Please see the below article from Brewin Dolphin providing an update on rebalance and market news. Received yesterday evening – 13/12/2022
Backdrop to this month’s tactical rebalance:
US inflation appears to have peaked and central banks are getting closer to the end of their tightening cycle. This should relieve pressure on growth stocks and make sovereign bonds a more attractive asset class. In China, the government seems to be moving away from its economically damaging zero-Covid policy following protests across several major cities.
This month, the Asset Allocation Committee felt that although progress is being made in the fight against inflation, it is still not the right time to increase government bonds further.
There were no changes in the Asset Allocation Committee’s guidance. However, in light of forthcoming changes to the strategic benchmarks in the new year (where overseas equities are being increased and UK equities are being reduced), adjustments have been made to the portfolios’ regional equity exposure.
The key details of this rebalance are as follows:
The changes reflect a reduction in the UK equity allocation and an increase in the overseas equity allocation.
•In Active MPS, there has been a reduction in the MI Select Managers UK Equity and UK Equity Income funds. Existing overseas equity holdings have been increased.
•In Passive Plus, there was a reduction in broad UK equity and FTSE 250 exposure. Existing overseas equity holdings have been increased.
•In Sustainable MPS, US equity exposure was increased through the Brown Advisory US Sustainable Growth fund. UK exposure was moderated through a reduction in TB Evenlode Income and Royal London Sustainable Leaders.
The next planned rebalance date is 16 January 2023.
Markets in a Minute
US and European stock markets fell last week as several bank CEOs gave a bleak outlook for the global economy.
In Asia, the Shanghai Composite gained 1.6% and the Hang Seng soared 6.6% as China announced a ten-point guideline to its new Covid prevention and control measures. We discuss these topics, and more, in the latest Markets in a Minute.
In this week’s video, Guy Foster, Chief Strategist, discusses the outlook for the US economy in 2023 and whether a recession could be avoided. Janet Mui, Head of Market Analysis, explores China’s pivot from its zero-Covid strategy and the complexities involved in the reopening process.
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Please see the below article from Brooks Macdonald, providing an update on latest economic and markets news. Received yesterday afternoon – 12/12/2022
US equities and oil sold off as economic growth concerns returned last week
Last week equities fell with the US underperforming Europe as it unwound its rally post US Federal Reserve (Fed) Chair Powell’s speech the week before. It was a broad based sell-off with domestic focused US mid cap companies underperforming as economic growth fears rose. Bonds also took part in the sell-off with yields rising over the week however it was oil that saw some of the largest moves with Brent Oil falling by over 10%.
The last US CPI release of 2022 remains crucial to market sentiment
Despite the size of sell-off that we saw last week, that was the quiet week in terms of data and central banks. Before the market moves onto central banks this week it must contend with the last US inflation print of 2022 on Tuesday. The consensus expects Core Consumer Price Index (CPI) to rise by 0.3% over the month, bringing the year-on-year reading down from 6.3% to 6.1%. The headline figure is also expected to grow by 0.3% on the month, bringing the annual rate down from 7.7% to 7.3%.
The Fed, ECB and BoE are all expected to downshift the size of their interest rate moves this week
The market remains confident that the Fed will raise US interest rates by 50bps on Wednesday and barring a huge surprise within the CPI figures it is likely to push ahead with this ‘downshift’ from the 75bps of previous months. The US CPI reading will influence the Fed’s thinking around the tone of the statement as well as determining how high Fed members expect the US terminal rate to reach (contained within the ‘dot plot’ of interest rate expectations). After the Fed on Wednesday, the European Central Bank (ECB) and Bank of England conclude their meetings on Thursday with the ECB expected to raise interest rates by 50bps, another downshift, alongside hawkish messaging around the need to tackle inflation. The third downshift is expected from the BoE, raising rates by 50bps after 75bps of rate rises in November.
While we are expecting three central banks to downshift this week, the Bank of England is likely to be the only bank to present a dovish narrative. The dovish tone is likely to be catalysed by fears over the economic impact of over-tightening rather than a belief that UK inflation is under control. Should the Bank raise rates by 50bps this week, it is still expected to raise interest rates by a further 1% before the middle of next year.
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Please see the below article from Invesco received over the weekend:
December is shaping up to be a momentous month for the global economy and markets. Following are some reasons why:
Changes to China’s COVID policy. China is making meaningful and positive alterations to its COVID policies. Last week China announced a new initiative to encourage further vaccinations for the elderly, and it has also recently relaxed its COVID testing requirements in some major cities. This news has been very well received by investors, who have driven up Chinese stocks. And it has been reported that China may announce this week a new, less stringent set of national COVID policies that could be stimulative for the economy, which could provide another strong boost to Chinese stocks.
China’s growth target. Senior policymakers in China will meet in mid-December for the Central Economic Work Conference (CEWC) in order to agree upon key economic policies for the coming year. All eyes will be on the growth target set for 2023 – specifically whether the target will be 5% or above. I expect it will be 5% or above, and that there will be supportive fiscal policies to help China reach that target. In addition, the People’s Bank of China recently cut its reserve requirement ratio, and I expect its supportive policies to continue. This could set the stage for significantly stronger economic growth in 2023.
