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Tatton Investment Management – Monday Digest

Please see below, a ‘Monday Digest’ from Tatton Investment Management discussing the key economic news from the past week. Received this morning – 20/02/2023:

Overview: markets acknowledge the enduring stickiness of inflation

After a surprisingly strong start to the year in January, February has brought market consolidation rather than a continued uptrend – despite the FTSE100 finally passing the psychologically important threshold of 8,000 points. In last week’s digest we wrote that the prevailing ‘Goldilocks’ market sentiment of not-too-hot (growth, inflation), not-too-cold (rates coming down again soon) was being replaced by a more realistic view that rates will in all likelihood have to stay higher for longer than previously hoped. Inflation is stubbornly persistent – even as goods and energy/commodity price rises have indeed proven to be transitory – and tight labour markets have carried so-called second-round effects from last year’s price shock into the ‘stickier’ areas of goods and services.

Commentators from the US Federal Reserve (Fed) and the European Central Bank (ECB) have added further evidence to this view, as both said last week that central banks need to do more in their fight against inflation. This came after US consumer price index (CPI) inflation data contained both good and bad news, whereas the producer price index (PPI) inflation data showed a worrying uptick. Worrying, because falling raw material and energy costs were not enough to counterbalance price rises from rising labour and other input costs. While global government bond yields rose quite sharply after the central bank comments, they are not yet making investors fear recession is imminent. Credit spreads – for us the best indicator of fears of a recession – rose slightly last week, but are still close to the lowest levels of the past six months.

That said, the rise in bond yield levels may push the resumption of profit growth out towards 2024, which makes equities once again look relatively expensive and therefore vulnerable to corrections. This means that while we remain optimistic for the 2023 central scenario, we are more cautious for the near-term and have been taking the opportunity to lock in some of the attractive yields this period of uncertainty has brought. The shift in perspective has not necessarily changed the long-term picture of a relatively benign economic slowdown. Rather, the past weeks’ data points have injected a dose of realism into market sentiment.

Falling profit margins meet declining inflation

The last few company earnings reports for 2022 are trickling in, and at the aggregate level they look pretty bad. US companies took a big hit in the last three months of the year, and overall profits are either lower or roughly the same as in 2021 – depending on which measure you use. Relative earnings growth for the next twelve months (the rest of 2023 and the start of 2024) has also been revised down. For US equities, average earnings per share (EPS) is expected to grow by less than 4% compared to the 12 months just gone. European companies are even more sluggish, projecting 2.1% growth. By comparison, the historical averages for both US and Europe are around 11% EPS growth year-on-year.

In the light of rising interest rates and consequent slowing growth across the world, investors are braced for recession. On the face of it, corporate results back up those signs. Still, sales growth slowed rather than fell in the fourth quarter of 2022. What caused the earnings declines were therefore compressing profit margins, which declined markedly. The simple explanation would be that wages and other input costs are growing faster than sales, while on the revenue side of the equation a certain level of price discounting has crept back in following the extraordinary pricing power suppliers enjoyed during the initial post-pandemic period. That matches up with the general stagflation story, as well as with central bankers’ concerns about potential wage-price spirals.

The relationship between inflation and corporate profits is not straightforward, but in general you would expect inflation to cut into a company’s profit margins. The post-Covid episode seems to have differed from other potentially inflationary periods in that many companies appear to have raised prices on existing inventory rather than applying the price rises only to new stock. But regardless of why companies wanted to raise prices, it is still significant that they could. Moreover, the realisation that they could raise prices without choking off too much demand might mean firmer pricing power down the line. But in terms of the current outlook, it is important that rising margins were primarily a defensive move, coming from a position of expected weakness rather than strength. The opposite seems to be happening now, but for the same reasons. Profit margins are coming in, relieving a big chunk of the inflationary pressures we saw before. Whereas before, companies expected sharply higher costs and an okay short-term demand picture, now they see falling input costs and widespread talk of a recession. With sales growth already slowing, businesses likely feel the need to rein in prices – or at least hold them steady – to retain customers.
 
