News

Please see the below article from Brewin Dolphin which covers their views on recent events in markets. Received 24/10/2023.

Stock markets slid last week as investors grew increasingly concerned about the Israel-Hamas war.

In the US, the S&P 500 suffered its biggest weekly decline in a month, falling 3.4%. The Nasdaq tumbled 4.3% and nearly entered bear market territory as long-term US Treasury yields hit a new 16-year high.

Indices in Europe also fell, with the Stoxx 600, Germany’s Dax and the FTSE 100 shedding 3.7%, 2.9% and 3.0%, respectively. Sticky inflation and concerns about interest rates staying higher for longer also weighed on investor sentiment.

 In Asia, China’s Shanghai Composite slid 3.0% and Hong Kong’s Hang Seng fell 2.7% following reports that property developer Country Garden had missed its final deadline for a coupon payment on a dollar bond.

Eurozone economic downturn accelerates

Stocks gave a mixed performance on Monday (23 October) ahead of a busy week of economic data and corporate earnings reports. The S&P 500 and the Dow ended the day in the red, whereas the Nasdaq rose 0.3% as investors awaited earnings reports from major technology stocks.

In economic news, the latest HCOB purchasing managers’ index (PMI) for the eurozone showed the region’s economic downturn accelerated in October, with the flash composite PMI output index declining to 46.5 from 47.2 in September. Excluding pandemic months, the fall in activity was the sharpest since March 2013. New orders fell at an accelerating rate and companies cut employment as a result, representing the first drop in headcounts since the lockdowns of early 2021.

In the UK, the S&P Global / CIPS flash composite output index measured 48.6 for October, up fractionally from 48.5 in September but below the 50.0 no-change mark for the third month running. Manufacturing output declined for the eighth-consecutive month. The FTSE 100 was down 0.7% at the start of trading on Tuesday.

UK inflation remains at 6.7% year-on-year

Last week saw the release of the latest UK consumer price index (CPI) report. Economists were expecting the year[1]on-year rate of inflation to decline in September. Instead, it held steady at 6.7%, triggering a sell-off in global bonds.

The data from the Office for National Statistics (ONS) showed rising prices for motor fuel were the main factor preventing a decline in the annual inflation rate. However, 24 October 2023 core inflation (excluding energy, food, alcohol and tobacco) was also higher than expected at 6.1% year-on-year, down slightly from 6.2% in August. Services price inflation increased from 6.8% in August to 6.9% in September, driven by more expensive hotel rooms.

 The Bank of England is still expected to keep interest rates on hold at its meeting on 2 November, but the data has added to uncertainty about the longer-term outlook.

Warm weather hits UK retail sales

The latest UK retail sales figures also proved disappointing. Figures from the ONS showed retail sales volumes fell by 0.9% in September compared with a month earlier, as unseasonably warm weather limited sales of colder weather clothing and consumers cut back on non[1]essential spending. The drop was much steeper than the 0.2% decline forecast by economists.

Elsewhere, GfK registered the biggest monthly fall in UK consumer confidence since 1994 (excluding the coronavirus pandemic) as consumers grew more concerned about the prospects for their personal finances and the wider economy. The latest gauge of consumer optimism dropped to a three-month low of -30 in October, down from September’s reading of -21.

US retail sales stronger than expected

In stark contrast to the UK, retail sales in the US smashed estimates. Sales rose by 0.7% in October, roughly double the consensus forecast for 0.3% growth. Fuel sales were a key driver, rising by 0.9% as prices at the pump increased (US retail sales figures are based on receipts, not volumes, and are not adjusted for inflation). Over the preceding 12 months, sales rose 3.8%, roughly in line with consumer inflation.

Separate data showed industrial production increased by 0.3% in September, higher than the expected 0.1% increase.

