week. The market took the decision and communications as dovish, with sterling weaker against the US dollar and gilt yields falling across the curve.

Bottom Line

The BoE held interest rates at 5.25%, although today’s change in voting patterns signals that we are getting closer to a first interest rate cut. We continue to expect this will materialise around the middle of the year as inflation decelerates to the 2% mark.

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

Alex Kitteringham

21st March 2024

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Evelyn Partners: March FOMC Monetary Policy Decision

Please see below, an article from Evelyn Partners explaining the implications for markets of the latest Federal Open Market Committee meeting and rate decision. Received last night – 20/03/2024

What happened?

The Federal Open Market Committee voted unanimously to keep rates on hold at 5.5% (upper bound) at the conclusion of their meeting today. This was in line with market expectations and is the fifth consecutive meeting where rates have been held at the same level since the last increase in July 2023.

The Fed also today released its quarterly ‘dot plot’ which tells markets where committee members see interest rates going in the future. It showed no change from their December publication in terms of median rate expectations for the end of 2024 at 4.6%, suggesting 75bps of cuts from current levels.  Importantly, it did show revised expectations for where rates will be at the end of 2025 at 3.9%, suggesting one less cut than their estimate in December.

What does it mean?

No change in rates at today’s meeting came as no surprise to financial markets, which were pricing the chances of a cut at less than 1% going into the meeting. There were no significant changes in the wording of the statement today, and the ‘dots’ revealed fewer rate cuts to come but with one taken from 2025, rather than 2024 as some analysts had been speculating. Officials also increased forecasts of where they see rates settling over the long term, increasing their median estimate from 2.5% to 2.6%.

Interest rate expectations have moved a long way since the Fed’s last meeting on the 31 January. Immediately following that meeting, futures markets were pricing in six interest rate cuts over the course of 2024, while their ‘dot plot’ (which was published in December) was suggesting there would be only three. Since then, markets have slowly fallen into line with Fed thinking, with the latest market estimation for the number of rate cuts this year also being three, immediately before today’s meeting. That was largely thanks to month-on-month core CPI inflation prints for both January and February coming in 10 basis points higher than market expectations – stickier than expected. Producer Price Index inflation readings (a price measure at the wholesale level) have also come in hotter than expected, leading to bond market inflation expectations to move from around 2.2% (CPI) annually for the next 5 years to around 2.4%. Interestingly, the Fed’s preferred measure of inflation, the PCE deflator was not stronger than expected, with the headline measure for January coming in at 2.4%. This inflationary backdrop led the Fed to increase their estimates today for PCE inflation to 2.6% from 2.4% by the end of the year.

On the growth side of the equation, payroll gains have been strong in January and February although unemployment ticked up to a 2 year high of 3.9%. Q1 GDP is tracking close to 2% after the remarkable strong 4% seen in the second half of last year – lower but still above the long run rate.

This varied economic backdrop led the committee to repeat the guidance in the previous statement that it doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Officials maintained the pace of quantitative tightening, with a maximum of $60 billion of Treasuries and $35 billion of mortgage-backed securities rolling off the balance sheet each month, and no guidance of any changes to this.

Bottom Line

There weren’t many surprises out of today’s Fed meeting, and therefore market expectations (and our own) for interest rates have not changed.  The equity market hasn’t been put off its stride by the prior moderation in cut expectations in quite the same way that the bond market has, but with futures markets finally in line with the fed, we would expect one source of volatility, particularly for the bond market, to dissipate. Clearer visibility over cuts should be a more benign backdrop for positive performance from both equity and bond markets.

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

Alex Kitteringham

21st March 2024

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EPIC Investment Partners – The Daily Update (UK Inflation Cools)

Please see the below article from EPIC Investment Partners providing their update based on the latest UK inflation data. Received this afternoon.

UK CPI has fallen to the lowest level since September 2021 as easing prices for food, hotels and restaurants helped offset an increase in fuel prices and household services. The Office for National Statistics (ONS) said CPI dropped to 3.4% in February, 0.1% below the market consensus and the 4% recorded previously. Core inflation, so excluding volatile food, energy, alcohol, and tobacco prices, came in at 4.5%yoy, also 0.1% below estimates, and the previous reading of 4.1%. 