China’s post-pandemic recovery taking time to come through

Chinese investment assets have managed quite a turnaround over the last few months. Since November, China’s benchmark CSI 300 index has rallied by more than 15%, although gains over the last month have been harder to come by. Near-term confidence has probably been knocked by the spy balloon controversy, but markets are still clearly positive about Chinese growth this year. This is helping not only Chinese assets, but emerging markets more broadly. In fact, some market analysts have warned that buying into China’s reopening is becoming a crowded trade.

Despite the high degree of hope around China’s bounce, commodities have lately been surprisingly subdued. Copper, the industrial metal most sensitive to Chinese construction and technology production, rose sharply towards the end of last year. Since then, however, that rally has reversed somewhat. The same is true for energy, which gained momentum after the end of Zero-Covid, but has since cooled. This dynamic is also playing out across a range of industrial metals, including iron and palladium. Both are indicators of swings in the health of domestic vehicle demand. The fact palladium prices have come down is particularly interesting. While other metals point to the strength (or lack thereof) of Chinese industry, cars are more an indicator of consumer spending. Consumers appear to be slower than expected in regaining confidence.

In short, we have yet to see any conclusive signs of a strong post-Covid, post-regulatory crackdown bounce in China, despite the conducive conditions. However, we should not be worried yet that the 2023 Chinese growth spurt might fall short of expectations. When Beijing declared the end of Zero-Covid, we argued it might take some time for the results to show, in part because of seasonal factors. China celebrated its Lunar New Year at the end of January, and is only now coming to the end of its Spring festival – a month usually reserved for spending time with family, often away from the big cities. We said earlier this year that March might be the time when we see growth begin in earnest, and that is still possible. In terms of background conditions, the reopening bounce is very much on: it might just take a little longer to get going

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

20/02/2023

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Brewin Dolphin – What is the true state of the UK economy?

Please see below article received from Brewin Dolphin yesterday evening, which provides a positive outlook on the UK economy and global markets.

The UK has been the subject of many headlines in recent weeks as journalists and politicians spar over the country’s economic performance. Ironically, this comes at a time when the economy is doing very little. We therefore felt it might be worth giving some consideration to the true state of the UK economy and what it means for investors.

Recession bound?

Traditionally, we measure economic strength by looking at the speed of growth (or shrinkage) in economic activity. The go-to measure here is gross domestic product (GDP). Faster GDP growth is assumed to be better, while two consecutive quarters of declining GDP is often considered a technical recession.

Speculation has been rife recently over whether the UK will enter a recession. If the economy shrank during the final quarter of 2022, then it would meet the technical definition of a recession because it had already contracted in the third quarter. Hence, there was great focus on the first estimate of growth for that period. As it transpired, it neither grew nor shrank, meaning that a recession has been averted for now. This splitting of hairs misses the point that the UK economy stagnated during 2022 and is in danger of doing the same during 2023.

Taking 2022 and 2023 as a whole, a recession could be avoided, or suffered, but the likelihood is that either way the economy will be a lethargic performer throughout. When we talk about the risk of a recession in the UK it conjures pictures of queues outside job centres as unemployment picks up sharply. But the opposite remains the problem for now. Jobs growth has been strong and the challenge for businesses has been finding workers.

Although the worst fears of rapidly rising energy bills due to spiralling gas prices have been eased by a warm winter and bolstering of gas supplies, prices seem likely to hover around the level of the fuel bill cap. More pressing will be the cost of refinancing mortgages for anyone whose deal is coming to an end. Mortgage interest rates have moved sharply higher during the last few years. Taxes are also set to rise from April in a bid to shore up the public finances.

The current economic environment is a difficult one, and so lower rates of growth might be inevitable to some extent.

New highs for the UK stock market

At the same time, though, the FTSE 100 has hit all-time highs. While rising oil and gas prices have weighed on the UK economy, they have helped the commodity-sector[1]heavy FTSE 100 rise by 6.2% year-to-date and breach the 8,000-point mark for the first time ever. Meanwhile, the FTSE 250 is up by around 5% year-to-date. This may initially appear counter-intuitive and, historically, the strength of an economy would inevitably have an impact upon the companies listed on the stock market there.

