News

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

Please see below, Brooks Macdonald’s ‘Weekly Market Commentary’ which provides a brief update on global investment markets. Received yesterday afternoon – 09/10/2023

Over the weekend, a coordinated attack by Hamas militants led to more than 700 Israeli civilian and troop fatalities. The Israeli government has declared war on Hamas with its military targeting over 1,000 sites in Gaza last night. Alongside the fatalities from the attack, the UN estimates that 123,000 people have been displaced from Gaza as of Saturday. The humanitarian implications of a further escalation could be deeply troubling. For markets, the impact is being shown within the Israeli stock market which was down -6.5% yesterday and within the oil price which is seeing a move higher today after last week’s sell-off.

This week sees the start of the US earnings season with JPMorgan, Citi, BlackRock and Wells Fargo all reporting on Friday. With the market weakness of the last month, equity valuations are relatively undemanding which could lead to a rally if earnings prove to be as robust as economists predict. Whether investors ‘look through’ positive near term numbers and focus on stagflation or recessionary risks will be influenced by the evolving economic backdrop as the season develops as well as corporate forward guidance.

On Wednesday the latest producer price inflation index will be released from the US. Headline Producer Price Index (PPI) is expected to slow from 0.7% in August to 0.3% in September while the core reading is expected to stay unchanged at a 0.2% month-on-month gain. Attention will then shift to Thursday’s Consumer Price Index (CPI) report with headline CPI expected to retreat to a 0.3% monthly gain versus 0.6% the month prior. Core CPI is expected to be unchanged at 0.3% month-on-month. Gas prices were up in September versus August so higher energy prices continue to weigh on the headline CPI figures.

Last Friday the market needed to contend with a blockbuster beat in the US employment report which saw almost double the number of jobs created versus expectations. The non-farm payroll report echoes the labour market strength seen in the initial jobless claims and caused markets to forget the weaker data within last week’s Automatic Data Processing (ADP) release. Bond markets reacted sharply with the US 10-year Treasury closing at 4.8%, a fresh high. With the labour market strength showing no signs of abating, the question is whether inflation can fall despite this, making this week’s CPI report critical for bond markets.

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

10^th October 2023

Please see below article from EPIC Investment Partners outlining the ‘Dutch Disease’ and giving insight into the Presidential line of succession.  

We wrote in our Daily Update last week about Guyana’s record growth, which is being driven by substantial profits generated from its oil production and export sector, however, having the very real danger of being bedevilled with Dutch disease.

Dutch disease is a term that describes an economic phenomenon where the rapid growth of one sector of the economy, usually natural resources, leads to a decline in other sectors. It is often characterised by a significant appreciation of the domestic currency, which has a detrimental effect on the rest of that country’s economy, hindering exporters and, in turn, other sectors of the economy.

The term “Dutch disease” originated in 1977 when it was introduced in The Economist magazine to analyse the economic situation in the Netherlands (hence the name). This occurred after the discovery of substantial natural gas reserves in the late 50’s. While the Dutch economy benefited massively from increased revenues generated by natural gas exports, the substantial influx of capital into the sector resulted in a significant appreciation of the currency. This, in turn, led to a decline in the manufacturing industry that was not connected to oil, and higher unemployment rates.

There are various ways to mitigate Dutch disease, from actively managing your currency appreciation to economic diversification, including targeted public spending. One commonly employed method is the establishment of a sovereign wealth fund. Numerous developed and developing countries, including Norway, China, Abu Dhabi, Singapore and Qatar, have successfully implemented sovereign wealth funds to use as a counterbalance to their newfound wealth.

Sovereign wealth funds serve the purpose of stabilising capital inflows into the economy to prevent overheating and substantial currency appreciation. Excess revenues can be channelled into areas like education or infrastructure development, again facilitating economic diversification.

Elsewhere, with Kevin McCarthy’s ousting as House speaker on Tuesday, the congressional body is now without an elected leader, meaning the US is also without its second person in the presidential line of succession. The US presidential line of succession is the list of people who would assume the presidency should the sitting leader of the free world be unable to do their job, say due to death, incapacitation, or even removal from office.

After the Vice President, Kamala Harris, it’s the Speaker of the House of Representatives, followed by the President pro tempore of the Senate, Patty Murray. Murray has been promoted to second in line until the House gets a new speaker. The full list includes Cabinet secretaries in order of their agencies’ creation. So, the Secretary of State is fourth in line, while the Secretary of Homeland Security is last, at number 18.

Nine VPs have assumed the presidency mid-term. However, that’s as far as it got, as the offices of president and vice president have never been simultaneously vacant. The closest ever was one Andrew Johnson, Lincoln’s VP, who was impeached in 1868 but acquitted by the Senate.

Dick Cheney served as acting US president for a total of 4.5 hours when George W. Bush was sedated for colonoscopies in 2002 and 2007. In 2021, Kamala Harris became the first woman with presidential powers for 85 minutes during Biden’s colonoscopy.

