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Brooks Macdonald daily market update

Please see below an article received from Brooks Macdonald today 17/03/2023 which provides their views on recent global market events:

What has happened

Equities stabilised, then rallied yesterday as investors concluded that contagion risks were receding in the aftermath of the SVB and Credit Suisse issues.

Bank crises

Shares in First Republic Bank, a regional US bank considered to be one of the most exposed to a SVB-style event, opened lower yesterday but started to recover as reports suggested that a support package was imminent. Just before the market closed, a consortium of major US banks contributed $30bn of uninsured deposits to First Republic. First Republic announced after the market close that it would be suspending its dividend and will be seeking to repay some debt instruments. Credit Suisse equity rallied yesterday after the overnight news that the bank would be using a Swiss National Bank liquidity facility to meet near-term liabilities. The bond market was less impressed however with credit default swaps, effectively an insurance contract on the bank’s debt, remaining elevated and their bonds remaining under pressure.

ECB meeting

The ECB chose to follow through on its pre-announced 50bp interest rate hike despite the meeting coming within the midst of the current banking sector turmoil. Arguably the outsized hike was a ‘dovish’ move in that the ECB made no future commitment to the path of interest rates, stressing a data-dependent approach going forwards. This is no real surprise as the ECB must have felt boxed in by their previous 50bp guidance and one wonders whether they would have proceeded with that larger hike without the prior commitment. The ECB said that it was monitoring the current market volatility closely, adding that the ‘euro area banking sector is resilient, with strong capital and liquidity positions.’

What does Brooks Macdonald think

With the ECB meeting out of the way, investors are already looking ahead to the Fed meeting next week with markets broadly pointing to a 80% probability of a 25bp move and 20% probability of no change at all. With the Treasury market the release valve for SVB tensions over the last week, as some of the immediate fears have subsided the yield curve is unwinding its emergency pricing with the 2-year yield up over 25bps yesterday alone. The other important change has been a heavy revision of the number of Fed rate cuts expected in the second half of this year, with bond investors now pricing in a longer pause and decline after the Fed reaches its terminal rate.

Bloomberg as at17/03/2023. TR denotes Net Total Return

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

Adam Waugh

17/03/2023

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Brewin Dolphin: Spring budget 2023

Please see below an article published and received late yesterday (15/03/2023) evening from Brewin Dolphin, which provides their summary of the Chancellor’s Spring Budget which he delivered yesterday:

As you can see from the above the Chancellor made some surprise announcements which will certainly be welcomed, particularly around pensions. The announcements on Pensions,

  • Abolishment of the Lifetime Allowance;
  • Increasing the Annual Allowance (annual savings amount) to £60,000.00; and
  • Increasing the Money Purchase Personal Allowance up to £10,000.00 per annum

All of the above will present financial planning opportunities to help people service their overall tax-efficiency.

Please speak to a Financial Adviser if you would like to know more on the above and what opportunities these announcements could mean for you.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

16/03/2023

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Brooks Macdonald Daily Market Update

Please see below article received from Brooks Macdonald today, which provides a global market update for your perusal.

What has happened

With markets having run out of fresh reasons to panic, we saw a marked rally across the board in risk assets on Tuesday. Equities, and importantly including bank stocks, saw a major recovery, and sovereign bond yields pared back a good chunk of their declines suffered in recent days. On some measures, US and European banks saw their best positive trading day in 4 and 5 months respectively on Tuesday. In US Treasuries, the 2-year yield saw it’s biggest one-day rise since June last year. Also supporting yields, the US CPI print for February, out yesterday, saw another repeat of the sticky-inflation narrative, with US core CPI month-on-month up 0.5%, above the 0.4% consensus estimate.

Panic over, no global financial meltdown after all?