However, in one of the anomalous features of modern finance, that is no longer necessarily the case. Most of the major companies on the UK stock market are listed there by virtue of history, not as a reflection of their current business activities. Some 80% of FTSE 100 revenues and 50% of FTSE 250 revenues arise from outside the UK. Most companies gather sales from around the world, and a few are even specifically focused on individual countries outside the UK.

That is not just the case in the UK. New technology companies seeking to list on the stock market would feel inclined to do so on the US Nasdaq exchange, almost no matter where they were founded.

The long term

If we were to look to the long term, what can we conclude about the UK?

Convention dictates that we should judge the UK’s performance relative to its peers in the G7. This is a collection of countries who loosely formed a group in the 1970s when they were among the biggest economies in the world, excluding the Soviet Union. Today, most of these countries remain towards the top of the table, with China and India having supplanted the Soviet Union.

Starting at a discreet distance, the UK economy has been a relatively strong performing economy against this peer group since 2000. The trailblazers have been the US and Canada, but the UK has outpaced its European peers.

Much of that strong performance for the UK, however, came in the early years and a series of shocks mark useful milestones to check on our national progress. Since the financial crisis, for example, Germany has pretty much caught up with the UK, while France, Japan and Italy have all lagged.

Looking ahead, we can observe that there are some features of the UK which act as impediments to its economic growth.

The most obvious is demographics. In many parts of the world, populations are growing more slowly or, in some cases, starting to decline. Demographics is one of the key determinants of growth. The UK population has been growing faster than its European peers, but Canada has been the fastest growing in the G7 both economically and in terms of population. The worst-performing economies for growth have been Japan and Italy whose populations, unsurprisingly, are contracting.

Connected with demographics is the fact that the UK is the second-most densely populated of the G7 (after Japan). This results in a lot of opposition to new development, particularly on greenfield sites. This has been a hindrance to economically stimulative activities such as housebuilding as well as new infrastructure projects such as rail links or runways. The UK has a similar population growth rate to that of the US but the latter is managing to grow more strongly than demographics alone would suggest.

The UK also has a disproportionate share of its economy devoted to services. One of the advantages of this is that many services activities create a lot of value. However, one of the shortcomings is that the services sector tends to experience less productivity growth than the goods and production sectors, where new tools and techniques see a more stable pace of efficiency gains.

All European states suffer relative to G7 highflyers like Canada and the US from being relatively poor in natural resources. The UK, in particular, with its higher-than[1]average population density, imports a higher share of energy and food than some other members of the G7.

Growth isn’t everything

If this description of the UK seems very downbeat, then some additional context is needed.

The UK has several strengths, most notably its time zone, its language, its legal system, its universities and its history. As a desirable place to work and live, the UK continues to be an attractive destination for talented young workers. The UK has a strong competence in technology and science, which is not represented in its investment market.

As mentioned at the beginning, GDP is a conventional way of measuring economic performance, but that doesn’t mean that it necessarily captures every aspect of standard of living, which most people would care more about. And which contribute to creating a desirable place in which to work and live.

What does this mean for investors?

When deciding which investment market to invest in, the constituents of the index are as important as the region it is based in. Technology is the largest sector in the US, for example. The UK, on the other hand, has quite a spread of industries represented. The biggest sector is financial companies but that can be misleading; many of them are investment trusts, which themselves invest across a whole host of other sectors within the public markets or more diverse asset classes. The UK is rich in defensive ‘staple’ goods, which are less exposed to the vagaries of the global business cycle. Conversely, however, it also has some of the most economically sensitive companies in the form of its substantial constituents from the energy and mining sectors.

Whilst it makes the market somewhat incoherent – it is neither defensive nor cyclical – it does mean investors in the UK have scope to choose from a lot of different kinds of companies.

The fact that UK stocks generally generate a lot of their revenues from overseas provides some benefits. When the UK economy performs poorly or suffers shocks, the pound tends to fall. We saw this around the global financial crisis, Brexit referendum and emergence of Covid. These falls increase the value of the overseas profits UK companies generate, which helps to cushion some of the falls (although the same can generally be said of overseas-listed companies too).

