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Brewin Dolphin: Markets in a Minute 13/07/2021

Please see below for Brewin Dolphin’s latest ‘Markets in a Minute’ article, received by us yesterday evening 13/07/2021:

Equities mixed as US Treasury yields slide

Stock markets were mixed last week as fears about a slowdown in global economic growth led to a steep decline in longer-term bond yields. US indices suffered heavy losses on Thursday as the yield on the benchmark ten-year Treasury note slid to a near five-month low. Although falling bond yields usually increase the relative appeal of equities, investors feared it signalled expectations of a slower recovery from the pandemic. The S&P 500 and the Dow managed to claw back losses on Friday to end the holiday-shortened week up 0.4% and 0.2%, respectively.

The spread of the Delta variant of Covid-19 also weighed on investor sentiment, particularly in Asia where Japan’s Nikkei 225 plunged by nearly 3.0%. Tokyo is being placed under a fourth state of emergency to try to curb the rise in infections. In Europe, the STOXX 600 recovered from Thursday’s sharp pullback to end the week up 0.2%. Germany’s Dax also added 0.2%, whereas France’s CAC 40 slipped 0.4%. The UK’s FTSE 100 was flat as the government confirmed it would ease quarantine rules for fully vaccinated adults and under-18s from mid-August, despite the surge in infections.

Stocks rise ahead of Q2 earnings season

Wall Street stocks were in the green on Monday (12 July) ahead of the start of the second quarter earnings season. Analysts expect strong results from banks such as JP Morgan Chase and Bank of America. The Dow, S&P 500 and Nasdaq all closed at fresh record highs, with the Dow narrowly missing the 35,000 mark. The FTSE 100 edged up 0.1%, with insurer Admiral leading the way on news its first half profits are likely to be higher than expected. Travel-related stocks underperformed amid data showing passenger numbers at Heathrow Airport in June were almost 90% lower than pre-pandemic levels. The FTSE 100 was up 0.3% at Tuesday’s market open, after the Bank of England said it was lifting Covid-19 restrictions on dividends from lenders. Shares in NatWest, HSBC and Lloyds all rose by around 2% following the announcement.

US economic data miss forecasts

A raft of worse-than-expected US economic data weighed on equities and bond yields last week. The Institute for Supply Management’s gauge of service sector activity fell to 60.1 in June, lower than the 63.5 figure forecast by economists in a Reuters poll and down from 64.0 in May. It came amid labour and raw material shortages, which resulted in the survey’s measure of backlog orders rising to 65.8 from 61.1 in May. The IBD / TIPP economic optimism index also slipped from 56.4 in June to 54.3 for July, its lowest reading since February. Elsewhere, figures from the Labor Department showed US weekly jobless claims rose to 373,000 for the week ending 3 July, worse than the 350,000 Dow Jones estimate. Job openings hit a record high of 9.2m in May, which was up 1.7% on the previous month but lower than the expected 9.3m.

UK economic rebound slows

Here in the UK, gross domestic product (GDP) expanded by 0.8% in May from a month ago, down from April’s 2.0% increase and weaker than the 1.5% expansion predicted in a Reuters poll. The Office for National Statistics said GDP growth remained 3.1% below its level in February 2020, just before the pandemic struck. The services sector rose by a weaker-than-expected 0.9% between April and May, as the huge surge in accommodation and food services output failed to offset slower increases elsewhere. Services growth was 3.4% below its February 2020 level. Meanwhile, manufacturing output slipped by 0.1% as the ongoing microchip shortage disrupted car production, leading to the steepest fall in the manufacture of transport equipment since April 2020. Construction output fell for a second consecutive month, down 0.8%, but remained the only sector to have output levels at above its pre pandemic level.

