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Brewin Dolphin Markets in a Minute: Stock markets ease as inflation fears return

Please see below for Brewin Dolphin’s latest Markets in a Minute Article, received by us yesterday evening 14/09/2021:

US and European stocks fell last week as the prospect of higher inflation and slower economic growth weighed on investor sentiment.

The S&P 500 and the Dow ended their four-day trading week down 1.7% and 2.2%, respectively, amid a higher than-expected rise in producer prices and concerns about the Delta variant’s impact on the economic rebound.

The pan-European STOXX 600 eased 1.2% as the European Central Bank (ECB) said it would trim its emergency bond purchases. The FTSE 100 also fell 1.5% on concerns the Bank of England could start increasing short-term interest rates.

In contrast, Japan’s Nikkei 225 extended the previous week’s gains, adding 4.3% amid ongoing optimism that the new prime minister will bring further fiscal stimulus. China’s Shanghai Composite rallied 3.4% after newspapers reported ‘candid’ talks between the country’s leader Xi Jinping and US President Joe Biden.

S&P 500 ends five-day losing streak

The S&P 500 added 0.2% on Monday, ending its five-day losing streak, as rising oil prices boosted energy stocks. Airlines and cruise line operators also performed strongly, after the seven-day US Covid-19 case average fell to 144,300 from 167,600 at the start of the month.

UK and European stocks also edged higher, after a top European Central Bank official said recent gains in inflation did not yet pose a risk, and that the extremely low level of inflation seen in 2020 needed to be taken into account.

The FTSE 100 opened Tuesday’s trading session down 0.3%, after the Office for National Statistics reported that while UK company payrolls have returned to pre-pandemic levels, the recovery is uneven and labour shortages are likely to persist for the rest of the year.

US producer inflation accelerates

Last week saw the release of the latest US producer price index, which is a measure of inflation based on input costs to producers. The index rose by 0.7% in August from the previous month, which was a slowdown from July’s 1.0% increase but above estimates for a 0.6% rise.

The index rose by 8.3% on an annual basis, which was the biggest yearly increase since records began over a decade ago. This followed a 7.8% annual increase in July.

The data, which comes amid supply chain issues, a shortage of goods, and heightened demand related to the pandemic, suggests inflationary pressures are persisting despite the Federal Reserve’s insistence they will prove temporary and ease through the year.

Firms are also facing cost pressures from the tight labour market. The closely watched US Jobs Openings and Labor Turnover Survey (JOLTS), released last Wednesday, showed there were a record 10.9 million positions waiting to be filled in July, up from 10.2 million in June. It marked the seventh consecutive month of increased job openings, fuelled by factors such as enhanced unemployment benefits, school closures and virus fears.

ECB to trim bond purchases

Over in Europe, the ECB said it would move to a ‘moderately lower pace’ of pandemic emergency bond purchases following a rebound in eurozone economic growth and inflation. ECB president Christine Lagarde sought to reassure investors by stating that the shift to a slower pace of purchases was not tapering. This contrasts with the US Federal Reserve and the Bank of England, which have signalled they plan to start tapering asset purchases this year.

In comments reported by the Financial Times, Lagarde said the economic rebound was ‘increasingly advanced’, but added: “There remains some way to go before the damage done to the economy by the pandemic is undone.” She pointed out that two million more people are out of work than before the pandemic, and many more are still on furlough schemes.

Lagarde added that a fourth wave of infections could still derail the recovery, while supply chain bottlenecks could last longer and feed through into stronger-than-expected wage increases.

BoE split over rate increase

BoE governor Andrew Bailey gave a speech last week in which he revealed the central bank’s policymakers were evenly split between those who thought the minimum conditions for considering an interest rate hike had been met, and those who thought the recovery wasn’t strong enough. According to Reuters, Bailey said he was among those who thought the minimum conditions had been reached, but that they weren’t sufficient to justify a rate hike.

The comments have led to speculation that the next vote could skew towards raising the base interest rate, which currently stands at 0.1%.

Bailey also said there were signs that the UK’s economic bounce back from the pandemic was showing some signs of a slowdown. Indeed, data published by the Office for National Statistics on Friday showed monthly gross domestic product (GDP) grew by 0.1% in July – lower than the expected 0.5% rise and the 1.0% growth seen in June. Output in consumer-facing services fell for the first time since January, driven by a 2.5% decline in retail sales. Output from the construction industry also dropped amid a shortage of building materials and higher prices.

