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Markets in a minute: Global markets rise but UK shares lag behind

Please see below for the latest Markets in a Minute update from Brewin Dolphin, received late yesterday 02/09/2020:

Global share markets mostly rose over the past week, driven by growing signs of an economic recovery, positive news on coronavirus developments, and the US Federal Reserve’s shift on inflation targeting (see below).

Sentiment in the US was so bullish that the S&P500 set fresh record highs every day last week, helped by a cooling of the US/China tensions. The UK, however, was a notable underperformer, with the FTSE100 weighed by a stronger pound. This reduces the value of multi-national companies’ dollar-based earnings.

A mixed start to the week

The UK markets, along with many in Europe, were closed on Monday, although in the US it was business as usual and shares fell slightly.

On Tuesday, however, US shares rebounded, with the Dowgaining 0.76% and the S&P500 rising by 0.75%, while the Nasdaq continued its extraordinary rally, rising by 1.4% to 11,939.67.

In the UK it was a different story, as the continuing strength of the pound and Brexit uncertainties saw the FTSE100 fall by 1.7% to 5,862.05, its worst level in three months.

In early trading on Wednesday, UK shares were heading up, as Nationwide reported house prices had had risen to an all-time high of £224,123 in August, as activity rebounded after the lockdown was eased.

Market performance*

  • FTSE100: -3%
  • S&P500: +2.4%
  • Dow: +1.4%
  • Nasdaq: +4%
  • Dax: -0.6%
  • Hang Seng: -1.2%
  • Shanghai Composite: +1%
  • Nikkei: -0.7%

*Data for the week to close of business, Tuesday 1 September.

Coronavirus news

New global coronavirus cases have been trending sideways for a month now. Infections in emerging economies may be slowing especially in Brazil, South Africa (which has gone from 13,000 new cases a day down to around 2,000), Pakistan, Mexico and Saudi Arabia.
In addition, new cases are falling in developed countries, led by the US which has seen a sharp decline, and also Japan, both of which are helping to offset some worrying rising trends in Europe.

Encouragingly, the death rate in this second spike of cases in developed countries is far lower than the highs of April, even though the number of new cases being detected is well above the April highs. This is likely to be because there is more testing of younger people and therefore more cases detected among younger, more resilient populations. This is helping to avoid a return to a generalised lockdown and helping keep confidence up. 

UK piles on the debt

Although the UK has only just entered a recession, recent data has started to illustrate the true extent of the damage so far suffered during the coronavirus pandemic. The Office for National Statistics has revealed that, following the sheer cost of its Covid-19 response, UK government debt has risen above the £2trn mark for the first time.

According to the data, spending on measures (such as the widely used furlough scheme) meant total UK government debt was £227.6bn higher in July 2020 than it was a year before. At the same time, tax revenue has been hit hard by the fact many businesses and people are earning and spending less. Combined with greater government borrowing, this is the first time UK government debt has been above 100% of gross domestic product (GDP) since the 1960s.

Jackson Hole Symposium

In his speech to the annual gathering of central bankers and policymakers in Jackson Hole, Wyoming, US Fed Chair Jerome Powell confirmed it is moving to a system of inflation “average targeting”.

This is important because it means that it will allow inflation to run above 2% to make up for a previous undershoot. The Personal Consumption Expenditure (PCE) price index is the Fed’s preferred inflation index for the 2% target, and in the chart below you can see it has been running below 2% for a sustained period of time for the past decade.

According to the St Louis Fed, even if you allow for 2.5% PCE inflation, which is an overshoot of inflation of 0.5%, it will take until 2032 to make up for the inflation undershot over the past decade. So, the implication is that the Fed wants to let the economy to run “a little hotter”, with faster-rising prices, without the need to raise interest rates or tighten monetary policy when inflation is above 2%. It also likely means that US interest rates will stay at, or near, 0% for a long time, which should be a positive for investment assets. Indeed, many think that the US will need to return to near-full employment and inflation of at least 2% before the Fed will consider raising rates again. We expect further guidance on this at the next Fed meeting later this month.