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

06/10/2023

Alex Clare

Please see the below article from Brewin Dolphin which covers their views on recent events in markets. Received 03/10/2023.

Higher Oil Prices Weigh on Financial Markets

Stocks and bonds fell last week as higher oil prices added to concerns about interest rates staying higher for longer. In the US, the S&P 500 fell 1.1%, its fourth-consecutive week of declines, while the Dow and Nasdaq slid 1.5% and 0.4%, respectively. Concerns about a US government shutdown also weighed on investor sentiment.

In Europe, the Stoxx 600 and Germany’s Dax both slipped 0.1% after central bank officials indicated that monetary policy would need to stay restrictive for some time. The FTSE 100 fell 0.2% despite better-than[1]expected UK economic growth in the first quarter.

Rising oil prices and US interest rate woes also weighed on stocks in Japan, where the Nikkei ended the week down 2.5%. The yen hit an 11-month low against the dollar, adding to speculation that Japanese authorities could intervene to prop up the yen. China’s Shanghai

Composite fell 0.2% ahead of a ten-day holiday for Mid-Autumn Festival and China’s National Day.

UK manufacturing data disappoints

The FTSE 100 slumped 1.3% on Monday (2 October) following the release of disappointing UK manufacturing data. The S&P Global/CIPS manufacturing purchasing managers’ index (PMI) showed a marginal increase from 43.0 in August to 44.3 in September, which is still well below the 50.0 mark that separates growth from contraction. The headline manufacturing PMI for the eurozone also painted a gloomy picture, declining from 43.5 to 43.4. This weighed on the Stoxx 600, which fell 1.0%.

US stocks were largely flat on Monday despite a last[1]minute deal to avert a government shutdown. The Institute for Supply Management’s manufacturing PMI for the US rose from 47.6 in August to 49.0 in September, the highest reading since November 2022. The encouraging data added to concerns about US interest rates staying higher for longer and resulted in last week’s global bond rout resuming on Monday. The yield on the benchmark ten-year US Treasury note rose to 4.7%, the highest level since 2007.

Oil prices near $100 per barrel

Last week saw the price of Brent crude oil top $96 per barrel. The latest data showed a decline in oil inventories and critically low stockpiles at the Cushing hub in the US. Oil prices have gained 30% in the third quarter alone.

The latest rally has been driven by extended production cuts caused by Saudi Arabia keeping supply tight. The Energy Information Administration’s estimate for oil demand for this year has also been revised up.

Fed’s preferred inflation measure eases

Higher oil prices are adding to investors’ fears about persistent inflation in the US and Europe, although these concerns abated somewhat following the release of encouraging US inflation data on Friday. The core personal consumption expenditures (PCE) price index – the Federal Reserve’s preferred measure of inflation – rose by just 0.1% in August. This was lower than the 0.2% gain forecast by economists and the smallest monthly increase since November 2020. On an annual basis, core PCE measured 3.9%, the first sub-4% reading in around two years.

Less positively, the Conference Board’s gauge of consumer confidence fell again in September to 103.0 from 108.7 in August. This was driven by a steep decline in the ‘expectations’ sub-index to 73.7 from 83.3. The Conference Board said that a reading below 80.0 historically signals a recession within the next year.

Eurozone inflation at lowest level in two years

In the eurozone, consumer prices rose by 4.3% year-on[1]year in September, which was below forecasts and the slowest pace in two years, according to Eurostat’s flash reading. Core inflation (excluding food, energy, alcohol and tobacco) fell to 4.5% year-on-year from 5.3% year[1]on-year the previous month.

The data was published a few days after a speech by European Central Bank (ECB) president Christine Lagarde, in which she said that while borrowing costs may have reached their peak, they will remain high for as long as it takes to get inflation down to the 2% target. Her comments were echoed by ECB chief economist Philip Lane, who said interest rates would be “set at sufficiently restrictive levels for as long as necessary”.

UK economic growth better than expected

Here in the UK, figures from the Office for National Statistics (ONS) showed gross domestic product (GDP) grew more strongly than expected in the first quarter of the year. GDP expanded by 0.3% in the first quarter, up from the ONS’s previous estimate of 0.1%. Second[1]quarter GDP is estimated to have grown by 0.2%, in line with the ONS’s previous estimate. The data also showed that by the end of the second quarter, the UK economy was 1.8% larger than in the final quarter of 2019 (the last full quarter before the pandemic struck). This puts its growth ahead of Germany (0.2%) and France (1.7%) over the same period, but below Italy (2.1%), Canada (3.5%), Japan (3.0%) and the US (6.1%).

Meanwhile, data from the Bank of England showed the UK property market continued to slow in August. Net mortgage approvals for house purchases fell to 45,400, the lowest level in six months. Net approvals for remortgaging dropped to 25,000, the lowest since July 2012.