The Tankan Index. This index helps us take the temperature of the Japanese manufacturing sector, and it’s expected that the upcoming reading on Dec. 14 will show conditions have improved since the previous quarter. However, some recent economic data points from Japan have disappointed, such as retail sales. A disappointing Tankan Index could suggest a less-positive outlook for the Japanese economy and weigh down Japanese stocks in the short term, despite a supportive central bank.
US Inflation measures. I’m especially keeping an eye on the US Consumer Price Index (CPI) and Producer Price Index (PPI), as well as preliminary inflation expectations from the University of Michigan. While I do believe that a 50 basis point rate hike in December is almost a “fait accompli,” there is a small chance the Federal Reserve (Fed) could hike 75 basis points instead. I don’t believe that the higher wage growth in last week’s jobs report would be enough to prompt a higher hike on its own; however, if it is followed up with higher-than-expected inflation or inflation expectations, it could change the Fed’s mind. Recall that in June, the Fed had communicated it would only hike rates by 50 basis points. However, just a few days before the rate announcement, both CPI and Michigan inflation expectations were higher than expected, and the Fed pivoted to a 75 basis point hike. And so these upcoming readings have a small chance of influencing the Fed’s decision in December, although most likely they will just contribute to higher volatility.
Bank of Canada meeting (BoC). Canada has been at the vanguard of central banks downsizing rate hikes, so it’s good to keep an eye on the BoC. Canada is also facing many of the same challenges as the US economy, with a tight labor market and high wage growth; it also has run the risk of slowing its economy too much because of its “fast and furious” rate hike cycle. Like the US yield curve, the Canadian yield curve has experienced a deep inversion. The Bank of Canada was initially expected to hike rates by 50 basis points at its December meeting, although there is a growing likelihood of a 25 basis point hike. A 25 basis point hike, in my view, is more likely and would ease the pressure on the Canadian economy — as well as lead the way for other central banks to follow in normalizing the size of rate hikes.
The Federal Open Market Committee. FOMC economic projections and the accompanying press conference are scheduled for Dec. 14. At the end of the day, markets aren’t focused on December’s rate hike — they’re focused on what the terminal rate will be and when the Fed will hit the “pause” button, because that will help dictate how the stock market performs and when an economic recovery can unfold. And it is the FOMC press conference as well as the “dot plots” that will give us a far better idea of that.
The European Central Bank (ECB). It looks like inflation may have peaked in the eurozone, increasing the likelihood that the ECB will downshift to a 50 basis point hike at its Dec. 15 meeting. However, at a recent conference, ECB President Christine Lagarde disagreed that inflation had peaked and warned about the danger of letting inflation expectations become unanchored, which suggested she may err on the side of greater hawkishness in reinforcing ECB credibility.
Watching the markets
December has tended to be a good month for risk assets, inspiring the term “Santa Claus Rally” to describe late December surges. It’s been the third-best month for both the S&P 500 Index (since 1950) and the NASDAQ Composite (since 1971), and the second-best month for the Russell 2000 Index since 1979 International stocks also have historically participated in Santa Claus Rallies. For example, the FTSE 100 Index’s average monthly return for December is 2.55%, the MSCI Emerging Markets Index’s average return is 3.18%, the MSCI EAFE’s average return is 2.34%, and the Hang Seng’s average return is 1.79%.
But this year, markets have largely been driven by the Fed and other central banks because of their historic monetary policy tightening, and so I expect these central banks will likely continue to have an outsize impact on stocks in December. In addition, lowered earnings revisions could exert downward pressure on stocks. Therefore, I expect significant volatility for the month, although the bias is likely upward given historical trends. I suspect this will be a December to remember for the global economy – and markets – as we get ready for 2023.
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Please see below, an article from Brewin Dolphin looking ahead to what may be in store for investors over the next 12 months. Received yesterday afternoon – 09/12/2022.
After a challenging year for financial markets, Janet Mui, our Head of Market Analysis, looks at what the next 12 months could have in store for investors.
2022 proved to be a challenging year for investors. The war in Ukraine, high inflation, rising interest rates and the growing risk of a global recession meant there were many sources of anxiety for financial markets.
A mild recession ahead
While a recession in major developed economies looks inevitable, the length and depth of the recession is likely to be mild. Labour markets in developed economies remain in good shape, with job openings in abundance. Financial institutions are well capitalised and are unlikely to experience the kind of liquidity crunch that we saw in the 2008 financial crisis. Governments around the world are shielding the most vulnerable from the surge in energy costs, and there are still plenty of pandemic household savings to cushion the blow of the cost-of-living crisis.
That said, the cost of borrowing has risen significantly. 2022 saw the fastest cycle of interest rate hikes in US history, and this is something that will reverberate more visibly in 2023. There will be inevitable adjustments to the years of excesses and imbalances built up in the economy. That could mean a downturn in the housing market, a reduction in borrowing by households, de-leveraging by corporates, and more fiscal prudence by governments in 2023.