After the SVB-driven risk-version over the past week, markets seemed to be settling back into a more constructive mood on Tuesday. At their simplest, banks’ operating models are intrinsically linked to a liability-asset duration mis-match… after all, it’s in a bank’s DNA to borrow short (deposits) in order to lend long (loans), and profit from the interest rate spread less some provisioning for the risk of loan-defaults. The fact that banks might choose to park excess deposits into generally-considered-risk free assets such as government bonds is not necessarily bad in and of itself. If banks can hold to maturity, then in nominal terms, there is no risk (assuming we’re not worrying about a government default). As we’ve seen from the SVB debacle last week, the problem arises when a bank cannot hold to maturity, where the discounted mark-to-market price of a bond reflects the impact of the remainder of the bond’s life in real terms. With the Fed now allowing banks to swap Treasury holdings for cash loans at par (the value that the bonds were originally issued at) through a so-called Bank Term Funding Programme (BTFP), this has significantly eased that problem. Initially, the BTFP is to run for one year, but frankly, given the hitherto history of central bank QE-led intervention over the years, it’s probably not a big stretch to assume this programme could be extended if it were needed.

Not yet all clear for bank profit margins though?

Whilst the consensus is that we are not facing financial systemic risk after all, there is still the problem of varied margin impacts for banks. The speed of interest rate hikes over the past year provided a boost to banks’ net interest margins, as interest rates on loans repriced quicker than deposits. The events over the past week have reminded us that with greater competition for deposits, this has given rise to concerns of whether we have seen peak net interest margins for the time being. That said, some relative perspective is important – given we have mostly moved-on from a world of zero interest rates, with interest rates higher and likely to be around these higher levels for some time, the medium-term outlook for bank profitability in aggregate is still arguably much better than it was over the past decade or so.

What does Brooks Macdonald think

With the SVB-induced volatility in recent days now falling, markets are turning back to weighing up the latest economic data, and how it might influence interest rate policy ahead. We have the ECB rate decision up tomorrow, and then it’s the turn of the Fed next week. How these and other central banks balance the recent bout of worries around financial conditions, versus still sticky-inflation pressures, will clearly be the key focus over the near term.

Index 1 Day1 Week1 MonthYTD
 TRTRTRTR
MSCI AC World GBP 0.9%-4.6%-4.9%2.0%
MSCI UK GBP 1.1%-3.5%-3.5%3.1%
MSCI USA GBP 1.8%-4.3%-5.2%1.9%
MSCI EMU GBP 1.8%-3.6%-1.8%9.0%
MSCI AC Asia Pacific ex Japan GBP -1.7%-6.8%-7.3%-1.3%
MSCI Japan GBP -3.4%-5.6%-3.6%0.7%
MSCI Emerging Markets GBP -1.6%-6.8%-6.7%-1.6%
Bloomberg Sterling Gilts GBP -0.8%2.6%0.6%1.7%
Bloomberg Sterling Corps GBP -0.9%1.0%-0.8%2.4%
WTI Oil GBP -4.6%-10.5%-9.8%-11.6%
Dollar per Sterling 0.0%2.7%0.0%0.7%
Euro per Sterling 0.0%1.1%-0.1%0.4%
MSCI PIMFA Income GBP 0.4%-2.1%-2.8%1.6%
MSCI PIMFA Balanced GBP 0.5%-2.5%-3.1%1.8%
MSCI PIMFA Growth GBP 0.8%-3.4%-3.8%1.7%
Index 1 Day1 Week1 MonthYTD
 TRTRTRTR
MSCI AC World USD 0.9%-2.1%-5.0%2.6%
MSCI UK USD 1.1%-0.9%-3.5%3.7%
MSCI USA USD 1.7%-1.8%-5.2%2.5%
MSCI EMU USD 1.8%-1.0%-1.8%9.7%
MSCI AC Asia Pacific ex Japan USD -1.7%-4.3%-7.3%-0.7%
MSCI Japan USD -3.4%-3.0%-3.7%1.3%
MSCI Emerging Markets USD -1.7%-4.3%-6.7%-1.0%
Bloomberg Sterling Gilts USD -0.9%5.0%0.5%2.7%
Bloomberg Sterling Corps USD -1.0%3.3%-0.9%3.4%
WTI Oil USD -4.6%-8.1%-9.8%-11.1%
Dollar per Sterling 0.0%2.7%0.0%0.7%
Euro per Sterling 0.0%1.1%-0.1%0.4%
MSCI PIMFA Income USD 0.3%0.5%-2.8%2.2%
MSCI PIMFA Balanced USD 0.4%0.2%-3.1%2.4%
MSCI PIMFA Growth USD 0.7%-0.8%-3.8%2.3%
      

Bloomberg as at 15/03/2023. TR denotes Net Total Return.