Following the release, Grant Fitzner, chief economist at the ONS, said: “Inflation eased in February to its lowest rate for nearly two-and-a-half years. Food prices were the main driver of the fall, with prices almost unchanged this year compared with a large rise last year, while restaurant and cafe price rises also slowed. These falls were only partially offset by price rises at the pump and a further increase in rental costs”.

However, the drop in inflation is unlikely to have a material impact on the Old Lady’s rate decision tomorrow. The market was already overwhelmingly looking for the BoE to hold rates at 5.25% for a fifth straight meeting. The central bank is likely to stick to the script, acknowledging the possibility that the of the next move could be lower, while remaining vague about the timing.

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

20/03/2024

Team No Comments

Brewin Dolphin – Markets in a Minute

Please see the below article from Brewin Dolphin giving their overview of global markets. Received yesterday.

Guy Foster, Chief Strategist, discusses improvement in the UK housing market and its effect on the wider economy, while Janet Mui, Head of Market Analysis, analyses the good and the bad news following fresh U.S. inflation data.

Hopes for seemingly enormous interest rate cuts during 2024 have been dissipating since the year began. Two months ago, investors thought U.S. interest rates would finish the year at just over 3.5%. Now that is just over 4.5%, implying there may be three interest rate cuts. But why the change in mood?

In short, inflation has remained stickier than expected. Last week’s U.S. consumer price index (CPI) print saw core inflation slightly above estimates for the second month in a row. Recent monthly readings have been consistent with a rate of core inflation of 4%, which is clearly too high.

Core CPI excludes the volatile food and energy prices that can make interpreting the data difficult. After this adjustment, shelter inflation makes up 45% of what is left. Some of the shelter data is very lagged in its impact because it relates to when tenancy agreements are renewed. Therefore, the Federal Reserve has discussed core services excluding shelter (so called super-core inflation) as a preferred measure. That rate also remains well above the Federal Reserve’s target rate.

On Thursday, producer price indices, which measure the prices of goods sold by their manufacturers, were also above estimates. This seems to fit the phenomenon that we have been highlighting over the last few months, that more companies are experiencing high services output prices.

A matter of ‘when’ rather than ‘if’?

All this sounds pretty concerning given the narrative for 2024 has been about interest rate cuts, and markets have certainly paused for breath. So far, though, investors still believe the question is ‘when’ rather than ‘if’ rates will be cut. Despite a full percentage point of cuts for this year being erased, long-term bond yields have risen by around 0.2%.

Theoretically, if you believe that companies are valued based upon bond yields with an acceptable equity risk premium, the stock exchange would be quite responsive to small changes in bond yields, but the evidence to support this is lacking.

Instead, the interaction between share prices and interest rates seems more likely to reflect the broader concept of liquidity, which so far this year remains reasonably abundant. The notable risk on this front would be if liquidity support for U.S. regional banks was to diminish, as we are now a year past the crisis.

U.S. retail sales accelerate in January

U.S. retail sales expanded at the fastest pace in five months during January, which could have given policy makers more inflationary fears to fret over. But this rebound reflected an improvement in the weather rather than a resurgence in animal spirits. Inclement weather caused a sharp decline in shopping trips during January and most of the recovery in February was driven by building materials and garden equipment, both of which are weather sensitive. U.S. goods demand therefore remains in the doldrums, with services having been the category of choice for consumers.

Chinese stocks bolstered by new growth target

Chinese stocks had a good week overall but were struggling for momentum by the end of it. The enthusiasm for these stocks has been bolstered by the idea that the newly announced growth target implies powerful stimulus must be coming.

Alas, it remains a trickle rather than a gush.

Despite property prices, which we learnt on Friday are continuing to decline, and bank loan growth, which decelerated to its slowest pace on record last month, the authorities have not been forthcoming with stimulus. Instead, China drained liquidity from the banking system during February and held interest rates steady.

The Chinese economy has shown some green shoots of recovery, with prices at last rising again in February after four months of deflation. It seems likely more stimulus through lower reserve requirement ratios and lower interest rates will eventually be unleashed.

UK GDP estimate turns positive in January

Green shoots are also evident in the UK. The January estimate of monthly gross domestic product (GDP) turned positive, which was implied by the already-released retail sales numbers for that month.

The recovery in the housing market continued as well, as last week’s Royal Institution of Chartered Surveyors (RICS) house price index would seem broadly consistent with house price growth of up to 5%. Demand for housing has recovered following a normalisation in borrowing costs. Most encouraging is that new sellers are entering the market as well, suggesting the recent uptick in prices is perceived to last. And it’s not just the secondary market for homes that is recovering.