Inflation to ease
The biggest challenge for financial markets in 2022 was arguably the persistence of eye-watering inflation, which had a knock-on effect on monetary policy and economic activity. The good news is that inflation is likely to slow sharply in 2023 for a number of reasons.
Commodity prices, including wholesale oil and gas, have fallen markedly. Inventories of goods are building up and shipping costs are declining rapidly, which are good indications that price pressures will fall.
Historically, interest rate rises impact the real economy and inflation with a lag of 12 to 18 months. Inflation of goods and services typically eases as demand falters in a recession. So, once inflation comes down, we can anticipate better times ahead.
Interest rates to peak and pause
We think that most of the large and rapid interest rate increases are behind us in major developed economies. The Fed funds rate is likely to peak at around 5% in the second quarter, while the UK bank rate will likely peak at between 4% and 4.5% in the third quarter.
The hawkish tone from Federal Reserve officials has softened a bit recently, as they acknowledged there is a time lag between monetary policy and the impact on the real economy. Meanwhile, the Bank of England’s governor Andrew Bailey has decisively pushed back against previously elevated market interest rate expectations.
These suggest to us that while central bankers are determined to fight inflation, they know they have already done a lot in a short time span, and they don’t want to overtighten and crash the economy as a result. Whether interest rates will be cut in 2023 depends on how quickly inflation comes down. It seems more likely that interest rates will plateau and stay high in 2023, and that cuts are a 2024 story.
China to gradually reopen
There are more concrete signs that the Chinese government is softening its stance towards Covid restrictions after widespread protests. We think the overall direction remains constructive and that the worst of zero-Covid restrictions are behind us. The normalisation of Chinese activity will be incrementally positive for global demand, at a time when recession looms in 2023.
Investors and, indeed, the market will remain very sensitive to Covid developments in China. There is a general sense of FOMO – fear of missing out – in case there is a big rally, which could help Chinese stocks gather momentum.
While the markets may have got ahead of themselves, and before we get overly excited, we should recognise the challenges and complexities involved in the reopening process. Over the longer term, investors are likely to remain concerned about the political, geopolitical, and regulatory implications of the cabinet reshuffle by president Xi Jinping at the National Party Congress.
Long-term investment opportunities
Despite this year’s economic uncertainty and market volatility, we believe opportunities for long-term investors are emerging. We think there are pockets of attractive opportunities in bonds after the surge in yields and spreads this year. Investors are now able to lock in decent yields while taking little to no credit risk, with the potential for attractive price returns when interest rates eventually fall.
The outlook for equities is less clear. Weak growth and earnings could drag stock markets lower before a decisive fall in interest rates helps equities reach a bottom. Throughout history, equities tend to deliver superior long-term returns. Timing the market is difficult, but the declines in prices we have seen this year give investors the ability to buy good companies at more attractive valuations. Our preference remains on quality companies with strong balance sheets, pricing power, and sustainable business models.
To conclude, while 2023 is likely to be a year of recession, it could be a better year for market sentiment as central banks slow and then pause interest rate hikes, and inflation eases more meaningfully.
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Please see below article received from Brooks Macdonald earlier this afternoon, which provides a global market update following positive economic developments in the US and Europe.
What has happened
Equity markets ended the day slightly lower as economic growth concerns continued. Bond yields fell as this weaker demand narrative was priced in, with the US 10-year yield now down to 3.42%, maintaining the significant inversion of the yield curve.
Economic growth
Nearer term strong economic momentum in the US, such as the upward revision to Q3 productivity, is doing little to shake the market’s malaise over the state of the global economy. Europe also saw some more constructive data with Euro Area growth revised up by 0.1%. Despite this, yesterday saw further falls in the US and international oil benchmark with Brent crude closing yesterday with a year-to-date loss. These moves, whilst implying far weaker demand, should reduce inflationary pressures, with US gasoline prices already at their lowest levels since January of this year. The 10-year inflation breakeven, a market proxy for inflation expectations, fell to just 2.27% as investors wager that the current period of heightened inflation will fade.
Central banks
The Bank of Canada hiked rates by 50bps yesterday however they did so alongside a dovish statement that said that the ‘Governing Council will be considering whether the policy interest rate needs to rise further.’ Whilst this does not mean that the Bank of Canada has necessarily reached its terminal rate, that will ultimately be driven by the change in the rate of inflation, it is the closest we have had this cycle to a ‘pause’ in rate rises. With many in the market hoping for a 25bp rate rise from the Bank, Canadian government bonds underperformed yesterday despite the more dovish overtones within the policy statement.
What does Brooks Macdonald think
Next week’s Fed and ECB decision will, alongside the US CPI print, set the scene for December. Unhelpfully for the ECB, the latest inflation survey saw upgraded expectations of 1-year Euro Area inflation. The central bank will be far more concerned about medium term expectations such as the 3-year rate which remained unchanged at 3%, however the ECB and the Fed not only need to tackle actual inflation but also consumer and business expectations. This is one of the reasons why we should expect continued hawkish rhetoric from those two banks even if their actions become softer in the coming months.