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

Chloe

15/03/2023

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Brooks Macdonald Latest Investment Bulletin

Please see the below article from Brooks Macdonald providing the latest Investment Bulletin. Received this morning 14/03/2023

What has happened

Yesterday saw further wild moves in the bond market with some of the price changes in the US 2-year Treasury rivalling those of 2008. European equity markets caught up with the late US losses on Friday and banks continued to underperform despite measures by the Federal Reserve to rebuild confidence in the regional banking sector.

SVB impact

The market remains deeply concerned that there will be contagion from SVB into other banks and the wider financial system. President Biden said yesterday that he would do whatever it takes to ensure the banking system is secure, raising the possibility of additional regulation to avoid similar collapses in the future. In terms of the quantum of liquidity needed, the US Federal Home Loan Banks raised $88.7bn yesterday to provide funding to private regional banks, including SVB. Other US regional banks under pressure yesterday include First Republic and Western Alliance Bancorp, with both banks experiencing halts to the trading of their shares. The banking giants in the index, such as JPMorgan, outperformed with investors suspecting contagion is limited to the smaller banks.

Bond market impact

The moves within the bond market were far more dramatic than within the equity market yesterday. Market pricing for the US terminal rate plummeted to below 4.8%, this contrasts to just last week where we saw a peak of almost 5.7%. This reflects the new market belief that the Fed, having now ‘broken’ something, may step back from their interest rate hikes. Last week a 50bp interest rate hike was seen as the most likely outcome for next week’s meeting, now markets are weighting up the odds of 25bps or no hike at all. Should the Fed hike by 25bps, the market has concluded that that will likely be the final hike of this cycle. Huge moves within the Treasury market that prior to 2022 has been relatively calm for a decade.

What does Brooks Macdonald think

While bond pricing has moved, investors ultimately have no idea how the Fed will interpret the SVB news and whether voting members will be willing to pause interest rate hikes when CPI remains well above the target range. This of course brings us to today’s CPI release which remains crucially important to the Fed’s room for manoeuvre. How the core CPI number (expected 0.4% month-on-month) and hourly earnings (expected 0.2% month-on-month) unfolds will provide another hurdle for a market still struggling to price the risk of SVB.

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

Alex Clare

14/03/2023

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Brooks Macdonald – Weekly Market Commentary

Please see below, the weekly market commentary from Brooks Macdonald highlighting the key economic and markets news over the past week. Received today – 13/03/2023

Silicon Valley Bank’s failure catalysed a rapid sell-off amongst risk assets last week

Equities were sharply lower last week as the US banking sector suffered in the aftermath of SVB’s failure. US equities underperformed with the banking sector, predictably, bearing the brunt of the equity market sell-off. On Friday the number of new US jobs created in February beat market expectations however the average hourly earnings, a key measure of labour market inflation, missed expectations, coming in at 0.2% month-on-month versus 0.4% expected. This, alongside the SVB news, catalysed a broad rally in bond markets which saw US Treasury yields fall alongside expectations for the US terminal rate.

Silicon Valley Bank collapsed last week, bringing with it broad volatility across most asset classes. The bank was heavily exposed to venture capital funded technology companies that were burning cash reserves as funding markets dried up in 2022. Deposit rates also became less attractive as short-term US Treasury yields rose and the yields available on other asset classes improved. Last week these factors were compounded by a growing concern that the bank was likely to fail, which began a bank run as depositors sought to withdraw their funds. Overnight the Federal Reserve and US Treasury announced that they were taking emergency measures to protect the banking system including widening access to the Fed’s discount window. This allows banks to obtain liquidity without selling assets which have been heavily discounted by the rapid rise in interest rates. Specifically for SVB, the Fed announced that depositors ‘will have access to all of their money starting Monday’. The rapid tightening in US monetary policy was always likely to cause heightened idiosyncratic risk within markets and SVB is a high-profile casualty of the seismic shift in interest rates over the last year.