Eurozone retail sales rebound

There was more positive economic data from the eurozone, where monthly retail sales rose more than expected in May following a decline the previous month. According to Eurostat, retail sales rose by 4.6% monthon-month and by 9.0% from a year ago. This was above consensus forecasts of a 4.4% monthly rise and an 8.2% annual increase. The surge was driven by purchases of non-food products and car fuel as several countries lifted coronavirus restrictions. However, the rapid spread of the Delta variant has cast doubt over the speed of Europe’s economic recovery. On Friday, Germany and France warned people against travelling to Spain, where the infection rate is the highest in mainland Europe. The Netherlands said it would reintroduce restrictions on hospitality venues just two weeks after lifting them. Figures from the European Centre for Disease Prevention and Control, reported by the Financial Times, showed the weekly Covid-19 infection rate for the EU and European Economic Area rose to 51.6 per 100,000 people on Friday, from 38.6 the week before. The infection rate is expected to exceed 90 per 100,000 people in four weeks’ time.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well

Paul Green DipFA

14/07/2021

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AJ Bell: What is happening to the markets’ hotshots?

Please see below for one of AJ Bell’s latest Investment Insight articles, received by us yesterday 09/05/2021:

In many ways right now, it looks like business as usual for the financial markets. Blow-out quarterly numbers from Google’s parent Alphabet, Apple and Facebook are taking their share prices to new highs and carrying the NASDAQ index along with them; the FTSE 100 is having another crack at breaking through the 7,000 barrier; and central banks seem in no rush to switch off the hose of cheap liquidity with which they are dowsing markets (unintentionally or otherwise).

And yet, as discussed last week, bonds are trying to rally, as is gold. This move in haven assets seems at odds with the prevailing optimism regarding global vaccination programmes, an economic upturn and higher corporate profits and dividends.

It can be too easy to read too much into such short-term moves, as nothing goes up (or down) in a straight line. One way to test the market mood is to check out what is going on at the periphery, as that is where advisers and clients are probably taking the most risk and therefore the asset classes and holdings they are most likely to liquidate first in the event that bullish sentiment starts to ebb.

Another is to look at the market darlings: the areas that are doing (or have done) best and are garnering the most coverage from analysts, press and commentators alike. If they are keeping on running, then all may still be well. If not, this may be the first inkling of trouble ahead, or at least a shift in the market mood.

Cryptic message

Both the Archegos hedge fund and Greensill Capital went down in March, despite the bullish market backdrop and expectations that the global economy is on the mend (see Shares, 29 March 2021). That still feels odd. Markets have so far done a good job of shrugging off those failures, however advisers and clients will remember markets kept rising after the first two Bear Stearns property funds collapsed in June 2008, but it did not take long for deeper problems to appear – so everyone must remain vigilant, especially as there are some signs that some of the hottest areas are starting to cool.

This can, for example, be seen in the fortunes of both Bitcoin and Special Purpose Acquisition Companies (SPACs), a phenomenon that has gripped the US market in particular. The Next Gen Defiance SPAC Derived Exchange-Traded Fund (ETF), which tracks a basket of over 200 SPACs, is down by more than a third from its high. This is perhaps less of a surprise when you consider the data from SPACinsider.com, which shows how 308 SPACs are looking for a target even though 263 have already floated. In the end, supply may be outstripping demand.

Setbacks in Bitcoin are nothing new and cryptocurrency supporters will be unperturbed, but the way the performance of Initial Public Offerings (IPOs) is tailing off around the world is worthy of note. Perhaps the quality of deals is going down as the prices are going up, or, again, supply is starting to catch up with demand.

Electric shock

Advisers and clients are unlikely to have the time for, or interest in, the intricacies of stock-specific issues, but there can surely be no better proxy for the current bull market than Tesla. Yet even Elon Musk’s charge is, well, losing a bit of its power to impress and that is weighing on another momentum favourite, Cathie Wood’s ARK Innovation ETF, a $22 billion actively-managed tracker which aims to deliver the performance of 58 tech and growth stocks.

Even that classic gauge of both market sentiment and economic activity small-cap stocks are pausing for breath, although America’s Russell 2000 is yet to roll over.

All of this could be healthy. Again, nothing goes up in a straight line and some of these assets and securities were looking bubbly, at least in the eyes of some. A cooling-off may be no bad thing.

