Team No Comments

AJ Bell: Why the dollar must be watched

Please see below for one of AJ Bell’s latest articles received by us yesterday 10/10/2021, looking at the importance of the US Dollar to Global Markets:

The International Monetary Fund’s quarterly Composition of Official Foreign Exchange Reserves report may not be everyone’s idea of bedtime reading but one trend immediately emerges from the latest data. The dollar is still – slowly – falling from favour as the globe’s reserve currency with non-US central banks.

As of June 2021, the dollar represented 59% of global exchange reserves, only a fraction above December’s 25-year low and way down from this century’s 73% peak, reached in 2001.

The creation of the euro may have something to do with this and the rise of the Chinese renminbi may be another, while the US may not have helped its cause with rampant deficit creation and money printing since 2009 (even if it is not on its own in either respect).

This has perhaps tempted some central banks to sell dollars in exchange for something else (gold or other currencies), because the greenback trades well below its early-century highs, as measured by the trade-weighted DXY index. The so-called ‘Dixie’ benchmark currently stands at 94 compare to its 2002 peak (for this century) of 120.2.

This may feed into the ‘demise of the dollar’ narrative that is popular with some economists and investors (even if that neglects the lack of credible alternatives, especially as the Chinese renminbi still represents just 2.6% of global foreign reserves). Yet for all of that, the DXY index trades at its highest mark for 2021 and all market participants, not just currency traders, will know that attention must be paid when the US currency starts to make a move, up or down.

Dollar dynamic

Two asset classes are particular sensitive to the dollar, at least if history is any guide.

The first is commodities. All major raw materials, except cocoa (which is traded in sterling) are priced in dollars. If the US currency rises then that makes them more expensive to buy for those nations whose currency is not the dollar or is not pegged to it and that can dampen demand, or so the theory goes.

While the past is by no means a guarantee for the future, it can be argued that there is an inverse relationship between ‘Dixie’ and the Bloomberg Commodity Price index.

The second is emerging equity markets. They do not appear to welcome a strong dollar either, judging by the inverse relationship which seems to exist between the DXY and MSCI Emerging Markets benchmarks. Dollar strength at the very least coincided with major swoons in EM, or at least periods of marked underperformance relative to developed markets, during 1995-2000 and 2012-15. Retreats in the greenback, by contrast, appeared to give impetus to emerging equity arenas in 2003-07, 2009-12 and 2017-18.

This also makes sense, in that many emerging (and frontier) nations borrow in dollars and weakness in their currency relative to the American one makes it more expensive to pay the coupons and eventually repay the original loans.

Sovereign defaults are thankfully few and far between in 2021 – Suriname and Belize are the only ones that spring to mind – but a rising dollar could put more pressure on potential strugglers whose credit ratings continue to slip, notably Tunisia.

Bouncy buck

But before investors jump on the dollar bandwagon – and to conclusions – it must be worth asking why the US currency is back on a roll, and there are a couple of possibilities here.

The first is risk aversion. It may seem strange to say this as so many equity markets trade at or near all-time highs and so many sub-classes of the bond market offer record-low yields, but it may not be entirely a coincidence that the S&P 500 index has just served up its weakest month since the outbreak of the pandemic.

China’s regulatory crackdown, and signs of an accompanying economic slowdown, may be tempting some investors to seek out a haven asset and the dollar, as the globe’s reserve currency, still fits that bill.

The good news here is that the DXY index is nowhere its all-time high of 160 in the mid-1980s (a situation that was only resolved by 1985’s Plaza Accord, when the G5 unilaterally revalued the deutschmark, as they were then, against the US currency), let alone that 120 peak of 2002, but substantial further dollar gains could be a warning of a market dislocation of some kind.

The second is US monetary policy. Whether you believe it or not, the US Federal Reserve is again discussing the prospect of tapering quantitative easing and raising interest rates in either 2022 or 2023.

Real US interest rates, adjusting for inflation, are as deeply in negative territory now as they have been for 50 years, thanks to record-low interest rates and a 5.2% inflation reading. History suggests a move upward, either due to lower inflation, higher borrowing costs or both, could boost the buck.