Index
1 Day
1 Week
1 Month
YTD
TR
TR
TR
TR
MSCI AC World GBP
-0.8%
-4.6%
-0.9%
-8.1%
MSCI UK GBP
-0.4%
-1.0%
3.0%
7.4%
MSCI USA GBP
-0.6%
-5.9%
-2.6%
-9.1%
MSCI EMU GBP
-0.6%
-1.3%
4.1%
-8.0%
MSCI AC Asia ex Japan GBP
-2.1%
-2.9%
4.2%
-11.4%
MSCI Japan GBP
-0.7%
-2.1%
1.7%
-7.8%
MSCI Emerging Markets GBP
-1.8%
-3.6%
0.8%
-11.5%
Bloomberg Sterling Gilts GBP
-0.1%
0.4%
4.7%
-21.4%
Bloomberg Sterling Corps GBP
0.1%
0.8%
5.3%
-17.2%
WTI Oil GBP
-3.4%
-12.7%
-26.1%
6.0%
Dollar per Sterling
0.6%
1.2%
6.0%
-9.8%
Euro per Sterling
0.2%
0.3%
1.1%
-2.3%
Index
1 Day
1 Week
1 Month
YTD
TR
TR
TR
TR
MSCI AC World USD
-0.4%
-2.3%
5.1%
-17.0%
MSCI UK USD
0.0%
1.3%
9.3%
-3.0%
MSCI USA USD
-0.2%
-3.7%
3.4%
-17.9%
MSCI EMU USD
-0.2%
1.1%
10.5%
-16.9%
MSCI AC Asia ex Japan USD
-1.7%
-0.6%
10.5%
-20.0%
MSCI Japan USD
-0.3%
0.2%
7.9%
-16.7%
MSCI Emerging Markets USD
-1.5%
-1.4%
7.0%
-20.1%
Bloomberg Sterling Gilts USD
-0.3%
2.8%
11.4%
-29.2%
Bloomberg Sterling Corps USD
-0.1%
3.2%
12.0%
-25.4%
WTI Oil USD
-3.0%
-10.6%
-21.5%
-4.3%
Dollar per Sterling
0.6%
1.2%
6.0%
-9.8%
Euro per Sterling
0.2%
0.3%
1.1%
-2.3%
Bloomberg as at 08/12/2022. TR denotes Net Total Return
Please check in again with shortly for further relevant content and news.
Please see below, an article from Brewin Dolphin providing a summary of the latest news from global markets. Received yesterday afternoon – 06/12/2022.
Eurozone inflation slows for first time since 2021
Shares in Europe rose for the seventh consecutive week last week as a slight easing of inflation raised hopes of slower interest rate hikes.
The STOXX 600 ended the week up 0.6%, with signs of improving economic confidence also helping to boost investor sentiment. The FTSE 100 gained 0.9% despite a sharp slowdown in the UK housing market.
In the US, the S&P 500, Nasdaq and Dow rose 1.1%, 2.1% and 0.2%, respectively, after Federal Reserve chair Jerome Powell signalled smaller interest rate hikes.
In Asia, the Shanghai Composite added 1.8% and the Hang Seng surged 6.3% amid signs that China is moving away its zero-Covid policy. Japan’s Nikkei 225 underperformed, falling 1.8% as data showed a decline in industrial production and consumer confidence.
Asia shares rally as China eases testing rules
Stock markets in Asia rose on Monday (5 December) after authorities in China relaxed some of their strict Covid testing rules over the weekend. It followed a wave of nationwide discontent the previous week. The Shanghai Composite added 1.8% and the Hang Seng soared 4.5%, with travel and technology stocks among the top performers.
The positive news was somewhat marred by the latest Caixin / S&P Global purchasing managers’ index (PMI), which showed service sector activity in China contracted at its fastest pace in six months in November. The index dropped to 46.7, well below the 50.0 mark that separates growth from contraction.
The easing of restrictions in China helped to boost the FTSE 100, which rose 0.2% on Monday, led by the mining sector. Gains were held back by a warning from the Confederation of British Industry that the UK faces a “lost decade of growth” if action isn’t taken to address falling business investment and worker shortages. In Europe, the Dax lost 0.6% and France’s CAC 40 fell 0.7% after S&P Global’s composite PMI for the eurozone showed economic activity contracted for the fifth month in a row in November, marking the longest downturn since the recession of 2011 to 2013.
Eurozone inflation eases to 10.0%
Last week, figures from the EU’s statistics agency showed inflation in the eurozone fell for the first time in 17 months, raising hopes the European Central Bank (ECB) will announce smaller interest rate rises this month. Consumer prices rose by 10.0% year-on-year in November, down from a record high of 10.6% in October and below the 10.4% forecast by economists in a Reuters poll.
Energy price inflation eased to 34.9% from 41.5% in October, which outweighed a slight rise in food, alcohol and tobacco inflation to 13.6% from 13.1%. Services inflation also slowed slightly to 4.2% from 4.3%.