US/China tensions cool

Powell’s speech came in a week of broadly positive economic news for the US. At the beginning of the week, both the US and China affirmed their willingness to negotiate and declared they were ready to progress with trade talks. With tensions between the two nations a recurring source of stress for investors, this update was welcomed by markets.

US economic data

  • US Durable goods orders in July were up 11.2% vs expectations of 4.8%, helped mostly by new orders for vehicles and parts (+21.9%), electrical equipment and electronic products. Durable goods orders are a proxy for business investment demand and it has now risen for a third consecutive month – a sign things are really normalising.
  • US housing data, which is vital in supporting economic growth, has been really encouraging. July new home sales came in significantly above expectations at $900k versus the estimated $790k, surging to the highest level since the 2009 financial crisis. Existing home sales increased by a record 24.7% in July to an annual rate of $5.86m, the highest level since December 2006. The median house price rose to 8.5% on an annualised basis, the highest since April 2015. Pending home sales also rose 5.9% in July compared to June, after a huge 16.6% increase in June over May.

Australia enters recession

Having avoided a recession even during the financial crisis of 2008/09 (thanks to huge demand from China for its iron ore and other commodities), the world’s longest economic expansion has finally ended. After almost 30 years of uninterrupted growth, Australia’s economy contracted by 7% in the June quarter, following a 0.3% contraction in the first three months of the year.

Brewin Dolphin are market leading fund managers, and so receiving their regular insight in this efficient manner is a quick but well-informed way to update your consensus view of the global markets.

Please keep using these blogs to regularly update your knowledge of current market affairs from around the world.

All the best, keep well!

Paul Green

03/09/2020

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Global markets push higher despite downbeat end to week

Please see below for Brewin Dolphin’s latest Markets in a Minute article received yesterday 18/08/2020:

Global equity markets pushed higher for most of last week on positive economic data, before an ugly session on Friday erased most of the gains. Markets dropped in the UK and Europe as France was added to the quarantine list, which hit travel stocks hard. Prior to that, the Nasdaq hit a new record high, as did the gold price, while the S&P500 briefly surpassed the record high it set back in February before closing slightly lower.

Last week’s markets performance*

• FTSE100: +0.95%

• S&P500: +0.64%

• Dow: +1.8%

• Nasdaq: +0.07%

• Dax: +1.8%

• Hang Seng: +3.84%

• Shanghai Composite: +0.2%

• Nikkei: +4.3% *

Data for the week to close of business on 14 August 2020

Mixed start to week on US/China tensions and virus concerns

Markets were mixed yesterday after digesting news that the US and China cancelled their weekend talks to assess how Phase 1 of the trade deal was progressing. It was blamed on “scheduling conflicts” but given the recent escalation in tensions, including banning WeChat and Huawei, perhaps a postponement is no bad thing. London equities rose, with the FTSE100 up by 0.6%. In the US they were mixed – the Dow closed down 0.3% at 27,844.91, while the S&P500 rose 0.27% to 3,381.99. The Nasdaq closed 1% higher at 11,129.73. Europe was also mixed, with the pan-European Eurostoxx up by 0.3%, alongside gains in Germany and France, but equities in Italy and Spain lost ground.

There are concerns that economies are reaching their maximum capacity for growth without further easing of restrictions, which could increase the chances of a second wave of coronavirus infections. However, surging cases in some European countries are leading to more containment measures, not less.

Level of UK GDP (February 2020=100)

UK recession

 The standout headline last week was the UK’s record decline into recession in the second quarter. The -20.4% quarterly fall in GDP does look ugly. It is the largest quarterly decline on record, and it was the biggest quarterly fall amongst major economies. As a services-sector driven economy, the UK has been hit harder than other countries – there was a -23.1% drop in consumer spending, while business investment fell by -31.4% in the second quarter.