Equally, it could be just a sign that markets are moving on. Frontier and emerging equity markets still look to be showing upward momentum, a trend that would fit with the narrative of a global economic recovery and bullish investor sentiment – few areas are more peripheral than frontier arenas such as Vietnam, Morocco, Kenya and Romania.

As such, we could just be seeing the next leg of the switch from defensives and growth to cyclicals and value. And if the upturn does prove inflationary, then there is a further trend to watch, one to which this column will return. This final chart shows the relative performance of commodities, as benchmarked by the Bloomberg index, against the FTSE All-World Equities index. Maybe real assets are on the verge of ending a decade’s worth of underperformance relative to paper assets, or at least paper claims on them?

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

10/05/2021

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Equities slide on rising Covid-19 infections

Please see below for Brewin Dolphin’s latest markets in a minute article, received by us yesterday evening 27/04/2021:

Most major stock markets declined last week on fears that rising Covid-19 infections could hinder economic recovery.

With Europe firmly in the grip of the so-called ‘third wave’, the pan-European STOXX 600 ended the week down 0.8%, while Germany’s Dax fell 1.2% and France’s CAC 40 declined 0.5%. The UK’s FTSE 100 slid 1.2%, with positive economic data failing to lift investors’ spirits.

Rising infections also weighed on Japan’s Nikkei, which dropped 2.2% after the country reported nationwide daily infections of more than 5,000 for the first time in three months. This led to another state of emergency being declared in several prefectures.

US stock markets posted small declines last week after President Joe Biden announced proposals to nearly double taxes on capital gains for those earning more than $1m a year. In contrast, Chinese stock markets posted solid gains following strong inflows from Hong Kong via the Stock Connect trading programme.

Last week’s markets performance*

  • FTSE 100: -1.2%
  • S&P 500: -0.1%
  • Dow: -0.5%
  • Nasdaq: -0.3%
  • Dax: -1.2%
  • Hang Seng: +0.4%
  • Shanghai Composite: +1.4%
  • Nikkei: -2.2%

* Data from close on Friday 16 April to close of business on Friday 23 April.

European stocks gain on travel plans

UK and European stocks rose on Monday after European Commission president Ursula von der Leyen told the New York Times that inoculated Americans will be able to visit the EU in the summer. The STOXX 600 added 0.3% and the FTSE rose 0.4%, with shares in easyJet, Ryanair and TUI all posting strong gains.

In the US, the Dow slipped 0.2% whereas the S&P 500 and the Nasdaq rose 0.2% and 0.9%, respectively. Tesla started a busy week of corporate earnings statements, reporting a 74% surge in quarterly revenues. Apple, Microsoft, Amazon, Alphabet, Boeing and Ford are all due to release first quarter results this week.

HSBC and BP were in focus at the start of trading on Tuesday, with the former posting a 79% rise in first quarter pre-tax profit, and the latter receiving an earnings bump from higher oil prices and a surge in revenue from natural gas trading. The FTSE 100 opened flat ahead of the US Federal Reserve’s two-day policy meeting.

UK economy shows signs of rebound

Last week saw the release of several pieces of economic data that suggest the UK economy is starting to rebound from the Covid-19 crisis. Friday’s IHS Markit/CIPS flash composite PMI showed a strong revival in private sector output following the downturn seen at the start of 2021. The index rose to 60.0 in April from 56.4 in March – the strongest overall rise in private sector output since November 2013.

For the first time since the pandemic began, service activity growth outperformed manufacturing production growth. The service sub-index rose from 56.3 to 60.1, marking the fastest pace of expansion for more than sixand-a-half years. The manufacturing sub-index increased from 58.9 to 60.7, the highest since July 1994.

Separate data from the Office for National Statistics (ONS) showed UK retail sales volumes continued to recover in March, increasing by 5.4% from the previous month. This reflected the easing of Covid-19 restrictions on consumer spending. Sales were 1.6% higher than in February 2020 – the month before the pandemic struck.