Further positive news came from the European Commission’s economic sentiment survey, which registered its first increase since February. The index rose to 93.7 in November from 92.7 in October, driven by a rebound in consumer confidence. This more than outweighed a further deterioration in industry confidence. Consumers were more positive about their household’s financial situation, both over the past 12 months and especially for the next 12 months. Consumers’ expectations about the general economic situation were also more upbeat.
UK house price growth slows
Here in the UK, the latest research from Nationwide showed a sharp slowdown in annual house price growth to 4.4% in November from 7.2% in October, as the fallout from the mini-budget continued to impact the market. Prices fell by 1.4% month-on-month, the largest fall since June 2020.
Robert Gardner, Nationwide’s chief economist, said that while financial market conditions have now stabilised, interest rates for new mortgages remain elevated and the market has lost a significant degree of momentum. “Housing affordability for potential buyers and home movers has become much more stretched at a time when household finances are already under pressure from high inflation,” he said.
Separate figures from the Bank of England showed UK mortgage approvals dropped to 59,000 in October, down from 66,000 the previous month and the lowest level since the June 2020 lockdown. The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 25 basis points to 3.09% in October, the highest since 2014.
Fed signals smaller rate hikes
US Federal Reserve chair Jerome Powell said in a speech last week that the central bank could slow the pace of interest rate increases as soon as the mid-December policy meeting. Many commentators are now anticipating a 0.5 percentage point rate hike at the December meeting, as opposed to the four consecutive 0.75 percentage point rate hikes that preceded it. However, Powell also warned against relaxing monetary policy too soon and said the peak interest rate could be higher than previously forecast.
Powell said that in order to bring inflation back down, the labour market would need to soften. However, Friday’s nonfarm payrolls report showed the economy added 263,000 jobs in November, exceeding consensus estimates, while the unemployment rate stayed at 3.7%. Average hourly earnings were up by 0.6% month-onmonth, pushing the annual rate of increase to 5.1% from 4.7% the previous month.
Japan industrial production declines
Over in Japan, industrial production declined by 2.6% month-on-month in October, worse than forecasts of a 1.5% fall, according to flash data from the Ministry of Economy, Trade and Industry (METI). It came as elevated raw material costs and slowing overseas demand resulted in industries scaling back output. Production was up by 3.7% on an annual basis, but this was below expectations for a rise of 5.0% and represented a slowdown from 9.6% growth the previous month. METI’s forecast of industrial production was more positive, with output rising by 3.3% month-on-month in November and 2.4% in December.
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Please see Brooks Macdonald’s weekly market commentary below late yesterday afternoon:
Equities and bonds rose last week after Fed Chair Powell’s speech contained some dovish comments
Last week saw a further rally in bond and equity markets, catalysed by comments from US Federal Reserve (Fed) Chair Powell which were considered, on the margin, more dovish than previous speeches. Signs that China was moving away from its tougher COVID-19 regime was also welcomed by markets at the tail end of last week. This week’s schedule is significantly quieter with the US Fed now in its communication blackout ahead of its next meeting and a relatively small number of data releases.
Canada’s central bank meeting will be closely watched as the bank leads others with a dovish pivot
While we will not hear from Fed speakers this week, we will hear from the European Central Bank’s (ECB) Lagarde today which will be influential as markets attempt to price the probability of a 50 or 75bp rate hike by the ECB in December. Elsewhere we have Canada’s central bank meeting where policy setters are expected to continue on their dovish pivot seen at the last meeting. The market would welcome a smaller hike which implied a rapid move away from the bank’s rapid tightening of policy earlier in the year which included a 1% hike in July. Australia and India are also in the process of moderating the size of their rate hikes so their meetings on Wednesday will also be watched closely.
US average hourly earnings rose more than expected, however the response rate was very low
Markets on Friday were surprised by an upside beat to the number of new jobs created in November with 263,000 new jobs compared to expectations of 200,0003. The main focus was on the average hourly earnings number however, which came in at 0.6% compared to a consensus figure of 0.3%. Given the importance of income growth to inflation figures, markets took this headline figure poorly with the US equity index falling slightly on the day and US banks continuing their underperformance.
Wage growth inflation remains crucially important and Fed Chair Powell confirmed this when he spoke last week, Indeed, Powell explicitly referenced the strong demand for workers with the Job Openings and Labor Turnover Survey (JOLTS) showing 1.7 jobs for every unemployed worker. There is reason for some caution over the data however as the response rate for the jobs survey was very low, at just 49.4% compared to an average rate of c. 65-70%. This smaller data set is more likely to contain skews and therefore the figures that spooked the markets on Friday may well be heavily revised in coming months.
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Please see the below article from Tatton Investment Management which was received this morning (05/12/2022) detailing their thoughts on last week’s events and their impact on markets:
Overview: December begins in almost good cheer
December has begun on a positive footing for investors, with market participants choosing to focus on the positives rather than the negatives, and most equity markets now trading above bear market territory again. The release of Federal Open Markets Committee (FOMC) meeting minutes at the end of November gave investors enough reasons to buy risk assets. The minutes were in line with previous statement from Powell, but inflation data had turned less scary in the meantime. With news headlines full of stories of tech firm staff layoffs, signalling an easing of tight labour conditions, markets began to see an end to endless rate rises. Current interest rate futures have US interest rates peaking below 5% and with that peak brought forward to April next year (rather than above 5% in May/June). In other words, it is no longer premature to contemplate the Fed going easier or at least less aggressive at slowing the US economy.