Other assets such as UK bonds, and particularly UK government bonds (or gilts), are more connected to the UK economy. When the economy is struggling with a more conventional recession, the Bank of England is expected to cut interest rates. This increases the value of UK government bonds, which pay a fixed rate of interest. Some government bonds provide protection against inflation as well, although they are still sensitive to interest rates; balancing the extent to which they may benefit from higher inflation but suffer from higher interest rates is a complex analytical task.

Across the spectrum of company shares, bonds and the pound, there are various ways to benefit from the UK, whether it is on the up or down in the dumps. Currently, we believe that the UK’s economic headwinds make gilts more attractive than most other government bonds. However, we have reduced our long-term UK equity weightings after a strong year that was driven by the resource-heavy nature of the market during 2022.

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

Chloe

17/02/2023

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The minimum age you can access a pension is changing – why does this matter?

Cut and pasted from an A J Bell email received Thursday afternoon 16/02/2023:

It’s important to understand how the rule changes will impact your financial planning

Author: Tom Selby

The earliest age a pension can be taken is going up to 57 in 2028. Those who are 50 now might not be aware the impact this will have on their decisions. Can you elaborate? Steve

Tom Selby, AJ Bell Head of Retirement Policy, says:

You are referring to the ‘normal minimum pension age’ (NMPA), which is the youngest age someone with a defined contribution pension can access their retirement pot.

The NMPA is currently set at age 55 and is scheduled to rise to age 57 in April 2028, the same date the state pension age is due to increase to 67. That means if you are roughly aged 50 or younger today, the earliest you can access your pension in most circumstances will be 57.

The NMPA is then expected to remain 10 years lower than the state pension age, meaning it should increase again to 58 in April 2046 (when the state pension age is due to rise to 68).

If you have a defined benefit scheme, the age at which you receive your retirement income – and any tax-free lump sum entitlement you choose to take – will usually be determined by your scheme’s ‘normal pension age’ (NPA). Some schemes will allow you to take your income early, usually at a lower rate.

It is not possible to take your state pension early, although you can defer taking it if you want to.

The Government has created a complex set of rules to manage the transition to an NMPA of 57. Rather than apply the increase across the board, it has proposed creating a ‘protection’ regime so savers in a scheme which gave an ‘unqualified right’ to a NMPA below age 57 on 11 February 2021 can retain that earlier pension access age. This will be known as a ‘protected pension age’.

If people with this protection subsequently make an individual transfer to another (non-protected) scheme, the transferred funds will be able to keep the lower NMPA – although any benefits held in the receiving scheme before the transfer, or new contributions, will have a NMPA of 57 from April 2028.

People with a protected pension age who transfer as part of a ‘block’ with at least one other member of the same old pension scheme to the same new scheme at the same time will be able to retain the lower NMPA for all their funds in the new scheme, including any new contributions in.

Think carefully about what you are going to do with the money if you do access it early (such as in your late 50s), and how making the withdrawal today could impact the future sustainability of your retirement plan. If you are unsure, speak to a regulated financial adviser to better understand your options.

Comment

This could be a complex area but it’s not likely to impact on too many people in the UK, the majority can’t afford to retire earlier than age 65 or even State Pension age.

With regards to State Pension age we know that we are getting age 67 from April 2028 but age 68 is less clear in terms of timing.  I’ve read that this being looked at for 2044 and that this is under review.  Apparently, the State Pension age could be age 68 as early as 2038.

The key message for me here is that if you want to retire early take control and build enough of your own pension and investment assets so that the State Pension age does not impact on your early retirement plans.

Why are the government increasing State Pension age on a regular basis?  To try and counter the increasing cost of the ageing demographics in this country.  To increase State Pension age is a win/win for the State.  They save money paying out State Pensions later on, and it is likely more people will remain in work paying tax etc.

Steve Speed

16/02/2023

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Brewin Dolphin – Markets in a Minute

Please see this weeks Markets in a Minute update from Brewin Dolphin received yesterday evening:

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

Andrew Lloyd DipPFS

15th February 2023

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Brooks Macdonald – Weekly Market Commentary

Please see below, Brooks Macdonald’s Weekly Market Commentary, analysing the performance of markets over the past week. Received last night – 13/02/2023

Equities fell last week as investors called into question the disinflationary narrative that has driven returns in 2023

Last week saw the worst US equity performance so far in 2023 with European shares also falling as the disinflation narrative was called into question by investors. Last week began under the shroud of the stronger-than-expected US employment numbers released the previous Friday but hawkish central bank speak and strong US used car inflation caused sentiment to continue to wane after a mid-week attempt at a rally.