More encouragingly, GDP rose by 8.7% month-onmonth in June after 2.4% rise in May thanks to the easing in lockdown restrictions and there is good reason to think this will continue in the short term. For instance, wholesale and retail output rose by +27.0% in June compared with May. And with the reopening of pubs and restaurants in July and the “eat out to help out” scheme in August, we believe the unprecedented fall in GDP in quarter two will be followed by a recordbreaking double-digit growth in quarter three.

In addition, more current high-frequency data such as restaurant bookings, retail footfall and travel show normalisation in activity. However, the risk is that unemployment rises sharply once the furlough scheme ends in October. The ONS said last week that 730,000 fewer people were employed in July compared to March, based on data from HMRC, but with an estimated 5 million people still on furlough.

If such headwinds emerge later in the year, we think the Bank of England will expand its asset purchase program and further stimulus maybe announced by the Chancellor.

Japan follows UK into recession

Japan announced on Monday that its economy had contracted by 7.8% in the second quarter, which is less severe than the slowdowns in the UK, US and much of Europe. This is most likely because it had a less stringent lockdown. Still, the annualised rate of contraction of 27.8% for the three months to June is worse than Japan’s decline at the height of the financial crisis.

US retail sales and inflation

 US retail sales rose 1.2% in July compared to June, below expectations for a 1.9% increase. While the sharper than expected slowdown was a disappointment, the good news is that US nominal retail sales have already surpassed their pre-Covid level, so a flattening off is to be expected. Also, there is uncertainty surrounding the unemployment benefits which account for a large part of the income for millions of unemployed Americans, and there is little sign of progress between Republicans and Democrats at the moment. This will be weighing on consumer confidence.

Meanwhile, the US consumer price index jumped 0.6% in July compared to June, which is the biggest monthly increase since June 2009 (vs +0.3% expected), while the core annualised rate rose to 1.6%. These numbers are clearly still very benign compared to the Fed’s inflation target of 2%, but the risk is that inflation could be a problem further down the road.

Chinese data hints at slowing recovery

Overall the China July activity data continued to show improvement but at a slower pace, not surprising given the lingering Covid threat. The talking point was the disappointment in retail sales given China is increasingly a consumption-based economy, retail sales were still down -1.1% on an annualised basis, perhaps due to a spike in cases and people being cautious about going out. However, the Chinese savings rate is over 40%, so consumers would appear to have plenty of spending power for when confidence returns.

We can use these blogs to keep an up to date consensus view of the global markets. Recent recession news may have come as a shock to many, but the background to situations like these can be more easily understood by reading widely on investment issues.

Keep safe and well.

Paul Green

19/08/2020

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Brewin Dolphin: Markets in a Minute ‘Climbing the wall of worry’ 02/06/2020

Please see the below weekly market commentary update from Brewin Dolphin received yesterday (2nd June 2020):

Markets

Share markets had a positive week with most assets rising despite increasing political tensions between the US and China over Beijing’s imposition of security laws in Hong Kong.

There were widespread demonstrations in the city and markets were cautious ahead of President Trump’s speech on Friday in which he would outline his response. However, there was a collective sigh of relief when his speech, which took place after the UK and European markets had closed, lacked any threat of direct action against China or any intention to pull out of Phase 1 of the trade deal.

As a result, US markets closed effectively flat on Friday and UK and global markets rallied on Monday, having lost ground ahead of his speech last Friday. But the best gains were seen in Asia.

• Hong Kong’s Hang Seng closed up by 3.36% yesterday.

• Overall, the MSCI Asia ex-Japan index jumped 2.27% on Monday alone.

• Indices in Europe, the US and UK all finished higher yesterday; the FTSE100 gained 1.5%.

Last week’s gains: *

• FTSE100: 1.4%

• Dow Jones: 3.75%

• S&P500: 3%

• Dax: 4.6%

• Nikkei: 3.7%

• Hang Seng: 1.5%

 • Shanghai Composite: 1.4%

*Data to close on Monday 1 June 2020

“The speed at which the economy is able to open over the next two months will be an important factor determining the trajectory of unemployment thereafter.”