The release of above-forecast US non-farm payroll data might have dealt a blow to the dovish narrative. While surrounding labour market data has shown reasonable signs of a slowdown, it is not yet feeding through to the most important US national labour market surveys. The US picked up another 263,000 employees in November, another outsized month of job growth. Meanwhile, the unemployment rate stayed the same at 3.7%. Lots of jobs being filled while the unemployment rate stays the same ought to mean more people returning to the labour market. Yet the number of people in work or seeking work went down from 62.2% to 62.1% of the working age population. Even worse, they worked fewer hours and the rate of growth of average hourly pay went up slightly to 5.1% year-on-year. So, it’s all very confusing, and markets were skittish as a result. But despite Friday’s volatility, markets have been experiencing more stability over the past couple of weeks, with investors less fearful to invest into risk assets. This seems like a better test of household inflation expectations than just asking people what they expect the rate of inflation to be next year: they are putting their money where their views are.
The release of above-forecast US non-farm payroll data might have dealt a blow to the dovish narrative. While surrounding labour market data has shown reasonable signs of a slowdown, it is not yet feeding through to the most important US national labour market surveys. The US picked up another 263,000 employees in November, another outsized month of job growth. Meanwhile, the unemployment rate stayed the same at 3.7%. Lots of jobs being filled while the unemployment rate stays the same ought to mean more people returning to the labour market. Yet the number of people in work or seeking work went down from 62.2% to 62.1% of the working age population. Even worse, they worked fewer hours and the rate of growth of average hourly pay went up slightly to 5.1% year-on-year. So, it’s all very confusing, and markets were skittish as a result. But despite Friday’s volatility, markets have been experiencing more stability over the past couple of weeks, with investors less fearful to invest into risk assets. This seems like a better test of household inflation expectations than just asking people what they expect the rate of inflation to be next year: they are putting their money where their views are.
It is still not all plain sailing though, particularly with geopolitical risks lingering in the background. While China has not been the largest buyer of cheap Russian oil and gas supplies (the honours belong to India and Turkey), last week President Xi Jinping said China was willing to expand energy trade links with Russia in the future. So even if the markets present good opportunities, the political risks of investing in China will remain apparent while the Xi regime remains in place. The recent sentiment shift has been encouraging. However, it also means that market levels remain vulnerable to a whole host of factors that are fiendishly difficult to forecast – from central bank agendas and desire to reassert their credibility, to the geopolitics of China and Russia, to the level of consumer demand destruction from higher (energy) prices and interest rates that will eventually hurt corporate profits. Last week felt calm, and although we hope things stay that way, we would not bet on it.
Emerging markets still defying gravity
Emerging markets (EMs) are usually highly sensitive to the ebbs and flows of global growth. Investors see EM assets as high risk but potentially high reward, meaning buyers are plentiful when the going is good, and harder to find when things look bleak. In that respect, 2022 looked like an arduous task for EMs: global growth has stalled, interest rates are rising at the quickest pace in a generation, and the US dollar has been exceptionally strong. Many of the larger EM companies have substantial dollar-denominated debts, so this can prove a toxic mix for developing nations. And yet, in many respects, EM assets have held up surprisingly well. This may sound strange, considering MSCI’s EM index has lost around 20% of its value this year, but context is key. The S&P 500 has fallen by a similar amount in local currency terms, while the technology-heavy Nasdaq index has fallen by nearly a third. The comparison to US tech stocks is particularly significant, since both are considered long-term growth assets that are highly sensitive to financial conditions. Tech stocks have taken the hit, but EMs have got off much easier.
Everyone except China has done very well and generated positive returns. Brazil in particular has seen a lot of positivity, despite investor concerns about the return of left-wing President Lula. Strong commodity demand certainly helped as well. At the EM headline level though, all of these have been outweighed by negativity towards China. The world’s second-largest economy has been crippled by Beijing’s zero-Covid policy, along with a severe liquidity crunch in its property sector, and questions over the strongman leadership style of President Xi. With all this in the background – not to mention Russia’s war on Ukraine – EMs could have seen a dramatic fall this year, significantly underperforming developed market counterparts. That most EMs have not is testament to their resilience. Central banks frontloaded their monetary tightening last year, allowing them much more leeway in 2022. Commodity exporters were also helped by rallying energy prices earlier in the year, but even EM nations without these exports have held up well. Underlying this has been a sustained improvement in economic fundamentals. Even though risk appetite has sunk this year, there is a sense that EM risks (excluding Russia and China) are themselves lower, at least compared to previous global downturns.