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

14/09/2021

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Brewin Dolphin Markets in a Minute: Markets mixed as US GDP growth disappoints

Please see below for Brewin Dolphin’s latest ‘Markets in a Minute’ article, received by us yesterday evening 03/08/2021:

Global equities were mixed last week as weaker-thanexpected US economic data offset strong corporate earnings reports.

In the US, the S&P 500 and the Nasdaq slipped 0.4% and 1.1%, respectively, after gross domestic product (GDP) growth and durable goods orders missed expectations. Amazon’s warning of slower growth in the months ahead weighed on the consumer discretionary sector, whereas utilities and real estate stocks outperformed.

The pan-European STOXX 600 ended the week flat amid ongoing concerns about the spread of Covid-19. The UK’s FTSE 100 was also little changed after a spike in the number of people told to self-isolate continued to disrupt production.

Over in Asia, Japan’s Nikkei 225 lost 1.0% as new Covid-19 cases reached record levels, resulting in Tokyo’s state of emergency being extended until the end of August. China’s Shanghai Composite slumped 4.3% following the country’s regulatory crackdown on the technology and education industries.

Delta woes weigh on markets

US stocks closed slightly lower on Monday as concerns about the Delta variant were compounded by softer-than expected manufacturing growth. The Institute for Supply Management’s index of national factory activity fell from 60.6 in June to 59.5 in July, the lowest reading since January and the second consecutive month of slowing growth.

Asian markets followed Wall Street lower on Tuesday, with the Nikkei 225 and Hang Seng tumbling 0.5% and 0.4%, respectively, as fears about the spread of coronavirus overshadowed strong US corporate earnings.

In contrast, the FTSE 100 and the STOXX 600 added 0.7% and 0.6%, respectively, on Monday, following news that British engineering firm Meggitt has agreed a £6.3bn takeover by US company Parker-Hannifin. Shares in Meggitt surged 56.7% from Friday’s close.

Market gains continued into Tuesday, with the FTSE 100 and the STOXX 600 up 0.4% and 0.3%, respectively, at the start of trading.

US economic data misses estimates

Last week’s headlines were dominated by the latest GDP figures from the US. According to preliminary data from the Commerce Department, the US economy expanded by an annualised rate of 6.5% in the second quarter. This was better than the 6.3% increase seen in the first quarter but was significantly below forecasts of 8.5% growth.

Personal consumption was the biggest driver of growth, as the stimulus cheques issued between mid-March and April fuelled an 11.8% year-on-year increase in household spending. This was partially offset by lagging property investments and inventory drawdowns.

Separate data from the US Census Bureau showed orders for cars, appliances and other durable goods in June were also weaker than expected. Orders rose by 0.8% from the previous month versus estimates of 2.2% growth, although May’s reading was revised up to 3.2% from 2.3%. It came amid continued shortages of parts and labour as well as higher material costs.

Meanwhile, the Labor Department reported that 400,000 people filed initial claims for unemployment benefits for the week ending 24 July, above the Dow Jones estimate of 380,000 and nearly double the pre-pandemic norm.

More positively, US consumer confidence was little changed in July, hovering at a 17-month high of 129.1. Economists polled by Reuters had forecast a decline to 123.9.

Inflation picks up in Europe

Over in the eurozone, inflation accelerated to 2.2% in July from 1.9% in June, according to figures from Eurostat. This was the highest rate since October 2018 and above the 2.0% reading forecast by economists. Higher inflation came amid faster-than-expected monthly GDP growth of 2.0% in the April to June period. Compared with the same period a year ago, GDP surged by 13.7%. The eurozone economy is still around 3% smaller than at the end of 2019, but the expansion marked a strong rebound from the 0.3% contraction seen in the first quarter of 2021.

Germany missed expectations with a quarterly expansion of 1.5%, as supply constraints left manufacturers short of materials such as semiconductors.

Half a million come off furlough

Here in the UK, more than half a million people came off furlough in June. The gradual reopening of the hospitality sector drove more than half the total fall in jobs supported by wage subsidies, according to data from HM Revenue & Customs.

Shortages of labour and materials and problems recruiting staff meant manufacturing output and order book growth slowed to its weakest level in four months in July. The manufacturing PMI stood at 60.4, down from 63.9 in June. IHS Markit said July’s performance was still among the best on record but would have been even better had it not been for supply constraints.

Nevertheless, the International Monetary Fund (IMF) upgraded its 2021 growth forecast for the UK to 7%, meaning that together with the US it would have the joint fastest growth of the G7 countries this year. In 2020, the UK’s economic contraction was the deepest in the group.

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

04/08/2021

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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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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