China GDP grows by 4.9%

China’s gross domestic product (GDP) grew 4.9% year[1]on-year in the third quarter, beating expectations for 4.5% growth. On a quarterly basis, GDP grew by 1.3%, improving from growth of just 0.5% in the second quarter, according to China’s National Bureau of Statistics. Retail sales figures were also encouraging, with sales up 5.5% in September from a year earlier, improving from 4.6% growth in August. The data, however, was overshadowed by ongoing troubles in China’s property market. New home prices fell in September for the third-consecutive month.

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

Alex Clare

25/10/2023

Please see the below Tatton Investment Management Monday Digest article received this morning – 23/10/2023.

Overview: Bond yield volatility has markets guessing
While the human suffering in the Middle East conflict worsened, capital markets have still not meaningfully acknowledged the rising geopolitical risk, beyond the slight increase in oil prices that was already under way a week ago. Nevertheless, the volatility in long bond yields continued as the global benchmark US 10-year government yield yo-yoed between 4.5% and 5.00%. The risk premium for accepting fixed yields for longer periods remains the talk of the investment community at large. Fact though is that investors now want more reward for any new investment beyond cash.

What’s been interesting in past weeks is that the biggest relative change in required risk premium (that incentive of extra expected return) has been in the assets generally described as the least risky – government bonds.  The 10-year US Treasury yield traded at 4.992% last Thursday. Some of this rise is attributable to rising inflation fears although (oddly, given the oil price rises) not in the near-term – the fears seem to be more visible in five years’ time. It seems that investors hear the words ‘risk-free asset’, but perceive long-term US Treasuries bonds as one of the riskiest of defensive assets.

To sum up, one reasonable conclusion to draw from the raging debate is that this inflation-fighting tightening cycle may have indeed reached its nadir. Therefore, the emerging crunch point is whether the higher rates and yields are slowing activity just enough to declare victory over inflation (so we get away with an economic soft landing over the coming months), or whether the additional dynamics introduced by the ‘collateral damage’ of the high yield environment leads to an acceleration in the slowdown – or even possibly trigger a credit default cycle – all of which causes central bank tightening to turn into a policy error outcome that leads to a hard landing recession. We continue to watch credit spreads and stories related to default stress, which have increased but not to worrisome levels. Market liquidity remains good and intraday volatility well within the usual boundaries. This can all change quickly, but currently give little reason for concern, but equally the conditions are not tempting us to declare and position investor portfolios for one outcome or the other.

Chip cycles and tech bubbles
The microchip industry is in an odd place. On the one hand, investors have been eager to eat up anything related to the generative AI boom. This has given a huge boost to companies like high-end chipmaker Nvidia, whose share price has risen an eye-watering 192% year-to-date. On the other hand, more ‘traditional’ semiconductor manufacturers – those specialising in large-scale production of run-of-the-mill microchips – are struggling under the weight of a substantial cyclical downturn. Some analysts even think global semiconductor revenue will decline for the first time since 2019, and many chipmakers have announced plans to cut back production or capital expenditure.

Nvidia specifically has been hit by the US government’s decision to stop it selling high-end microchips to China – where 25% of its data centre chip revenues reportedly come from. Controls were introduced a year ago, but the Biden administration last week announced a tightening of restrictions to curb China’s technological advancement. Nvidia shares – previously the darling of tech investors – have fallen by 9% in the last five days. It is a reminder that, even if AI technology itself is genuinely transformative, it means little to businesses if they cannot (either through ability or government intervention) capitalise on it. One could easily argue that current chipmaker stocks are undervalued relative to AI-propelled peers, certainly if the US Federal Reserve achieves its fabled ‘soft landing’ and eases interest rates without ever triggering a damaging recession. What it suggests to us is that structural stories around AI and innovation may have their place, and will be especially visible in hindsight, but cyclical factors driven by supply and demand are at least equally important.