Yet the sensitivity of the emerging markets and commodity prices to sharp moves in the dollar suggests the Fed will have to move carefully, as the US central bank will not wish to cause – or be blamed – for the sort of upset which is now known as 2013’s taper tantrum. If monetary policy does become less loose, it seems sensible to expect higher volatility at the very least.

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

11/10/2021

Team No Comments

AJ Bell: The Economic Outlook For Mexico Is Improving

Please see below for one of AJ Bell’s latest articles received by us today 30/09/2021:

The second largest Latin American economy enjoys a big trade surplus with the US.

Mexico is the second largest economy in Latin America and its proximity to the economic juggernaut that is the US has helped support strong growth, with some intervening ups and downs, over the course of the last two decades.

In its interim report on the economic outlook in September 2021 the OECD lifted its growth forecast for Mexico for 2021 from 5% to 6.3% and for 2022 from 3.2% to 3.4%. The government led by Mexican president Andres Manuel Lopez Obrador has also recently announced plans to address tax issues and ease austerity measures in its latest budget to support the economy.

Like many countries Mexico is having to tackle the issue of inflation, with its central bank among several in emerging markets to increase interest rates in recent months to address the problem of rising prices.

In June consultants at Deloitte noted the role exports were playing in Mexico’s economic rebound: ‘The bold recovery of the American economy is bolstering Mexican exports to its northern neighbour. The trade balance saw a surplus of $26.6 billion, or 2.4% of GDP, in 2020, the highest level recorded since data became available in 1993.

‘In March 2021, exports grew 31% year over year to reach $43 billion, the largest expansion in almost a decade. This growth was driven by machinery and metal manufacturing, which expanded 6.6%; electronics and professional equipment also registered expansions of 21.3% and 14.5%, respectively.’

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

30/09/2021

Team No Comments

Brooks MacDonald Daily Investment Bulletin: 22/09/2021

Please see below the Brooks MacDonald Daily Investment Bulletin received by us yesterday, 22/09/2021:

What has happened

European indices posted strong gains yesterday, offsetting much of Monday’s weakness, however US bourses performed less well remaining mostly flat from Monday’s close.

Evergrande

Whilst Evergrande has been at the centre of the financial world this week, Chinese markets have been on holiday. When the equity markets opened for trading this morning shares dipped however the People’s Bank of China injected CNY 90bn of liquidity into the system to steady investor nerves. Reports are suggesting that Evergrande will make the domestic coupon payment due tomorrow however there has been no word yet as to payments on the foreign dollar denominated bond. The interest payments due on bank loans at the start of the week are reportedly yet to be paid so plenty of moving parts to this story. Expectations are pointing to a restructuring orchestrated by Chinese authorities and for the government to allow Evergrande itself to default but to take steps to ensure there isn’t extensive contagion into either Chinese property prices or the property investment sector.

US Infrastructure

The bipartisan $500bn physical infrastructure bill that passed the Senate vote but was held up in the House is now said to be moving to a House vote on Monday. This has less to do with any movement on the broader ‘social infrastructure’ bill but more to do with the proximity of the debt ceiling which is now demanding the focus of Democrats and the White House. Should the Republicans not support the government funding bills the White House will be forced to use budget reconciliation to pass the bills. Given there are procedural limits on the number of reconciliation bills in a Congress year, this risks Democrats having to hastily incorporate the least contentious parts of the $3.5 trillion social infrastructure bill, effectively watering down the size and scope quite considerably.

What does Brooks Macdonald think At 7pm UK time we will receive the latest policy statement from the Federal Reserve followed by a press conference by the Fed Chair. Expectations are for the bank to continue to guide to tapering this year but with the caveat that the economy must remain on track for the central bank to pull the taper trigger. This optionality will be important for market sentiment as if the Fed leaves a delay of taper on the table, even if it’s likely they won’t use it, this will provide a release valve for market concerns over the coming months.