UK retail sales surge 5.4% in March

Non-food stores provided the largest positive contribution to the monthly growth, with increases of 17.5% and 13.4% in clothing stores and other non-food stores, respectively. Fuel retailers reported monthly growth of 11.1%.

However, the ONS said retail sales for the quarter were subdued overall. In the three months to March, sales fell by 5.8% when compared with the previous three months because of tighter lockdown restrictions.

US economy moving to post-pandemic state

Last week’s flurry of US corporate earnings reports suggest the economy is starting to transition to life after the pandemic. Most notably, Netflix announced it had added just under four million subscribers in the first quarter – missing its forecast of six million. The company said it expected one million paid net additions for the second quarter – versus ten million in the second quarter of 2020, when it benefitted from a surge in demand at the beginning of the crisis.

Elsewhere, figures showed US weekly jobless claims fell to their lowest level since the onset of the pandemic, declining by 39,000 to 547,000 in the week ending 17 April. This was far better than the 617,000 figure. forecast by analysts.

US existing home sales declined by 3.7% between February and March to a seven-month low, largely because of the acute shortage of houses on the market. Compared with a year ago, when home sales first started to fall when the pandemic hit, sales were 12.3% higher. Limited supply and strong demand pushed the median existing home sales price by a record-breaking annual pace of 17.2% to an historic high of $329,100, the National Association of Realtors said.

Eurozone manufacturing enjoys record boom

Over in the eurozone, business activity in April experienced its fastest rate of increase since July 2020, thanks to record expansion in manufacturing output and a return to growth in the service sector. The composite PMI rose from 53.2 in March to 53.7 in April, according to IHS Markit’s preliminary ‘flash’ reading, which is based on around 85% of final responses to the survey.

Manufacturing output grew for a tenth straight month, expanding at a rate unsurpassed in more than two decades of survey history. The service sector continued to lag because of Covid-19 restrictions in many member states, but still reported the first expansion of activity since August 2020, rising from 49.6 in March to 50.3 in April.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

28/04/2021

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Small caps can tell us a lot about the market mood

Please see below for one of AJ Bell’s latest Investment Insight articles, received by us yesterday 28/03/2021:

Small cap stocks are perceived to be riskier than their large cap counterparts and with good reason. As such, they can be used to judge wider market risk appetite – if small caps are rolling higher, we are likely to be in a bull market. If they are falling, we could be shifting to a bear market.

In general, small caps tend to be younger firms that are still developing. They are potentially more dependent upon certain key products or services, a narrower range of clients and even key executives.

Their finances might not be as robust as large caps and they are more exposed to an economic downturn, especially as they are less likely to have a global presence and be more reliant on domestic markets.

The UK’s FTSE Small Cap index currently trades at record highs, while the FTSE AIM All-Share stands near 20-year peaks. The latter is still well below its technology-crazed highs of 1999-2000. Equally, they are more geared into any local economic upturn.

America’s Russell 2000 index, the main small cap benchmark in the US, is up 16% this year and by 116% over the past 12 months. That beats the Dow Jones Industrials, S&P 500 and NASDAQ Composite hands down on both counts.

In fact, the Russell 2000 now trades near its all-time highs, having gone bananas since last March’s low. Such a strong performance suggests that investors are in ‘risk-on’ mode and pricing in a strong economic recovery for good measure.

Rising Prices

One data point which does not sit so easily with the US small cap surge is the slight pullback in America’s monthly NFIB smaller businesses sentiment survey, which still stands 12 percentage points below its peak of summer 2018.

This indicator must be watched in case it does not pick up speed as America’s vaccination programme continues and lockdowns are eased. Further weakness could suggest the recovery might not be everything markets currently expect.

Equally, inflation-watchers will be intrigued by the NFIB’s sub-indices on prices. In particular, the balance between firms that are reporting higher rather than lower prices for their goods and services, and especially the shift in mix towards smaller companies that are planning price rises rather than price cuts.

If both trends continue, then bond markets could just be right in fearing that an inflationary boom is upon us.