US CPI on Tuesday will confirm whether the disinflationary trend remains intact and contains important labour market data

The latest, all-important, US inflation print has come around quickly with the headline US CPI expected to have expanded by 0.5% month-on-month on Tuesday, equating to a 6.2% year-on-year gain. US Core CPI is expected to have expanded by 0.4% month-on-month, driving the year-on-year number to 5.5%. Higher gas prices are the main factor driving the headline CPI number higher. Investors will also be looking at the length of the average workweek which is expected to have contracted last month, and the average hourly earnings which are expected to rise by 0.2% after rising by 0.3% in the last reading. There will be dual hurdles in the data tomorrow, does the headline and core CPI number continue to show disinflationary progress within the year-on-year number and secondly are there signs that some of the tightness in the wage market is easing. Later this week sees the release of the latest US producer price inflation which is considered a lead indicator of future consumer inflationary pressure.

After a dismal set of US leading indicators were released in January, markets expect these to be upgraded in this week’s reading

Recent US economic data has been stronger over the last few weeks and this stands in contrast to the start of the year which saw some pretty terrible releases. One of those poor releases were the US leading indicators, the latest release of which we will see on Friday. The US leading indicators are expected to pick up from the last reading but continue to stay in negative territory. Other data that is expected to bounce from the last reading include regional factory surveys and industrial production.

With the US earnings season well past its halfway point, the main questions that remain in the US market are whether the disinflationary trend continues and how strong the economy is. The data releases this week will help provide some concrete data after the speculation, both by investors and central bankers, over the last week which has driven market volatility.

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

Alex Kitteringham

14th February 2023

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Tatton Monday Digest

Please see below an article from Tatton Monday Digest. Received this morning 13/02/2023.

Overview: a challenging week brings investors back down to earth

For most of this year, investors have ran with the notion of a decline in longer-term inflation pressures, but they have been less convinced in recent days. As a result, bond and equity markets slipped back last week, despite the FTSE 100 reaching a new all-time price high on Thursday of 7949.57. What’s caused the sudden downward mood? Arguably January’s exceptionally strong US employment data weakened a key component of the market rally, knocking back while expectations that central banks would soon slip into neutral gear. Last week, Catherine Mann, an independent member of the Bank of England’s Monetary Policy Committee, warned there were still likely more rate rises to come in the UK, while in the US, Federal Open Markets Committee members also suggested that while the pace of rate rises may have slowed, the end was not yet in sight.

For most investors the question now is whether growth this year and next year will be slow but steadyish, or will it be “too strong” and therefore be forced to slow more dramatically by ever-tighter monetary policy. If we want an early path to lower interest rates and an early path to steady profitable growth, perhaps it is preferable to get weaker economic data now. The UK’s 2022 fourth quarter gross domestic product (GDP) data could not be described as strong although, contrary to expectations, it did not show a contraction. The quarter showed no real growth at all, while the mix was a little surprising, with services weaker than expected while manufacturing was stronger.

One of the reasons why markets have rallied this year is that we haven’t had any nasty shock for some time – Russia’s invasion of Ukraine was the last serious one. Markets could therefore plod along, eking out steady but small returns, while firms improve their cost bases amid slowish revenue growth alongside slowish economic growth. As we said at the start, further declines in bond yields and inflation expectations would be a big help.

Lastly, a quick mention on energy prices. There is still a possibility of cold weather for this winter, but gas storage levels remain very high across Europe in comparison to past years. In France, the main gas supplier estimated it will have storage at 40% capacity by winter-end, unless there are extremely freezing conditions substantially above normal. Gas and electricity prices continue to fall for next winter’s contracts and are now only double the price of winter 2021, before Russia removed supply. That still may sound terrible, but a return to near-normality now looks increasingly feasible.