How far can Americans run down their savings?
One of the biggest investment topics over the last few years has been so-called ‘excess’ savings. Over the pandemic, consumers across major developed economies tucked away huge rainy-day funds, some of which were spent as the world opened up. This is usually cited as a major factor behind the extraordinarily resilient post-pandemic economic figures. Central banks have therefore paid close attention to consumer savings, and as we come to the inflection point for global interest rates, predicting what will happen to excess savings is crucial to any outlook for inflation or monetary policy.

What this means in practice is much harder to tell. Economists are unanimous that lockdowns and fiscal handouts caused consumers to save more than they normally would, but putting a precise figure on this requires figuring out what the ‘normal’ rate would have been. Then there is the question of how much of those excess savings are still available. The US, experiencing the high and consistent GDP growth, also saw a sharp reduction in consumer savings rates as we came out of the pandemic. Others, like the UK and Eurozone, still have savings rates above their pre-pandemic averages.

Back in June, Federal Reserve Board economists predicted US excess savings would run out by the third quarter of 2023. At which point, one would expect consumption to fall back in line with underlying real income, which itself is slowing. That suggests a significant slowing of US consumer demand, bringing down both growth and inflation. This scenario is broadly in line with the latest economic data, which has shown a cooling of US growth without an outright downturn, and it also makes sense of the Fed’s recent pause on interest rates. But on the other hand, betting against the US consumer has been a losing game over the last few years; they have been incredibly resistant to things that we might have thought would knock their sentiment or spending habits. Moreover, US Americans, more than most developed world consumers, are big investors in their own stock market. Its stellar performance has had a direct impact on their abilities to spend. A reversal of this trend could be triggered by a US financial shock, though that does not look likely at the moment. It could also come from a sharp reduction in US fiscal spending, for example under a deficit-busting Republican presidency. All of these scenarios are shrouded in uncertainty. US outperformance has no immediate threats, but with savings in the balance, it looks more fragile than it has in years.

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

Charlotte Clarke

23/10/2023

Please see below, an update from EPIC Investment Partners which details the latest UK inflation figures and the possible policy implications for the Bank of England and the UK government. Received yesterday morning – 18/10/2023

UK inflation remains entrenched and at the highest levels of the G7 nations according to the latest figures released today. September’s headline CPI was up 0.5%mom, in-line with expectations, but higher than August, due to the jump in oil prices. Year-on-year, the figure came in above expectations at 6.7%. The core reading eased to 6.1%yoy, while services heated up to 6.9%yoy.

Given that inflation is below the BoE’s 6.9% August projected figure, coupled with the easing labour market, at this stage, there is little evidence to suggest the BoE will hike at the next meeting in a couple of weeks. The central bank will, however, need to consider the fact that wages overtook inflation in September. The market is currently pricing a 50/50 probability of another hike this year, and a higher chance of a hike in February 2024.

“As we have seen across other G-7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year,” the Chancellor of the Exchequer Jeremy Hunt said. PM Sunak Tweeted: “Tackling inflation remains my number one priority as Prime Minister…. We’ve made great progress, but I know there is still a way to go…. We will stick to our plan and get it done.”

September inflation prints are used as a benchmark in setting certain benefits, which will be announced in April. These latest figures suggest that welfare recipients will receive a generous uplift in payments next year.

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

Alex Kitteringham

19^th October 2023

Please see the below article from Tatton Investment Management providing their views on global economic news from the past week. Received this morning 16/10/2023.

Overview: Capital markets and war

The world took a turn for the worse last week, from a humanitarian point of view. The surprise element of the attack together with the current global economic backdrop, drew immediate parallels with the Yom Kippur War of October 1973, and the oil crisis that followed. Of course, the movements of capital markets are of trivial importance compared to the loss of life and immense human suffering brought upon the civilian populations of Israel and Gaza. However, our job at Tatton is to monitor and interpret the movements and motivations of capital markets and investors, and this remained our focus last week.