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

23/09/2021

Team No Comments

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

Team No Comments

Blackfinch Group Monday Market Update 30/08/2021

Please see below for Blackfinch Group’s latest Monday Market Update Article, received by us yesterday 31/08/2021 due to the Bank Holiday:

UK COMMENTARY

  • Recruitment company Hays warned of “clear signs” of skills shortages worldwide and said hiring woes were pushing up wages in some hard-hit sectors. It also noted salaries are rising in certain industries as employers seek to attract and retain staff, particularly in the technology and life sciences sectors.
  • British car factories produced the fewest cars for any July since 1956 as they struggled with worker absences and the global shortage of computer chips. UK carmakers made 53,400 vehicles in July, a 37.6% drop when compared with July 2020, according to data from the Society of Motor Manufacturers and Traders (SMMT), the industry’s lobby group.

US COMMENTARY

  • The Chair of the US Federal Reserve (Fed), Jerome Powell, expressed concern about rocketing COVID-19 infections and was cautious on when it would start easing back on its stimulus programme. Powell’s remarks were far less hawkish than some Wall Street analysts had expected, and had a positive instant impact on the financial markets.
  • A new survey from the University of Michigan showed weakening US consumer confidence. Its consumer sentiment index fell from July’s final reading of 81.2 to 70.3 in August, the lowest recorded since December 2011.

EUROPE COMMENTARY

  • Rising prices, and the increase in COVID-19 cases, have knocked consumer confidence in Germany, the eurozone’s largest economy.
  • Figures released by Destatis showed that the German government’s efforts to fight the pandemic saw its budget deficit expand  by €80.9bn in the first six months of 2021. That’s equal to 4.7% of GDP, and the highest reading since 1995.

ASIA COMMENTARY

  • Sentiment was weighed down by weaker-than-expected August Purchasing Managers’ Indices (PMIs) from China. The non-manufacturing PMI fell to 47.5, the first sub-50 reading since February 2020 (a sub-50 reading represents a contraction), which was below the 52.0 expected and down from 53.3 in July. Several factors were behind the slowdown, including further lockdowns to control the spread of the Delta variant, flooding in some regions, and ongoing regulatory changes that have impacted domestic wealth.

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

01/09/2021

Team No Comments

Brooks MacDonald Daily Investment Bulletin 19/08/2021

Please see below for Brooks MacDonald’s Daily Investment Bulletin received by us yesterday 19/08/2021:

What has happened

Markets spent much of Wednesday in a holding pattern ahead of the release of the Fed July meeting minutes. That changed when the minutes came out, as they showed that most officials looked to be favour of starting to taper bond purchases by the end of 2021. As a result, expectations around Fed Chair Powell’s speech next week at Jackson Hole will have gone up a notch or two, as investors await fresh clues on what a potential strategy for tapering might look like.  After the release, US 10-year Treasury yields gave up the day’s gains of around 3bps to finish broadly flat at around 1.26%, but in early trade this morning, have traded lower, below 1.25%. US equities, already small down on the day, moved lower after the report was published, with cyclical and growth sectors falling in broadly equal measure. Overnight Asian markets are following Wall Street’s lead, trading lower this morning. Separately, Wednesday also saw the latest UK Consumer Price Index (CPI) data for July, which came in at 2% year on year, below June’s 2.5%, and below expectations of 2.3%. However, such is the ongoing distortion from base effects and reopening imbalances that neither the ‘transitory’ nor ‘sustained’ inflation camp was able to claim the advantage.

Fed releases its July meeting minutes

The release of Fed meeting minutes doesn’t normally get this much attention, but such is the focus around when the US Fed might look to start tapering its asset purchase programme. Regarding the subject of the taper, the minutes showed that ‘most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year.’ The committee also discussed the method by which to taper asset purchases, with most participants wanting to taper purchases of Treasury securities and Mortgage Backed Securities ‘proportionally in order to end both sets of purchases at the same time.’ Finally, the minutes showed members wanted to emphasise the decisions between tapering and rate hiking would be separate and not dependent on each other, saying that ‘participants indicated that the standards for raising the target range for the federal funds rate were distinct from those associated with tapering asset purchases’. This last point seemed to fit with comments earlier in the day on Wednesday from St Louis Fed President Bullard, who said that he preferred that tapering were finished by Q1 2022, and that Q4 2022 was a ‘logical place’ for interest rate hikes to commence.