There is an oddity to this though. For half a decade, analysts have talked about the growing trend of ‘deglobalisation’: the fading or reversal of international trade, which had been marching forward since the 1980s. COVID exposed fragilities in global supply chains, particularly around medical supplies, which increased the incentive to ‘onshore’ production or development in key industries. Onshoring by western countries and the removal of trade links should be bad news for EMs, forcing a structural decline in exports. China’s meteoric rise in recent decades was initially down to its comparatively cheap labour and production costs. As the world’s second-largest economy has matured, those costs have caught up with the developed world. If Chinese production is no longer cheap – and the geopolitical risks are higher – there is little incentive for companies to move there, other than tapping into the enormous Chinese market to sell their products.
Of course, moving out of China does not necessarily mean moving back home – and companies might just as well look for cheaper production sites around the world. This has happened to an extent; India and Vietnam have seen massive production growth. But this process takes time. The trade flows between the US and China, while lower than they were a few years ago, are still huge, and that capacity cannot be easily replaced. These are the key question that investors and policymakers must grapple with in the years ahead. Building trade links takes time, and there is a lot of political pressure to move production back onshore, rather than finding somewhere else. The good performance of EMs outside of China this year suggests globalisation is far from over, but whether the decline is permanent or temporary will depend on politics.
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Please see below Daily Investment Bulletin received from Brooks Macdonald this morning, which provides a global market update as we enter the festive season.
What has happened
European equities rose yesterday, reflecting some of the large surge in US indices seen after the European close on Wednesday. US equities meanwhile trod water with banks declining due to a further fall in bond yields and US interest rate expectations. With yields falling and economic growth fears rising, growth equities continued their outperformance yesterday with large cap technology shares rising despite the slight fall in the headline US index.
Economic data
There was little good news within the ISM manufacturing data yesterday which fell into contractionary territory for the first time since May 2020. Both new orders and the employment measure also contracted. The release has added to market concerns over the risk of recession in 2023 and mirrors some of the negativity seen in other data releases in recent weeks. With the Fed, after Powell’s speech, now viewed as more aware of the economic risks in 2023 and beyond, bad economic news is no longer necessarily good news for markets. In a sign that a bit of normality has returned, yields fell on the back of this poorer data as bond markets priced in a loosening of Fed policy in future years. The terminal rate is now only expected to reach 4.86% in the US, a major downgrade from last week’s figure.
US employment report
Today sees the latest release of the US non-farm payroll figures which the market expects to come in at 200,000 new jobs created in November compared to 261,000 created in October. Whilst the overall unemployment rate is expected to hold steady at 3.7%, 200,000 new jobs would be the weakest reading in two years. With markets already concerned about economic growth momentum, a weak employment report would likely catalyse further fears of a cyclical slowdown.
What does Brooks Macdonald think
More positively, reduced economic momentum does appear to be filtering through to the inflation numbers, however. The PCE inflation number, which is the Fed’s preferred gauge, came in below expectations at both a headline and a core level. The question for markets now is how quickly the inflation numbers can fall and therefore allow the Fed and other central banks to react to the recessionary risks in 2023.
Index
1 Day
1 Week
1 Month
YTD
TR
TR
TR
TR
MSCI AC World GBP
-1.9%
0.4%
1.5%
-5.5%
MSCI UK GBP
-0.2%
1.2%
5.5%
8.3%
MSCI USA GBP
-2.6%
0.2%
-0.9%
-6.0%
MSCI EMU GBP
-0.1%
0.4%
7.9%
-6.9%
MSCI AC Asia ex Japan GBP
-1.5%
3.4%
9.6%
-10.1%
MSCI Japan GBP
0.1%
-0.9%
4.7%
-5.6%
MSCI Emerging Markets GBP
-2.0%
2.3%
5.8%
-10.0%
Bloomberg Sterling Gilts GBP
0.4%
-1.3%
2.6%
-21.4%
Bloomberg Sterling Corps GBP
0.5%
-0.6%
4.0%
-17.5%
WTI Oil GBP
-1.8%
2.3%
-13.9%
19.2%
Dollar per Sterling
1.6%
1.1%
6.6%
-9.5%
Euro per Sterling
0.5%
0.1%
0.1%
-2.1%
MSCI PIMFA Income
-0.7%
0.0%
2.2%
-6.6%
MSCI PIMFA Balanced
-0.9%
0.1%
2.4%
-6.0%
MSCI PIMFA Growth
-1.2%
0.3%
2.2%
-4.1%
Index
1 Day
1 Week
1 Month
YTD
TR
TR
TR
TR
MSCI AC World USD
0.7%
1.6%
8.3%
-14.4%
MSCI UK USD
2.5%
2.3%
12.6%
-1.9%
MSCI USA USD
0.0%
1.3%
5.7%
-14.8%
MSCI EMU USD
2.6%
1.5%
15.2%
-15.6%
MSCI AC Asia ex Japan USD
1.1%
4.6%
16.9%
-18.6%
MSCI Japan USD
2.8%
0.2%
11.7%
-14.5%
MSCI Emerging Markets USD
0.6%
3.5%
13.0%
-18.4%
Bloomberg Sterling Gilts USD
3.4%
-0.3%
9.8%
-28.8%
Bloomberg Sterling Corps USD
3.5%
0.5%
11.3%
-25.3%
WTI Oil USD
0.8%
4.2%
-8.1%
8.0%
Dollar per Sterling
1.6%
1.1%
6.6%
-9.5%
Euro per Sterling
0.5%
0.1%
0.1%
-2.1%
MSCI PIMFA Income USD
1.9%
1.1%
9.1%
-15.4%
MSCI PIMFA Balanced USD
1.7%
1.3%
9.3%
-14.9%
MSCI PIMFA Growth USD
1.4%
1.4%
9.1%
-13.1%
Bloomberg as at 02/12/2022. TR denotes Net Total Return
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Please see below, the ‘Markets in a Minute’ article from Brewin Dolphin, providing an update on the latest markets and economic news. Received late yesterday afternoon – 29/11/2022.