Interest rates on the move

The number of interest rate rises continues to gather pace on a global basis. Last month there had already been five hikes this year in borrowing costs, in Zambia, Venezuela, Mozambique, Tajikistan and Armenia. There have now been six more – Kyrgyzstan, Georgia, Ukraine, Brazil, Russia and Turkey.

The 11 rate increases we’ve seen year to date is already two more than in the whole of 2020.

In contrast, the US Federal Reserve is content to sit on its hands despite what is happening elsewhere. Chair Jerome Powell continues to reaffirm the American central bank’s commitment to running its quantitative easing scheme at $120 billion a month, while any plans to increase interest rates from their record lows seem to be on hold until 2024.

Powell does not seem concerned about inflation and is seemingly willing to risk its resurgence to ensure that the economy gets back on track in the wake of the pandemic.

Yet financial markets are still taking the view that a strong upturn is coming, because US government bond prices are currently going down, and yields are going up, regardless of what the Fed says. That is a huge change from the last decade or so, when bond and stock markets have been happy to slavishly take their lead from central bank policy announcements.

Please continue to utilise these blogs and expert insights to keep your own holistic view of the market up to date.

Keep safe and well.

Paul Green DipFA

29/03/2021

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FTSE primed to play catch-up after lagging US stocks

Please see below for the latest market update from AJ Bell: 

The pound losing its recent strength and oil stocks responding to a higher commodity price could boost the index

Investors in UK stocks have been looking jealously (or frustratingly) at the performance of the US markets and wondering why the FTSE 100 has stubbornly refused to rebound as fast.

Year to date, the S&P 500 is up nearly 5% and the Nasdaq is up 25% whereas the FTSE 100 is down nearly 19%, all on a total return basis.

The answer is simple – the UK stock market is very under-represented by tech stocks which is the sector that has driven US markets this year.

The UK is also heavily weighted towards banks and energy stocks, two of the worst performing sectors in 2020.

The former has been depressed by a drop in interest rates, rising concerns over potential bad debts as consumers and companies struggle as a result of the pandemic, and the suspension of dividends.

The energy sector has been hit by a big decline in the oil price and a reduction in dividends making it less appealing to income investors.

Yet are we about to see a reversal of fortunes?

Recent strength in the pound versus the US dollar will have worked against the multitude of companies on the FTSE 100 which earn in the latter currency, but whose share price is quoted in the former. Those dollar earnings will be worth less when translated into sterling.

Approximately three quarters of the FTSE 100’s earnings come from outside the UK, so foreign exchange rates really matter to the performance of the index.

Bank of America this month turned bullish on UK equities, partly because it expects the pound to weaken again on the back of rising no-deal Brexit risks. If sterling weakens then dollar revenues, once converted back into sterling, are worth more.

The bank also believes the energy sector should catch up with recent strength in the oil price, thereby giving another support to the FTSE 100 with oil producers Royal Dutch Shell (RDSB) and BP (BP.) being major constituents of the index.

Such predictions would suggest investors are right to remain hopeful for better returns from the FTSE. However, performance is still dependent on economic activity picking up around the world and unfortunately there are some mixed signals.

Stock markets last week took a tumble after the US central bank expressed concern that the pandemic could greatly impact the US economy in the medium term.

The latest Eurozone PMIs disappointed while the US and China’s recent figures have been more upbeat. These are various indices which show confidence levels from purchasing managers and which are a good economic bellwether.

Against this backdrop, the latest Bank of America survey of fund managers shows that institutional investors remain bullish about markets despite a difficult backdrop.

It’s an ever-moving feast and investors would be best served by not fiddling with their portfolios in response to every bit of economic data that comes out. Stay diversified and accept that there may well be some parts of your portfolio lagging others – it’s just the nature of investing.

A brief but concise summary like this is an efficient way of keeping your views of the markets up to date.

If you read the previous blog you can see Jupiter’s Fund Manager, UK All Cap, James Bowmaker’s views on the FTSE too.

Take care and keep well.

Paul Green

28/08/2020