Indeed, capital markets are not considered good predictors of changes to the geopolitical risk framework. At the beginning of last week, the oil price rallied predictably by around 4% before falling back towards the end of the week and the move felt somewhat irrelevant following the previous week’s 12% fall. Perhaps this was not overly surprising after all, given the unfolding tragedy seemed to remain confined to Israel and Gaza, rather than spreading to a conflict with Iran via Hezbollah and other Arab states. This may have been a contributor to the stability and even upwards trend in equity markets during most of the week.

At a time when up-trending bond yields make the usual ‘safe haven’ assets of US bonds more at risk to capital losses, the US mega-cap stocks rose as some investors appeared to prefer them to government bonds. Still, benchmark US 10-year government bond yields fell back as well on increased demand, at one stage almost to 4.5%, before pushing back up. This came after after September’s US inflation numbers on Thursday came out higher than expected, suggestion a slowing of the recent downward inflation trend.

So, despite a paradigm-shifting week in geopolitical terms, capital markets appeared as if they had returned to being driven by the same drivers that we have been discussing over the past weeks. However, it would be wrong to conclude that markets are telling us that risks will remain contained. The coming days will be crucial in this respect. For the time being, our thoughts and prayers go out to all that have been affected by the violence and counter-violence, while we also observe that despite the parallels to 1973, oil reserves and regionality of sources 50 years later are on a much more diversified and far more stable footing.  

Is the Bank of England actually winning against inflation?

Britain’s inflation outlook is back in the spotlight (if it ever left). The International Monetary Fund (IMF) published a gloomy UK inflation report in which it forecasts prices will jump 7.7% year-on-year in 2023, and 3.7% in 2024. That is the highest predicted inflation rate of any G7 country, and it could mean another interest rate rise from the Bank of England (BoE), with UK rates staying well above peers to the end of this decade. This is despite the IMF downgrading Britain’s growth forecast to just 0.6% in 2024 – the lowest of any developed nation.

In truth, there are some reasons to doubt the IMF’s outlook. UK inflation has proven particularly persistent – compared to both other countries and our own history – but there has been a noticeable easing of price pressures in recent months. Headline consumer price index (CPI) inflation has been trending downwards since February, with the latest print of 6.7% in August. This is likely to come down further when September’s figures are released, thanks to the food price spike tailing off and increased supermarket competition.

Of course, as the BoE has repeatedly emphasised, its policymakers are worried about the tightness of the UK labour market and continuation of a wage-price spiral – one of the factors that pushed core inflation up again this year. Things remain tight, but analysts expect the labour market to loosen significantly in the next few months, moving even below balance. Given that keeping a lid on wages is the BoE’s proclaimed goal in its inflation fight, this should mean the BoE has delivered its last rate rise of this cycle. If the BoE leaves rates unchanged at its November meeting, that would mean two consecutive months of rates on hold and, if inflation comes down again in the meantime, as widely expected, it will send a strong message that the UK’s rate-hiking cycle is over.

Argentina back in crisis?

Argentina is suffering again, with political drama playing out against a backdrop of economic woes. Argentina has elections on 22 October, and markets are bracing for the possible win of radical far-right candidate Javier Milei. Milei, an economist who adheres to anarcho-capitalism, wants to dollarise the country if elected. His strong polling has led many to fear that their pesos could soon become worthless, thereby prompting a run on the currency. With an official exchange peg of 365 pesos per dollar in place since August, most Argentines have to convert savings at black market trading venues. Exchange rates there were reported at over 1,000 pesos per dollar last Tuesday – the largest gap between official and unofficial rates on record.

To heighten the tension, Argentina appears to be ‘robbing Peter to pay Paul’ but with the IMF and China. Argentina owes the IMF $43.4 billion, which accounts for 30% of all the credit extended by the IMF, more than all the countries in sub-Saharan Africa combined. And while IMF officials are aware of the need to cut the cord on Argentina’s struggling economy, the idea of it aligning with China is currently too scary to countenance. In June, the People’s Bank of China gave Buenos Aires an $18 billion swap line, which it immediately used to repay debts to the IMF. This move has never happened in the 80-year history of the IMF. The significance of the event was clearly not lost on IMF officials or US politicians. Just two months later, it gave Argentina another $7.5 billion, despite it not meeting any payment conditions. Only last week, President Fernandez was in Beijing asking for more money, while Argentina has been asked to join the BRICS group, which includes China and Russia.