Natural disaster hits Türkiye’s economy too 
In the wake of tragedy, discussing the economy can sound a little callous. The earthquake in Türkiye and Syria has killed more than 35,000 people, and injured tens of thousands more. The scale of the devastation is not yet clear, but the real toll will likely be much higher, with hundreds of thousands displaced from their homes. Over the longer term, rebuilding efforts will require resources and investment, which will mean smaller capacity for other things. In short, economic impacts are human impacts too. These impacts could be amplified by the nation’s already weak economy. President Erdogan has already pledged $5.3 billion in emergency aid. Given the government is running a budget deficit, short-term funding will mean extra borrowing. This will likely come at a great cost; yields on 10-year Turkish bonds are at 11% right now, and could go higher if more cash is needed.

Unfortunately, the global financial system does not stop to mourn. In the wake of the disaster, international investors sold Türkiye’s Bist 100 index at a rapid pace, culminating in a 7% fall on Wednesday morning. The negativity caused stock trading to be suspended, and reflected deep concerns over the hit to Türkiye’s productive capacity. However, while the stock market is closed temporarily, other indicators are not currently suggesting volatility in Turkish assets. Spreads on Turkish bonds (the difference between US and Türkiye yields) have barely moved, while the lira has remained static against the dollar in the days since the crisis. Perhaps this is testament to the support that Türkiye now has in the international community. President Erdoğan’s clashes with international markets are well documented, and have led to an inflation crisis in Turkiye which long predates global supply-side problems. But natural disasters can generate a lot of support for the afflicted countries – both politically and financially in the form of aid. If there is any good to come from this at all, it will be that President Erdoğan improves his relationship with western leaders. Regardless of his own politics, that will vastly improve the country’s prospects of rebuilding. The people of Türkiye desperately need that help now.

Will world trade die with the WTO?
When it launched in 1994, the World Trade Organisation (WTO) was the crowning achievement of western neoliberalism: an international regulator dedicated to lowering trade barriers around the world, opening up economies and creating a genuinely global market for goods, labour and services. But WTO members have not made any progress on new rules or treaties for more than two decades, and its court of appeal has not had the required number of judges – meaning disputes cannot be settled and its existing trade rules are unenforceable. Unless the court is rejuvenated, the world’s WTO trade laws will just be scraps of paper.

The question is, then, will world trade wither and die with the WTO? More likely is an increased reliance on regional trading blocs or supply chains. Within these regional blocs, trade links are likely to become deeper, even if the links between regions become shallower. This process is already playing out in Asia, Africa and South America. There is a good chance it could lead to a renewed bout of European integration too, particularly if European leaders think the US is no longer a dependable trade partner. 

The latest White House policies suggest President Biden plans to take full advantage of a world with fewer trade rules. The Inflation Reduction Act (IRA) passed in August promised tax breaks or subsidies for clean energy companies, with support tied to energy being produced in the US. European politicians are reportedly furious with flagrant attempts to give US companies a competitive advantage. But with the WTO crippled, they effectively have no recourse. The impasse seems to be making European Union (EU) lawmakers question their own trade rules. Currently, these restrict subsidies and state investment to encourage greater competition. But last month, European Commission president Ursula von der Leyen told delegates in Davos that the EU “needs to be competitive with offers and incentives that are currently available outside the European Union”. If they follow through, it would likely mean a chain reaction where nations around the world put up higher and higher trade barriers in reaction to one another. Therefore, a moribund WTO could have lasting and wide-reaching consequences. 

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

Alex Clare

13/02/2023

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Multi Asset market analysis – February 2023

Please see below article from Church House Investment Management providing multi asset market analysis. Received 09/02/2023.

January set a better tone for world markets, picking-up from Q4 last year rather than December’s negative tone. Let’s hope that January has set the tone for the year.

The European Central Bank and the Bank of England put their base rates up by a further 50bp (to 3% and 4% respectively), with the promise of a further 50bp to come from the ECB and rather more talk of “considerable uncertainties” and close monitoring by the Bank.  The US Federal Reserve lifted the Fed Funds rate by just 25bp to 4.75% and Chairman Powell cheered with talk of the onset of dis-inflation, though he was careful to warn that there is a long way to go, and it was probably going to be bumpy.