US CPI on Tuesday will be the major market event of this week with implications for the next Fed meeting

Tomorrow all eyes will be on the US CPI report which will play a major role in helping the Fed choose between a 25bp or 50bp interest rate hike at their next meeting. Headline CPI is expected to have expanded by 0.4% month-on-month bringing the annual rate to 6% (from 6.4% at the last reading). Core CPI is expected to also rise by 0.4% over the month however the annual rate is forecast to be stickier, at 5.5% compared to 5.6% for January.

Economic data this week will play a major part in determining whether the Fed hike by 0.25% or 0.5%

The Federal Reserve are in their communication blackout window so will not be able to comment on SVB or the US CPI release this week. Bond markets feel however that a high-profile bank failure may be enough to convince the Fed not to raise interest rates by 50bps at this month’s meeting. Should CPI meaningfully beat to the upside however, the Fed may be forced to take a more aggressive monetary policy approach even if it risks further idiosyncratic contagion in 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

13th March 2023

Team No Comments

Brooks Macdonald – Daily Investment Bulletin

Please see below todays (10/03/2023) Daily Investment Bulletin from Brooks Macdonald:

What has happened?

Earlier on Friday, the Bank of Japan (BoJ)’s last meeting under outgoing Governor Kuroda was the epitome of a non-event. There was no change to its -0.1% interest rate, no change to the +/-50bp tolerance band around its 0% target for 10-year JGB yields, and nothing in the accompanying BoJ statement that would suggest an imminent end to yield-curve-control. Instead, market volatility has centred around falls in the US banks sector on Thursday, led by a -60.41% share-price fall in SVB (Silicon Valley Bank) Financial Group, a California-based firm specialising in funding to venture-capital-backed companies to the tech sector. The turmoil started late Wednesday when SVB Financial Group announced a $2.25bn share-sale to shore up capital after being hit by loses on its securities portfolio. Negative sentiment spread across the US bank sector yesterday, even including far-better-capitalised banks, with JP Morgan shares off -5.41% on the day. The SVB news was also seen driving a risk-off move in US Treasuries, with 2 year yields down -20bps to 4.87%, its biggest daily fall in over 2 months, and the ‘10-year less 2-year’ yield spread steepened up through -1%, closing at -97.3bps on Thursday. Closer to home, this morning, we’ve seen UK GDP for January come in at +0.3% month-on-month, better than the +0.1% market consensus expected.

US jobless claims gives some support to the bulls

Thursday saw US weekly Initial Jobless Claims data, which showed that claims had risen to 211,000 during the week ending Saturday 4th March. That was higher than market estimates for 195,000, and up from 190,000 the week before. It also marked the first time claims has come in above 200,000 since early January. Cutting the data another way, the week-on-week gain in claims of 21,000 was the biggest weekly gain in 5 months, since October last year. That said, whilst this is a pick-up in claims, it’s coming from a low base. For context, the US labour market remains tight, with the US JOLTS (Job Openings and Labor Turnover Survey) data out earlier in the week showing that there was still a ratio of 1.9 job openings for every 1 unemployed person in January – that’s down from 2.0 in December last year, but well above the circa 1.2 level before the pandemic.

US non-farm payrolls

Today sees the first instalment of a double-header of crucial data that could tip market expectations (and the Fed for that matter), either towards a 25bp or 50bp hike on 22 March. US non-farm payrolls are due at 1:30pm UK time, and the Bloomberg market consensus is looking for a month-on-month gain of 225,000 (which incidentally is up from an earlier 215,000 estimate at the start of this week). Meanwhile, the unemployment rate is expected to stay unchanged at a 53 year low of 3.4%. Within the release, average hourly earnings are expected to be up 0.3% month-on-month, the same as last month’s gain. After today, markets will be looking ahead to the US CPI (Consumer Price Index) print due next Tuesday.