US health officials announce plan for widescale COVID vaccine booster shots

US health officials including Dr Fauci, Biden’s Chief Medical Advisor, came out with a joint statement on Wednesday, saying that subject to final FDA (Food and Drug Administration) and CDC (Centers for Disease Control and Prevention) approvals, the US would recommend booster shots to all Americans who had received the Pfizer or Moderna vaccines. The outlined plan on Wednesday suggested an booster dose should follow eight months after the second dose, and that the booster doses could begin during the week of 20th September. The drive to offer booster shots has come because of the rise in delta variant cases, as well as signs that the vaccines’ effectiveness is falling over time. According to CDC Director Walensky on Wednesday, ‘our plan is to protect the American people, to stay ahead of this virus’. As for those who had received the single-dose Johnson & Johnson (J&J) vaccine, health officials suggested they might also need booster shots, but that they were awaiting more data, principally because the J&J vaccine rollout had started much later than the other vaccines.

What does Brooks Macdonald think

Vaccines remain the ultimate game-changer in the fight against the pandemic. With concerns of falling protection over time, booster shots have been expected, but the fact that the US has formalised a widescale plan around this should be positive for markets. The flip-side is that for every Pfizer or Moderna vaccine given as a booster, it is potentially one-less shot available for those in poorer economies who have yet to get their first or second shots. Reiterating this point, the WHO (World Health Organization) on Wednesday objected to the US plan on the grounds that it could exacerbate vaccine-inequality especially for relatively poorer countries globally. If that assessment is right, then it probably lengthens the odds of seeing a synchronised economic recovery globally.

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

20/08/2021

Team No Comments

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

Team No Comments

Brooks MacDonald Daily Investment Bulletin: 28/07/2021

Please see below for Brooks MacDonald’s Daily Investment Bulletin received by us yesterday 28/07/2021:

What has happened

Equities had a weaker session yesterday with defensive equities outperforming technology stocks in particular. Some of this weakness in technology can be attributed to the concerns that China might continue to expand regulation after their foray into educational technology earlier this week.

Chinese technology

Markets have long had a concern around technology regulation in the US where a Democrat White House could try to curb the perceived overreach of big technology. Investors had downgraded this risk due to the economic impact of the pandemic but also a belief that the US would be unlikely to do anything too aggressive in case Chinese companies gained a competitive advantage. With China ‘going first’ on technology regulation this not only increases risks around Chinese securities but removes one of the arguments as to why the US would stay quiet on technology regulation for now. Meanwhile in the US, technology earnings saw some winners and losers with Alphabet rising 3% in the after-market but Microsoft losing an equal amount after it’s cloud-services business saw less growth than expected.

Federal Reserve

Now to the week’s major event, the Federal Reserve’s latest policy statement which is due out at 7pm UK time tonight followed by Fed Chair Powell’s press conference. Policy risk is at its highest at points of transition and the Fed will need to tread a delicate path today. The tapering genie is out of the bottle and will almost certainly be a conversation topic at the meeting however the extent to which Powell majors on this will give an important steer to the market. The rising risks around the delta variant and lower global growth expectations have both contributed to a less positive market backdrop ahead of tonight’s announcement. The statement will also need to address inflation where we have seen another upside beat to price levels in the June CPI numbers but inflation expectations have been falling in the bond market. Some of this reduction in inflation expectations is due to a belief that the Fed will not be afraid of raising rates over the next two years so there is a complex interplay that Powell will need to consider.

What does Brooks Macdonald think

Due to the rising uncertainties around the pandemic and economic growth, we expect Powell to stop short of warning that tapering is imminent. This meeting may well therefore serve as a placeholder until either the Jackson Hole Economic Symposium in August or indeed the meeting in September.