The first bump followed quickly with a jump in US employment in January (half a million new jobs, far greater than expected) and US bond yields rose.  But, over this period, ten and thirty-year US Treasury yields are still lower (both trading around 3.7%).  UK Gilt yields have also fallen, the ten-year is down to 3.3% and the thirty-year to 3.8%, not leaving a lot of room for disappointment.  Lower rates and the improved background are bringing down credit spreads and the primary market is buoyant, particularly in euros, with plenty of new issues meeting strong demand.

Equity markets have had a strong month led by the NASDAQ, which was squeezed higher by 16% over this period.  Having observed last month that big tech would need to show some signs of life soon to feel at all confident about the equity rally, this condition would appear to have been met.  But this does need to be qualified with a slowing in momentum apparent in figures from a number of the big tech companies over the past ten days. 

The US dollar has continued the sell-off that began in the autumn, but the momentum is definitely slowing and most of the move appears to have happened now.  Oil prices have picked-up over the period but, thankfully, European gas prices have not.  The rise in the price of gold also appears to have halted for now, recent data have revealed strong buying by central banks over 2022 in the wake of the war in Europe and ensuing sanctions.

The principal concerns that we set out at the beginning of the year are largely unchanged:

  • 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?

At the moment, the prospects for inflation still appear to be improving, which, in turn should limit central bank action, but…  The prospects for recession appear to be pointing more towards shallow or minimal outcomes.  I am sure this will all change.  We still like shorter-dated sterling corporate fixed interest (credit) but would be cautious for longer-dated fixed interest.  Equity markets feel more comfortable at present, and the impression is still that stocks are ‘under-owned’, though we definitely expect more volatility to come.

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

Adam

10th Febraury 2023

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald earlier this afternoon, which delivers a succinct global market update.

What has happened

Equities struggled yesterday as concerns over hawkish central bank commentary returned, with markets continuing to whipsaw between positivity and negativity. US technology stocks underperformed with Alphabet a standout after its new generative AI tool showed inaccuracies during a demonstration. European equities managed to eke out a small positive gain despite the poor sentiment within US equity markets yesterday.

Central bank speak

Starting off with the more hawkish commentary, President Williams of the NY Fed said that a terminal rate of between 5-5.25% was a reasonable view, effectively endorsing the run up in bond market expectations that we have seen over the last week. Williams referred to wage growth as a concern saying that ‘there’s definitely scenarios where inflation ends up being more persistent for various reasons.’ The overall tone yesterday was one of caution, which stressed, in the words of Governor Waller, ‘It might be a long fight, with interest rates higher for longer than some are currently expecting.’ President Kashkari said that he would need to see wage growth back to around 3% before the Fed could gain confidence over the disinflation narrative. As a consequence of these comments, bond yields rose and the market’s expectation for the US terminal rate also ticked up yet again.

ECB

Yesterday’s moves were not just confined to the US with ECB speakers taking a similarly hawkish line. ECB Vice President de Guindos said that ‘it might well be that financial markets are too optimistic with regard to inflation and our monetary policy response.’ The ECB’s Knot added to this, saying that if the current inflationary pressures persist, the ECB could continue to hike interest rates at 50bp increments into May. Later today we will see the release of the delayed German CPI numbers which will help investors decide whether January’s downside misses to European inflation were a blip or part of a trend.

What does Brooks Macdonald think

Both the ECB and Fed sounded more hawkish yesterday, but the bond market and equity market damage was done in the US given heightened expectations of a Fed pivot. The ECB sounded hawkish but this is very much what the bond market expects, with the European Central Bank seen as behind the curve versus the US and UK.