Stocks rise on hopes of slower rate hikes
Stock markets rose last week on positive US earnings reports and hopes of a slower pace of interest rate hikes.
In the US, the S&P 500 finished its holiday-shortened trading week above the 4,000 level for the first time in two months, rising 1.5% from the previous week. Technology and retail stocks performed particularly strongly after several earnings reports beat expectations.
The prospect of less aggressive interest rate increases boosted indices in Europe, with the STOXX 600, Dax and FTSE 100 rising 1.7%, 0.8% and 1.4%, respectively. This was despite business activity in the eurozone and the UK shrinking in November.
In China, the Shanghai Composite edged up 0.1% as investors weighed expectations of further monetary stimulus in China against the prospect of tighter Covid-19 restrictions.
China protests dent investor sentiment
Stocks started this week in the red as anti-lockdown protests in China dented investor sentiment. The Shanghai Composite and the Hang Seng shed 0.8% and 1.6%, respectively, on Monday (28 November) and the Chinese yuan tumbled against the US dollar. Oil futures dropped to new lows for the year before reclaiming around half of their earlier losses. Stock markets in other regions also fell, with the S&P 500 and the FTSE 100 down 1.5% and 0.2%, respectively.
In economic news, UK retail sales slumped in November, according to a survey by the Confederation of British Industry. The reported sales balance – the weighted difference between the percentage of retailers reporting an increase in sales and those reporting a decrease – declined to -19 from +18 in October.
Stocks bounced back on Tuesday, with the Hang Seng closing 5.2% higher and the Shanghai Composite gaining 2.3% as China reported a rise in the number of over-80s getting Covid-19 boosters and a new push to get more elderly people further vaccinated.
Fed officials see slower rate hikes
Last week, investors were cheered by the release of the Federal Reserve’s November policy meeting minutes. The minutes stated that a “substantial majority” of policymakers judged that slowing the pace of interest rate increases would likely soon be appropriate.
“A slower pace in these circumstances would better allow the [Federal Open Market] Committee to assess progress toward its goals of maximum employment and price stability,” the minutes said. “The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important.”
In the Fed’s November meeting, interest rates were increased by 0.75 percentage points for the fourth time in a row. Following the release of the minutes, it is now expected that rates will be lifted by 0.5 percentage points in December.
The case for slowing the pace of rate hikes was supported by signs of a weakening US economy. S&P Global’s flash composite new order index fell to its lowest level in over two years in November, while initial claims for unemployment benefits for the week ending 19 November were the highest since mid-August. In contrast, new home sales unexpectedly rebounded in October, rising by 7.5% from the previous month.
Business activity shrinks in the UK…
Business activity in the UK contracted for the fourth month in a row in November, while new orders decreased at the fastest pace for almost two years. The headline seasonally adjusted S&P Global / CIPS flash UK composite output index measured 48.3 in November, up only fractionally from 48.2 in October and registering below the crucial 50.0 no-change value for four consecutive months.
On a more positive note, business expectations for the year ahead rebounded from the 30-month low seen in October. Many survey respondents commented on recession worries and increasingly challenging economic conditions, but there were fewer comments citing domestic political uncertainty.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the data added to growing signs that the UK is in recession. “If pandemic lockdown months are excluded, the PMI for the fourth quarter so far is signalling the steepest economic contraction since the height of the global financial crisis in the first quarter of 2009, consistent with the economy contracting at a quarterly rate of 0.4%,” he said.
Despite the slowdown, Bank of England chief economist Huw Pill said last week that more interest rate hikes will likely be needed to return inflation to the bank’s 2% target.
…and the eurozone
The eurozone also saw business activity shrink in November, for the fifth month in a row. The composite PMI rose from 47.3 to 47.8, but was still below the 50.0 mark. S&P Global said data for the fourth quarter so far puts the eurozone economy on course for its steepest quarterly contraction since late 2012, excluding the pandemic lockdown months.
Manufacturing continued to lead the downturn, with factory output dropping for a sixth successive month. Service sector output also fell, down for a fourth consecutive month. One upside of weaker demand and alleviating supply constraints was a cooling of price pressures, most notably in the manufacturing sector. Firms’ costs rose at the slowest rate for 14 months, in turn allowing selling price inflation to moderate.
“Most encouragingly, supply constraints are showing signs of easing, with supplier performance even improving in the region’s manufacturing heartland of Germany,” said Williamson. “Warm weather has also allayed some of the fears over energy shortages in the winter months.”
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