What does Brooks Macdonald think

After a run of stronger economic data recently, markets are firmly in the mindset of ‘bad-news-is-good-news’. That’s to say, bad news for the economy translates as reducing the urgency of central banks to hike interest rates, and that would be good news for risk assets. So, will markets get some bad economic news today? To be fair, it all feels a bit US-centric right now in terms of the news flow, but we won’t have long to wait to see if the US jobs data later today, or the US CPI data on Tuesday next week plays ball.

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

10/03/2023

Team No Comments

Church House Investment Management – Multi Asset Market Analysis

Please see the below market update from Church House Investment Management received yesterday:

After the relief for bond markets in January as longer-term yields fell back despite the latest round of base rate increases, February saw a sharp reversal.

The US ten-year yield jumped from 3.5% to 4%, with a similar 50bp jump in UK yields taking the ten-year Gilt to 3.8%.  Of course, this led to steep falls for Gilt prices, which are now down for the year.  Possibly the most dramatic was the jump in Eurozone yields where the German ten-year Bund hit yield levels not seen since 2011, negative rates now being consigned to a historical oddity.

The change in mood followed better economic data with subsequent warnings of more to come from central bankers.  Here is Jerome Powell, Chairman of the US Federal Reserve, at yesterday’s testimony to the Senate Banking Committee:

“The data from January … have partly reversed the softening trends that we had seen … just a month ago … the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous [FOMC] meeting.”

“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated …If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

Chairman Powell continues to stress that they will be guided by the “totality” of the data as it emerges.  Next up being the US employment figures due on Friday, which are likely to set the tone for the next few weeks, along with inflation figures the following week.  Expectations for the peak levels to be reached by central banks have been ratcheted up again with a 50bp increase from the Federal Reserve later this month now anticipated (to 5.25%).  The Bank of England also meets later in the month and expectations have also been raised for their next move, we expect a 25bp increase to 4.25%.

Most equity markets sold-off as the mood soured in the bond markets, but the UK held on to modest gains (it does look quite compelling in an international context and seriously shunned…) and a mooted Middle Eastern bid for Standard Chartered contributed.  Consumer staples out-performed as usual in nervous markets, notably L’Oréal, Unilever, Walmart; oil stocks jumped again after good figures and despite a weakening oil price.  In contrast, mining stocks had a poor month, notably Anglo American, Barrick Gold and Newmont with a falling gold price and concerns that the Chinese recovery might disappoint.

We don’t think that much has changed with our four key questions/concerns for the year:

  • Have we seen the worst of inflation?
  • How far will the Federal Reserve (and the other CBs) go?
  • Will the recession be worse than currently expected?
  • Is there an endgame in Ukraine or does it get worse?

Despite the noise, we still expect to see lower inflation as the year unfolds with a shallow recession the most likely.  But we do expect the swings in sentiment to be repeated over coming months with markets in thrall to the employment, inflation and other economic releases.  Stick with (shorter-dated) sterling corporate fixed interest and take a fresh look at the UK equity market!

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

09/03/2023

Team No Comments

Brewin Dolphin: Markets in a Minute

Please see below, Brewin Dolphin’s ‘Markets in a Minute’ article summarising the key economic and markets news from the past week. Received late yesterday afternoon – 07/03/2023

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

Carl Mitchell – Dip PFS

Independent Financial Adviser

08/03/2023

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China sets economic growth target

Please see below weekly market commentary received from Brooks Macdonald yesterday afternoon, which provides global economic data and market news.