Index 1 Day1 Week1 MonthYTD 
 TRTRTRTR 
MSCI AC World GBP -0.5%1.3%5.5%7.8% 
MSCI UK GBP 0.3%1.7%2.2%5.6% 
MSCI USA GBP -1.1%1.8%6.2%7.8% 
MSCI EMU GBP -0.3%1.1%5.7%11.3% 
MSCI AC Asia Pacific ex Japan GBP 0.6%-0.1%4.4%8.0% 
MSCI Japan GBP -0.2%0.9%6.8%5.9% 
MSCI Emerging Markets GBP 0.5%-0.4%3.3%6.9% 
Bloomberg Sterling Gilts GBP -0.2%0.1%1.6%2.7% 
Bloomberg Sterling Corps GBP -0.1%0.6%3.1%4.6% 
WTI Oil GBP 1.7%4.5%6.4%-2.1% 
Dollar per Sterling 0.2%-2.5%-0.2%-0.1% 
Euro per Sterling 0.3%0.1%-0.8%-0.2% 
 
Index 1 Day1 Week1 MonthYTD 
 TRTRTRTR 
MSCI AC World USD -0.5%-0.5%5.5%7.6% 
MSCI UK USD 0.3%-0.1%2.2%5.5% 
MSCI USA USD -1.1%0.0%6.2%7.7% 
MSCI EMU USD -0.3%-0.7%5.7%11.1% 
MSCI AC Asia Pacific ex Japan USD 0.6%-1.8%4.4%7.9% 
MSCI Japan USD -0.2%-0.9%6.8%5.8% 
MSCI Emerging Markets USD 0.5%-2.1%3.3%6.8% 
Bloomberg Sterling Gilts USD 0.3%-1.9%1.8%3.1% 
Bloomberg Sterling Corps USD 0.5%-1.5%3.4%5.0% 
WTI Oil USD 1.7%2.7%6.4%-2.2% 
Dollar per Sterling 0.2%-2.5%-0.2%-0.1% 
Euro per Sterling 0.3%0.1%-0.8%-0.2% 
  Bloomberg as at 09/02/2023. TR denotes Net Total Return   

 Please check in again with us shortly for further market updates and news.

Chloe

09/02/2023

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 last week. Received late yesterday afternoon – 07/02/2023

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

08/02/2023

Team No Comments

Brooks Macdonald Weekly Market Commentary: Fridays US job report reiterates the current tightness of the US labour market

Please see this weeks Weekly Market Commentary from Brooks Macdonald received yesterday afternoon:

US Federal Reserve (Fed) Chair Powell’s failure to push back on market expectations of interest rate cuts helps drive equities higher

Equity markets retreated on Friday as the market digested the latest US jobs data. That said, equities still made solid gains last week with US large cap technology names leading the way.

A strong US jobs report last Friday reiterates the current tightness of the US labour market

The US non-farm payroll report on Friday contained benchmark revisions and large beats, breaking the market complacency that had settled in after a strong January for risk assets. Revisions to the calculations in 2022 meant that the official numbers for nominal income growth have surged, suggesting an even more robust labour market than previously thought. Of course, the 2022 numbers have already filtered through to broader economic data sets including the inflation report, Gross Domestic Product reports etc, so the revision in some ways is pure history however given that labour market tightness continues to be a theme in 2023, there is some read-across. In terms of the headline jobs growth in January, 517,000 jobs were created versus expectations of just 260,000. As a result unemployment fell to 3.4%, the lowest level in half a century. There was some good news, with labour force participation (percentage of the workforce in work or actively looking for work) ticking up to 62.4%, which will provide some support to the narrative that higher wages are tempting back workers who voluntary left the workforce during the pandemic.

The positive market tone of 2023 was unscathed by a week of major central bank meetings

Last week saw a deluge of central bank meetings which, in aggregate, provided a more dovish tone than we have been used to in recent quarters. It was also a major week for economic data with inflation numbers from the Eurozone as well as key labour market inflation data from the US. This week we will see the release of the delayed German Consumer Price Index numbers with this figure closely watched to see if the disinflationary forces seen in January’s release are continuing. The US earnings season also continues this week and is joined by European oil majors such as BP and Total. Lastly, we will see whether US/China relations fray after the shooting down of a Chinese balloon which entered US airspace.

US/China relations are likely to come back into the spotlight this week with the US considering a further clampdown on Huawai’s access to US companies and now the Chinese balloon incident. Secretary of State Blinken was meant to be visiting China this weekend as part of an attempt to reset diplomatic relations. With this now postponed, and an aggressive Chinese reaction to the shooting down of the balloon, investors will be wary of a political change that could reverse the positive Chinese equity market story that has been in place since the COVID reopening.

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

Andrew Lloyd DipPFS

7th February 2023