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

Alex Clare

04/10/2023

Please see the below article from Tatton Investment Management providing a brief analysis of the key factors affecting global markets received this morning:

Overview: Economic resistance is about to be tested

September is rarely a great month for investors, and last month proved no exception. Broadly, both equities and bond values declined and there is increasing sentiment that the 2023 market recovery is running out of steam or may even be turning. This may seem surprising to investors as earnings have been more resilient than many economists had thought possible.

In addition, US government subsidy programmes like Creating Helpful Incentives to Produce Semiconductors (CHIPS) and the Inflation Reduction Act (IRA) have added to near-term economic activity, surprising economists and central banks and causing them to wonder whether the resilience might be all due to the time lag in the effect of their rate rising efforts, rather than lasting strength. However, the nature of lags is such that the next quarter’s US earnings are more likely to continue to show resilience than weakness. Employment has clearly remained strong through the summer and that should mean that consumer spending also remained fairly stable. This makes us expect a generally solid third quarter – but company outlooks looking further out may be less so.

While investment grade companies had recently been raising finance (at least in the earlier part of the third quarter), smaller, less credit-worthy companies decided to wait for lower rates and quite a few have been waiting since rates started to rise early last year. Now though, with rates at new highs (instead of falling as many had expected), and with the ‘higher for longer’ narrative, the cost of refinancing is likely to become more pressing for growing numbers of businesses around the developed world. All-in-all, this latest round of increased interest rate costs has the potential to have a quicker impact than previous rounds, because it has been so unexpected and because it leaves less time for those awaiting refinancing. Stress levels could reach breaking point, especially where it becomes paired with revenue weakness. None of this implies economic disaster looming over the last quarter of 2023. What it does mean though is that the ‘Goldilocks’ environment of the past two quarters is likely to end. This may result in an uptick in market volatility and a return of the same ‘between hoping and dreading’ narrative of autumn last year. It also raises the probability that long-term bonds at the yield levels they touched last week may prove rather good value for investors with a longer-term perspective.

US narrowly avoids another government shutdown

For much of last week, another US government shutdown looked inevitable. Current funding for federal operations was due to end on Sunday and federal employees were unsure when their next paychecks would come. But on Saturday night, both houses of Congress voted in favour of a last-minute measure to keep the government funded until mid-November, although they left out billions of dollars of aid for Ukraine. President Joe Biden signed the stop-gap deal just minutes before the midnight deadline. Arguably the biggest loser from the deal could be House of Representatives’ Speaker Kevin McCarthy, as working with Democrats across the floor has inflamed the Republicans on the right of his party, and look like resulting in a no confidence vote that sees McCarthy lose his job.

For investors, concerns about US finances are mostly short-term fears about politics. Shutdowns and debt scares are regular occurrences in the world’s largest economy, but capital markets do not generally move too much in response. But the threat is symptomatic of a larger problem that fraught US politics poses to its economy. Extended shutdowns in the past – most famously in 2011 – have led to measurable drags on US growth, and ratings agency Moody’s emphasised a shutdown would “underscore the weakness of US institutional and governance strength”. Of course, the agreement reached at the weekend only offers temporary respite from the political posturing. In November another deal will need to be reached, or the shutdown spectre returns. The key question is therefore, will Kevin McCarthy still be House Speaker by then, and if not, will a less conciliatory replacement make good on Republican shutdown threats?

US mega techs vs. modern antitrust law

US tech giants beware; there’s a new sheriff in town. Last week, the Federal Trade Commission (FTC) brought a long-anticipated case against Amazon, suing the e-commerce behemoth for alleged violations of antitrust law. The case is a passion project for FTC chair Lina Khan, who believes anti-competitive behaviour is about broad market influence, rather than just narrow price rises coming from provider consolidation. The FTC’s complaint against Amazon is how it treats third-party sellers – which account for around 60% of all products sold on its platforms. The platform’s algorithms promote sellers that store goods in Amazon warehouses and use Amazon delivery trucks, but the fees to do so have gone up an estimated 30% in the last three years. Research firm Marketplace Pulse estimates third-party sellers pay around half of their revenues directly to Amazon.

Of course, it can be hard to convince people that Amazon is making things more expensive for consumers when it seems cheaper than the alternatives. The company is naturally trying to argue that its preferential practices are solely based on price and ease for consumers – these being often tied to Amazon’s own logistics simply because of their wider efficiency. And while the company has around 37.6% of all US online retail, according to Insider Intelligence, this is only 3.5% of total retail. It has already started a PR campaign claiming that any of the FTC’s recommended remedies will reduce choices and harm consumers.

As Khan herself noted some years ago, the deeper problem with US antitrust law is that it is based on policing old-fashioned companies that behave nothing like the tech giants we have now. The speed of tech innovation – particularly in the age of artificial intelligence – makes it a political necessity to modernise our understanding of monopolies. It is one of the reasons that constraining the power of the big tech companies is a rare point of bipartisan agreement in Washington DC. Even if Khan fails in her latest charge, the policy tide is clearly turning against big tech – with likely longer-term implications for the willingness of investors to extrapolate their past growth rates into the future to justify extended valuations.

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

Andrew Lloyd DipPFS

02/10/2023