Those international relationships are now central to the presidential election campaign. Both Milei and centre-right candidate Patricia Bullrich have come out against BRICS membership, with Milei saying he would cut diplomatic ties with China altogether. Both promise pro-market reforms too, with Milei promising to “chainsaw” public spending. Paradoxically, the victory of an anti-China candidate could mean a harsher stance from the IMF toward Argentina, since it would effectively remove the threat of a breakaway. But the flipside is that more restrained spending would inevitably make the IMF happier.

Whatever the case, the outlook for Argentina is not good in the near term. Either free marketeers get their way, and short-term pain comes for (hopefully) longer-term stability, or profligate governments continue to dip in and out of debt crises – sustained only by a lingering geopolitical threat of separation. EM stereotypes are often exaggerated, but Argentina might still be the most deserving of them.

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

Alex Clare

16/10/2023

Please see the below article from Evelyn Partners about yesterdays US CPI inflation announcements:

What happened?

US September annual headline CPI inflation rose 3.7% (consensus: 3.6%) and compares to 3.7% in August. In monthly terms, CPI rose 0.4% (consensus: +0.3%), compared to a gain of 0.6% in August.

September annual core inflation (excluding food and energy) rose 4.1% (consensus: +4.1%), versus 4.3% in August. In monthly terms, core CPI rose 0.3% (consensus: +0.3%), compared to a gain of 0.3% in August.

What does it mean?

The ongoing slowing of inflation probably offsets the blow-out jobs report last week for the FOMC to keep interest rates on hold when it next meets on 1 November. Moreover, policymakers are likely to place importance on the recent sharp rise in long-term government yields, which reduces the need for the Fed to tighten further, as the markets have efficiently done their job for them. The FOMC will also be aware about the impact on growth from strikes in the auto sector and a potential US government shutdown from mid-November.

In the CPI details, downward pressure on inflation continues to come from core goods, which decelerated to 0%, its lowest rate since July 2020. This indicates that supply chain disruption from the pandemic has lessened significantly. One way to observe this is through used car prices, which are now falling on an annual basis as production normalises. This puts downward pressure on a past key driver of core CPI inflation from the early stages of Covid from 2020 and the disruption caused by the Russian invasion of Ukraine, as well as the end of China’s stringent Covid-zero rules from last year.

Meanwhile, in the services sector, inflation appears elevated over recent history, but it is nonetheless on a downward trajectory: in September, annual core services (ex energy) inflation came in at 5.7%, down from a peak of 7.3% in February 2023.

Services inflation had been lifted by rents and implied housing costs in the shelter component. However, existing house prices have slowed sharply and, as a lead indicator, point to lower shelter CPI inflation over the coming 12 months.

Bottom Line

Regardless of whether the FOMC (the US Central Bank’s interest-rate setting body) raises interest rates in November or not, the Fed is likely coming to the end of its interest rate hiking cycle. This reduces the risk that the FOMC overtightens on interest rates to creates downward pressure to the economy and financial markets.

While it is a tricky for investors to balance the impact of interest rates and economic growth on markets, the upside case for equities is that the US economy avoids a severe economic hard landing. The downside case for investors is that a rapid rise seen in interest rates could overwhelm consumers and businesses so that spending grinds to a halt. This downside scenario appears less likely, as the consensus of economists surveyed by Bloomberg, expect 1.0% real GDP growth in 2024, after a 2.1% expansion in 2023.

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

Andrew Lloyd DipPFS

13/10/2023

Please see below Brewin Dolphin’s Markets in a Minute article, received yesterday afternoon – 10/10/2023

Markets mixed after surprise US jobs data

Stock markets were mixed last week following the release of a forecast-busting US nonfarm payrolls report on Friday.