  • China officials set out an economic growth target of “around 5%”, a little below expectations and potentially cooling hopes for fresh stimulus later this year
  • Next 8 days will be crucial for shaping the market’s outlook on jobs and inflation, with US Federal Reserve (Fed) Chair testimony to Congress plus monthly jobs and Consumer Price Index (CPI) all in the mix
  • Bank of Japan’s Governor Kuroda takes his last meeting this week, as markets continue to speculate if and when his successor might change BoJ policy goals

China officials opt for a slightly-softer-than-expected economic growth target of “around 5%”

Over the weekend, China officials set out a modest economic growth target of “around 5%” for 2023, at the low end of estimates that had hoped for more than 5% or maybe even 5.5%; the implication is that it lowers, a little, hopes for the size of any fresh policy stimulus later this year. As a result, Chinese equities are lagging small gains across Asia Pacific in early trade this morning. Over in the US, equity futures are indicating up, having capped off a positive day on Friday – that was despite a stronger US ISM Services print pointing to a still-tight labour market and inflation stickiness. Turning to the week ahead, the US will dominate the news flow with the latest jobs report out on Friday, along with US Fed Chair Powell’s biannual monetary policy report to Senate and House committees tomorrow and Wednesday respectively. Elsewhere this week, we also get China CPI on Thursday, UK January GDP on Friday, as well as 3 central bank decisions this week from Australia (tomorrow), Canada (Wednesday) and Japan (Friday). Also looming on the horizon for investors is next week’s CPI print (next Tuesday) which will cap a busy next 8 days for news flow.

What markets are looking for in this week’s US monthly jobs report

This coming Friday sees the latest print for the US monthly jobs report (for February), the non-farm payrolls data. It’s always a key print for markets, but arguably more so now given the importance that the Fed has put on the strength of the jobs data as a key factor in sticking to its hawkish rhetoric on interest rates in recent months. Friday’s monthly jobs data will also be the last one ahead of the Fed’s next FOMC (Federal Open Market Committee) decision due 22 March. In terms of what to expect, Bloomberg’s estimate is for 215,000 jobs added in February (down from January’s monster gain of 517,000 where some think the mild winter weather ended up providing a bit of a boost), with the unemployment rate expected to hold at over-50-year-lows of 3.4%.

Bank of Japan’s last meeting for Kuroda, and expectations for policy change are low….for now

Also due Friday is the Bank of Japan (BoJ)’s rate decision, and it’s the last meeting for the outgoing Governor Kuroda. Expectations for any fireworks are low, given the incoming Governor Ueda (pending final voting by Japan’s parliament on his appointment) said last month that current monetary policy settings remained appropriate. That said, markets are still speculating that the BoJ might change its yield-curve-control policy framework later this year, allowing bond yields to rise. The BoJ policy direction this year could have major ramifications for markets globally – with the BoJ as the last major central bank hold-out of zero rates, it has arguably hitherto pushed Japanese liquidity overseas in the hunt for yield – but if the BoJ allows yields to rise later this year, this could suck some of that liquidity back home again, and which might end up creating upward pressure on yields in other international bond markets.

Will the Fed stick to its rate-hike down-shift path or change course?

Fed speakers in recent weeks have raised the risk of a higher terminal interest rate, with market expectations for peak rate currently at 5.439% in September this year, and vs the current Fed policy rate range of 4.5-4.75%. After last month’s nonfarm payrolls print came in well above expectations, and the recent CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures) reports showed stickier-than-expected price pressures, this next set of data will be crucial. Markets are currently pricing in 29.8bps of hike in March, so split between expecting 25bps which is still seen as the most likely for now, or whether there’s a small-outside-chance of a 50bps move instead – the latter would be tough pill for markets to swallow, with the Fed so far having down-shifted its rate-hike pace from 75bps to 50bps to 25bps over the last 3 consecutive meetings.

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

Chloe

07/03/2023

Team No Comments

Tatton Investment Management: Monday Digest

Please see below article from Tatton Investment Management received today regarding their market commentary:

Overview: Mood swings

Bond and equity markets have been experiencing teenager-like mood swings for some time now. Investors have oscillated between optimism over the surprising resilience of consumer demand and relative company earnings stability, and pessimism that the same economic resilience will force central banks to keep raising rates for longer. Last week, focus shifted back to more positive growth indicators, resulting in an improvement at least for equity markets. Meanwhile, the bad mood in the pan-European bond market worsened. While Europe’s economy has avoided an outright energy crisis, and delivered some positive economic updates, the unfortunate upshot of this has been inflation creeping back up.