More housing market activity also seems to be drawing a line under the fifteen-month housebuilding recession that the UK has suffered. More housing transactions are good for economic activity as they are labour intensive to build and even selling already existing homes triggers a chain of connected economic activity from financing to furnishing.

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

20/03/2024

Team No Comments

Epic Investment Partners – The Daily Update | BoJ Rate Hike / Tooth Fairy

Please see today’s daily update from EPIC Investment Partners below:

To call it well flagged would be an understatement. Overnight, the Bank of Japan (BoJ) ended the world’s last negative rate policy, raising interest rates for the first time in 17 years. The central bank raised rates to the range of 0% to 0.1%, from -0.1%, after acknowledging its long-held goal of 2% inflation was within sight. The bank will also scrap its yield curve control (YCC) policy, along with purchases of exchange traded funds and Japan real estate investment trusts (J-REITS). However, it will continue buying long-end JGB’s at “broadly the same amount” as before.  

As we mentioned in Friday’s Daily Update, it was reported that the BoJ’s decision hinged on the outcome of the yearly wage negotiations by Japan’s largest union, Rengo. Japan’s largest companies agreed to hike wages by 5.28% for 2024, the largest increase in 33 years, and 3.5% above the average of the last 20 years.  

In the statement released after the decision, the BoJ said: “Services prices have continued to increase moderately, partly due to the moderate wage increases seen thus far”. “As these recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged it came in sight that the prices stability target would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 outlook report,” the central bank added. 

In the post-meeting news conference BoJ Governor Kazuo Ueda comments were balanced. Ueda admitted that the stronger-than-expected wage growth had played a large role in the decision. He reiterated that the price target was within sight and that the upward economic cycle has been confirmed by recent data releases. However, he expects the BoJ to remain accommodative until the underlying inflation eventually reaches 2%, whilst not taking the option of future hikes off the table. 

Talking of inflation, one person whose prices have sky-rocketed over the last year is the tooth fairy. According to a report in the WSJ, it appears that if the tooth fairy leaves your little ones a pound under their pillow for their teeth, they are entitled to feel hard done by.  

In 2023, the average payout for a lost tooth in the US was at a record high of $6.23, a 20% increase from 2022. However, that’s not the half of it. The report also states some of the jaw-dropping items some children get for losing their teeth. This includes silver fairy necklaces, Louis Vuitton bracelets, even brand-new iPhones!

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

Charlotte Clarke

19/03/2024

Team No Comments

Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global economic and market update.

What has happened

Over the past week, the financial markets grappled with persistent inflationary pressures. Key economic indicators, such as the US Consumer Price Index (CPI) and Producer Price Index (PPI), exceeded forecasts, signalling more persistent inflation. Concurrently, oil prices experienced a significant uptick, with Brent crude reaching $85 per barrel, a high not seen since October. These developments prompted a reassessment of the Federal Reserve’s potential interest rate trajectory. Market expectations for a rate reduction by the Fed shifted, with futures markets now indicating approximately a 60% likelihood of a cut by June, a stark contrast to the nearly certain expectation of a cut two weeks prior. The prospect of fewer rate cuts led to a rise in global yields and a slight downturn in equities. The S&P 500 fell 0.13%, and the small-cap Russell 2000 index was particularly hard hit, falling by 2.08% over the week .

Important decision from the Bank of Japan tomorrow

The Bank of Japan (BoJ) is poised to terminate its negative interest rate policy (NIRP), which would represent its first rate hike since February 2007. The BoJ is reportedly considering an increase in the short-term interest rate from the current -0.1% by over 10 basis points to a range between 0% and 0.1%. This move is based on the assessment that economic conditions are now favourable for achieving a stable 2% inflation rate. In addition to ending NIRP, the BoJ is also expected to discontinue its yield curve control (YCC) policy and halt new purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), although it may maintain some level of Japanese government bond (JGB) purchases to manage yield volatility post-policy change.

What does Brooks Macdonald think

The upcoming week could be pivotal for the financial markets, as we will see multiple central bank decision. The most important one is Bank of Japan, which is likely to increase rates to 0% tomorrow, marking an end to the era of global negative interest rates. This event may overshadow the Federal Reserve meeting on Wednesday, where no interest rate adjustment is expected but it should provide insights into the Fed’s stance on inflation. Additionally, the Bank of England (BoE) is scheduled to hold its policy meeting on Thursday, rounding out a significant week for central banks worldwide.