US indices started Friday’s trading session sharply lower, but staged a quick recovery as investors concluded that the jobs report was less worrying than initially thought. In particular, a slowdown in wage growth helped to calm fears about a rebound in inflation. The S&P 500 and the Nasdaq ended the week up 0.5% and 0.9%, respectively, whereas the Dow slipped 0.1%.

In Europe, a sharp fall in eurozone retail sales weighed on the Stoxx 600 and Germany’s Dax, which edged down 0.2% and 0.1%, respectively. The FTSE 100 fell 0.2% amid another decline in UK house prices.

In Asia, Japan’s Nikkei 225 slid 2.4% as US bond yields surged and domestic data showed real wages and consumer spending continued to fall in August. Financial markets in China were closed for the Mid-Autumn Festival and National Day holiday.

Israel-Hamas conflict shocks financial markets

UK and European stock markets fell on Monday (9 October) after Hamas terrorists launched a violent attack on Israel over the weekend. The Stoxx 600 and Germany’s Dax declined 0.3% and 0.7%, respectively. The FTSE 100 closed only marginally lower, as the assault led to a sharp rise in energy prices, limiting losses in the commodity-heavy index. US indices saw some gains as concerns about the conflict were offset by hopes of a pause in interest rate hikes. Two members of the Federal Reserve suggested that higher bond yields could act as a substitute for additional rate hikes.

The FTSE 100 was up 0.9% at the start of trading on Tuesday following the positive session on Wall Street. In economic news, figures from the British Retail Consortium (BRC) and KPMG showed retail sales rose by 2.7% year[1]on-year in September, down from 4.1% in August. Helen Dickinson, chief executive of the BRC, said the high cost of living was continuing to bear down on households.

US nonfarm payrolls smash forecasts

Last week’s economic headlines focused on the release of the highly anticipated US nonfarm payrolls report. Investors were hoping the report would show a decline in hiring, which would support the case for another pause in interest rate hikes. Instead, the number of job gains exceeded even the most bullish estimate. According to the Department of Labor, payrolls surged by 336,000 in September, resulting in the biggest positive surprise since January.

While the data initially exacerbated concerns about interest rates staying higher for longer, the report wasn’t quite as inflationary as feared. Average hourly earnings rose by only 0.2% month-on-month, taking the year-on-year rate down to 4.2%, the lowest since June 2021. Meanwhile, the workforce participation rate (the number of people working as a percentage of the total working-age population) remained steady at 62.8%.

Eurozone retail sales fall more than expected

In the eurozone, retail sales fell far more sharply than expected in August. According to Eurostat, retail sales volumes fell by 1.2% month-on-month and by 2.1% year-on-year. Economists in a Reuters poll had forecast declines of 0.3% and 1.2%, respectively. The monthly fall was driven by a sharp drop in mail orders and online shopping, as well as a drop in petrol sales.

The data added to an already bleak picture of the eurozone economy in the third quarter. Earlier in the week, S&P Global’s purchasing managers’ index for the eurozone came in at 47.2 for September, marking a fourth consecutive monthly contraction (a reading below 50.0 indicates a decline in business output).

Japan household spending drops 2.5% Over in Japan, household spending fell by 2.5% year-on-year in real terms in August. This marked a sixth consecutive month of declines, although it was better than the 4.3% drop expected by markets. Rising prices saw spending on food fall for the 11th month in a row, this time by 2.5% year-on-year.

Separate data showed real wages fell for the 17th month in a row in August, as rising prices continued to outpace salaries. Average earnings fell by 2.5% from a year earlier, according to the Ministry of Health, Labour and Welfare.

The data came a week after Japan’s prime minister Fumio Kishida said he would release a new economic stimulus package to help boost wages and ease the pain of rising prices.

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

Charlotte Clarke

11/10/2023