Source: Bloomberg as at 28/07/2021. TR denotes Net Total Return

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

29/07/2021

Team No Comments

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

Team No Comments

Invesco: Emerging markets, China, and the road ahead

Please see below for one of Invesco’s latest investment articles, received by us yesterday 07/07/2021:

A year and a half after the first reported cases of a new SARS-like virus in Wuhan, China, we can now look back with greater clarity on a period of some of the most dramatic volatility since the Asian and global financial crises. Here, we assess what this volatility and the associated policy responses have meant for China and emerging markets and plot a dotted line for the road ahead.

Looking up after locking down

At the time the pandemic hit, the unresolved US-China trade war loomed large and global manufacturing was in the early stages of restructuring to accommodate new trade patterns. Despite this, China stood out from other countries in terms of its fiscal, monetary and industrial policy response.

Beijing’s policy decisions focused on maintaining domestic productivity and employment with as little disruption on the demand side as possible. Manufacturers were given liberal access to capital to maintain operations, and refunds on social security tax and unemployment insurance incentivised businesses to retain staff without layoffs.

At the same time, the central bank lowered its reserve requirements and removed blocks on certain loan extensions and renewals. Investments were made in traditional infrastructure projects like housing and transportation, and spending on the nationwide 5G network was accelerated.

As a result, China moved from having a GDP contraction of almost 6% for the first quarter of 2020 to being the only major world economy to print a positive GDP growth number for the year.

A dolorous relationship?

While China’s growth in 2020 is unmatched, the road ahead is not unwinding, particularly when we consider the impact that US policy decisions could have on the US dollar.

The growth of the US fiscal balance sheet in 2020 (accommodated via easy monetary policy) appears to have stimulated real inflation in the US economy – an outcome which has led to talk of tightening. If asset purchase programmes are tapered or rates increased, the likely outcome is a stronger dollar.

Historically, a strong dollar has been negative for emerging markets, as it increases the burden of US dollar-denominated debt. This is less of a factor today than it was prior to the Asian and global financial crises. However, the fact remains that this could dampen growth prospects in some emerging market economies.

Commodities buck the trend

In spite of the observation noted above, it is likely that a stronger dollar will benefit firms selling commodities into US dollar-denominated markets, as long as there is global demand for these products. This factors into the dramatic outperformance we have seen from steelmakers, iron miners, commodity chemical companies, and even coal producers.

The demand behind this outperformance is not part of the same super-cycle seen after China’s admission to the World Trade Organisation, when investment in capacity and infrastructure facilitated the country’s transition to the so-called ‘world’s factory’.

Even when we account for the fact that some of this capacity has moved to other countries in the context of trade realignment, the overall demand for commodity materials is not in the same league as two decades ago.

Instead of a broad, sustainable growth in demand, we are seeing a short-term build-up of inventories that reflects ‘new normal’ uncertainties about tariffs and pandemic lockdowns. This goes all the way through the product cycle, from raw materials to finished goods.

Although these dynamics are almost certainly near-term and should subside in the medium-term, they do attract speculation that disrupts the market.

The road ahead

What does this disruption mean for emerging markets? In the absence of significant inflows, there is a conservation of capital within the asset class. The sharp and transitory shifts described above get funded by parts of the market that have outperformed — in this case growth companies, in particular those in China. In this sense, China has been a victim of its own success as far as its response to the pandemic is concerned, as some investors look to lock-in potential gains.

That said, in our opinion, these sharp transitions do not signify a change in the long-term view for emerging markets. The types of firms that create and capture value for shareholders remain the same.

Even with an ageing population, China remains a large economy with an outlook for sustained, high-speed growth. The growing middle class offers opportunities for investment in education, real estate services, and world-leading innovative technology platforms that facilitate consumption.

It is worth adding that the size and scale of the domestic market should make it less susceptible to external volatility than other markets in the asset class.

What these transitions offer, then, is the potential to invest in the best long-term opportunities at more attractive valuations than normal market conditions afford. 

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

08/07/2021