The latest purchasing manager index (PMI) reports of business expectations showed that global growth had returned in February but that it (quite literally) came at a cost. Despite falling energy prices, input cost pressures rose, a sign that even the smallest amount of growth takes us back to a position where there is little or no spare capacity. That view was backed up by German, French and Spanish inflation data which showed a surprising rebound, especially given that companies’ energy bills should have fallen somewhat.

For the central banks, therefore, this information has been enough to warrant another round of warnings that rates will probably have to go higher and stay there for longer. In the US, there is growing talk of a return of a jumbo 0.5% rate rise step on 22 March. The European Central Bank (ECB) had already said rates would rise by 0.5% on 16 March, but could be tempted to go to a deposit rate of 3.25%, a rise of 0.75%. On the back of this, bond yields rose again, with ten-year US Treasuries decisively breaching 4% for the first time since last November and German ten-year Bunds for the first time up to 2.7%. It is worth remembering it was only a year ago that Bund yields stopped being negative.

Higher government bond yields are problematic for other asset classes since they form an important part of market valuations. However, even with the impact of higher yields, confidence in the resilience of economies and household spending has improved – in terms of that looming recession, we are not even close to a downwards spiral. Equity markets are still in a risky position, particularly if consumer demand was to eventually buckle and corporates were no longer able to maintain revenues and thus profits. But if profit growth confidence is starting to improve – as we had some reason to believe last week – then we could see reasonable upside from current levels.

Will financial crackdowns mean China’s recovery bounce falls short?
Global investors were delighted when President Xi Jinping finally reversed China’s zero-Covid policy at the end of last year, opening up the world’s second-largest economy. Many predicted a post-pandemic bounce even bigger than that experienced in the west two years ago. But those expectations have faltered as the year has gone on. China’s stock rally tailed off at the end of January, and the CSI 300 – mainland China’s benchmark equity index – traded sideways through all of February, while Hong Kong’s Hang Seng index fell by more than 6%. So, should we be worried about China’s recent lack of spark? The answer is not just yet.

Following  the Lunar New Year and subsequent spring festival, early March has seen some overwhelmingly positive signs. February PMI data shows the best reading for the manufacturing sector in more than a decade, well above economist expectations and suggesting manufacturers are increasingly positive about the near term. Likewise, high-frequency data like mobility figures are extremely positive, suggesting citizens are taking the opportunity to travel. While it remains to be seen how this will impact the hard data later on, the signs are exactly what we would expect from a strong demand-led rebound.

Some commentators have sought deeper explanations for China’s disappointment, such as the (supposedly) lower savings base that consumers have to work with, compared with western counterparts in 2021. But we suspect that funding troubles on the institutional side – for property companies and local governments – are one of the reasons why China’s bounce has been underwhelming. As well as a break from zero-Covid, Chinese positivity was prompted by a change of fortunes for the property sector. Developers were suffering after the crisis at Evergrande, and found funding hard to come by, thanks to Beijing’s crackdown on private sector lending. There are signs Beijing may be embarking on another crackdown, this time across the financial sector. Deleveraging and financial crackdowns are part of Xi’s drive for stability in China, but pushing too hard too soon could massively destabilise things. Central authorities will no doubt be aware of some of these issues, but we have seen how Chinese ideology can often trump pragmatism and short-term growth. 

That Chinese growth is a vital part of the world economy is arguably truer now than ever before, partly due to its size but also because of the current relative weakness of the western world. For global investors, positivity around China has been one of the few bright spots in an otherwise challenging environment. Fear of disappointment is therefore understandable. If there is a broad and deep crackdown ahead, it would be a mismatch with Beijing’s stated growth drive. While the consumer demand bounce is most definitely coming, we will be keeping a close watch on measures which could undermine confidence at least in the short-term, even if authorities believe they act for the greater good. 

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

Adam

06/03/2023