PMIs signal slow improvement

Two surveys over the weekend suggested China’s recovery was continuing, with manufacturing activity expanding.

• China’s National Bureau of Statistics manufacturing PMI hit 50.6 in May, slightly down on April but above the key 50 level that indicates expansion.

• The private Caixin/Markit manufacturing PMI came in at 50.7 for May, above expectations of 49.6. • In the UK, the IHS Markit/CIPS Manufacturing PMI came in at 40.7, still firmly in contraction territory but sharply up from April’s reading of 32.6, suggesting the easing of the lockdown is stemming the decline in activity.

• Eurozone manufacturers appear to have passed their nadir, with the region’s manufacturing PMI rising to 39.4 in May from 33.4 in April.

PMI Data June 2020

Source: Datastream June 2020

Stimulus news

Chancellor Rishi Sunak confirmed on Friday that the furlough scheme will be gradually unwound. Starting from August, firms will have to pay employer national insurance and pension contributions for furloughed staff. In September, they will have to pay 10% of their wages, rising to 20% in October.

This comes despite plenty of lobbying for less burden on business. The Institute of Directors said only around half of firms can afford this. The speed at which the economy is able to open over the next two months will be an important factor determining the trajectory of unemployment thereafter. However, companies will be able to bring back staff on a part-time basis from 1 July, a month ahead of schedule, giving companies some flexibility in adapting to the new levels of demand.

Sunak also extended the Treasury’s self-employment income support scheme, so that those eligible would be able to claim another payment, albeit to a lower level of 70% of average monthly earnings. The first payments had been based on a ratio of 80%. Welcome news nonetheless.

Boost for Europe

The European Commission has proposed a €750bn package, dubbed “Next Generation EU”. The fund would consist of €500bn in grants to hard-hit member states which would not have to be repaid, with a further €250bn in loans. This follows a proposal from France and Germany of €500bn, which the EU’s so-called “Frugal Four” (Austria, Denmark, the Netherlands and Sweden) countered with a proposal of loans only. Since any proposal requires agreement from all 27 member states, we would not be surprised to see them meet somewhere in the middle.

Virus optimism

The general sense within the market seems to be that the worst of the virus is over and the re-opening of the economy will proceed. There are varying degrees of caution over the process which makes it hard to draw conclusions about how well it will go.

Asia is an example of how well the virus can be contained. As we expected, privacy concerns are causing resistance to the track and tracing amongst western populations, and the lack of an effective app means any track and trace programme will be limited in its effectiveness.

As the crisis appears to be ebbing and the UK government is loosening restrictions further, support for containment measures is starting to decline. Indeed, police have said that the lockdown is no longer enforceable, and scenes from parks around the country this past sunny weekend have shown crowds clearly breaching social distancing regulations.

So far, however, there have been very limited instances of cases starting to rise as a result of lifting lockdowns, although it is early days. Denmark remains on a downward trajectory despite lifting its lockdown early, as does Sweden despite much less strict suppression measures. The exceptions are largely in the US where, although the overall trend is lower, several states are seeing an upward trend including California. In Europe it is probably the more general persistence of cases in Italy, where lockdowns are being lifted, that is of greatest concern.

But convincing evidence of a second wave is lacking, which is good news, but there is no room for complacency. 

Vaccine progress

Stories regarding vaccines continue to support investor sentiment despite the challenges of producing these to a scale which would facilitate global herd immunity. However, a variant of these stories relating to GlaxoSmithkline was that the company plans to produce a billion doses of adjuvant. This can boost the effectiveness of a vaccine, reducing the quantity, improving the response and creating longer lasting immunity. With so many vaccines in early trials, we await news of concrete developments.

These weekly updates from Brewin Dolphin provide their view of the markets, the frequency of these reports is particularly useful given the present high levels of volatility.

We try to take on board a wide variety of fund managers’ and investment experts’ opinions such as Brewin Dolphin to give you an informed and overall view of the current climate we are in, the consensus view and any variation in views.

Paul Green

03/06/2020