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

Chloe

18/03/2024

Team No Comments

US Elections: How Biden and Trump could impact markets

Please see below article received from M&G Wealth Investments yesterday afternoon, which anticipates the markets’ reaction to the result of the November 2024 US presidential election.

2024 has a busy election calendar and governments may be more inclined to reduce taxes and spend more, in an effort to win over voters.

The November 2024 US elections are still a long way off but with the US Presidential nominees now set, we’re starting to think about the future outcomes and market scenarios. Given the sharp policy differences between the two political parties the election outcome could have profound political, economic and market implications – but this is also dependent on the scale of the candidate’s victory. These are our thoughts and what we’re watching:

2025: Expect a deluge of legislation

In the past decade, presidents have moved to enact their flagship policies early in their term. This is because there’s a risk of the House and Senate changing in the ‘mid-term’ elections two years later. In addition, political parties tend to stop working to pass legislation or approve new appointments in the run up to elections. For example, Donald Trump’s key policy of tax cuts was delivered in 2017 and reduced the headline rate of corporate taxes from 35% to 21%. President Joseph Biden’s Infrastructure legislation came in 2021 and the Inflation Reduction Act in 2022. These are examples of key policies that have influenced the US economy and markets.

What does this mean? There’s a narrow window for legislation to be passed in the US. Regardless of who wins, we expect a deluge of new legislation in 2025 and we would expect both candidates to continue spending and borrowing.

If Biden’s Back

We’d expect a Biden victory to reinforce the existing agenda of The American Jobs Plan – investment in infrastructure, transportation, and manufacturing, alongside a focus on building alliances abroad.

Regulation of technology companies and artificial intelligence could be a new area of focus. So far, the European Union has been taking more significant actions to regulate technology companies than the US. We could see this change, as artificial intelligence impacts more areas of society. Within the election itself, the ability to create fake videos, images and voices could have a profound impact.

Immigration is also likely to be high on the agenda, as it’s a key political issue. Biden recently negotiated an agreement on immigration with the US Senate. However, the House of Representatives has declined to consider it citing that it’s too close to an election. If the House of Representatives doesn’t take any action on the current proposal, Biden will want to do that quickly at the start of his next term.

If Trump is Triumphant

We expect to see large tax cuts for companies and individuals if Trump prevails. The real estate sector would likely be a significant beneficiary, as this would support Trump’s personal business interests. Reducing corporate taxes would boost company profits, so we’d probably see an initial boost for stocks. Consumer spending power would increase as well. Longer term, though, this could lead to higher inflation.

Trump has made no secret if his disdain for higher interest rates. It’s not surprising, given that higher interest rates create a more challenging environment for property developers. Jerome Powell’s term as Chair of the US Federal Reserve ends in 2026 and the next President would have to nominate a successor. Trump might replace Powell with someone more likely to reduce interest rates. There is a longer term risk that if Trump were able to appoint several individuals to the Federal Reserve board willing to take direction from him, then monetary policy could cease to be fully independent. A scenario where the market loses confidence in US monetary policy is the biggest risk to financial markets. We might see interest rates reduced in the short term, but combined with tax cuts this could lead to higher inflation in the long run.

Foreign policy would also see change under Trump, with the United States pulling back from international diplomacy. Laws have been changed to prevent Trump from withdrawing the US from North Atlantic Treaty Organisation (NATO), a joint defense agreement created after World War 2.  He could undermine it in other ways, such as not providing funding or not appointing representatives to interact with the organization. With the conflict between Ukraine and Russia ongoing, this would weaken Europe’s position.

What does this mean for investors?

Markets tend to look through election ‘noise’ in the run-up until the outcome is better known. The US economy is in a strong place as a result of four years of spending and investment. It’s an increasingly insulated and self-sufficient economy. We haven’t changed our investment approach in anticipation of the election.  If Trump is re-elected then we expect increased volatility and unpredictability.  But, even with Biden continuing for a second term we’re still likely to face a volatile environment.

Over the past year, we’ve increased exposure to government bonds. Government bonds, and particularly US Treasuries, can perform well during periods of uncertainty. There’s also one potential silver lining: there has been greater divergence in economies recently – most notably in economic growth and inflation. If this trend continues, it could make it easier to have diversification within portfolios.

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

Chloe

15/03/2024