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The Week In Markets – 6th January – 12th January 2024

This year’s political merry-go-round has already begun in France as we saw ex-Prime Minister Elisabeth Borne resign after meeting with President Macron. She has been succeeded by 34-year-old educational minister, Gabriel Attal. Macron was instrumental in the move, aiming to sway voters five months before the country’s parliament election.

Mr Attal was a firm favourite for the role as he’s been described as a “baby Macron” with comparisons made in terms of ambition and strong media presence. He has stood firm on tough decisions during his time as educational minister and Macron certainly trusts him to reunite his party that has become fractured after unpopular pension changes and more recently, strict immigration laws.

In the UK, the pinch of higher interest rates continues to hurt households as 39% more households in December 23 were unable to pay their energy bills. Energy bills initially jumped in February 2022 when Russia invaded Ukraine, and consumers became constrained by 14 consecutive interest rate hikes taking interest rates to 5.25%. Over the 2022 winter period into 2023 spring the UK government subsidised energy bills, however this has since been scrapped taking its toll on more households. We’ve previously written on the falls seen in oil and gas prices, but this has not yet fed through to regulated household energy tariffs. More pleasing for the UK was the release of GDP data on Friday morning which showed the UK economy grew 0.3% on a monthly basis, higher than anticipated.

We’ve seen markets accelerate through the last couple of months in 2023 and portfolios have enjoyed the “Santa Rally”, but this year has so far been more subdued. US inflation data, released on Thursday had potential to re-ignite asset markets. However, there was a mixed reaction in markets as headline inflation came in at 3.4% (year-on-year), a rise from the November figure of 3.1% and market expectations of 3.2%. Core inflation fell to 3.9% which wasn’t quite the drop expected as markets forecasted 3.8% but was a slight drop from the previous figure of 4%. Shelter (rents) continues to be the key driving force behind the high inflation data. However, there is still the very real prospect for rental inflation to soften over the coming months, which will help bring inflation closer to target, and would likely be well received by markets.

Weekly jobless claims, also out on Thursday, came in lower than market expectations at 202,000. March is the month investors have placed their bets for central banks to begin rate cuts, however the data points are proving there is no sign of weakening in the labour market at the start of this year.

In the UK we narrowly avoided weeklong tube strikes this week however this has not been the case in Germany. Europe ‘s largest economy is battling travel disruption on many fronts as not only did train drivers call a three-day nationwide strike, but farmers have lined hundreds of tractors outside Berlin’s Brandenburg Gate in a bid to pressurise the government into scraping plans to cut farmer subsidies. Strikes are one of a growing list of problems for Chancellor Olaf Scholz’s government that is already facing a declining economy and the headwind of high interest rates.

While much of the developed world continues to tackle elevated inflation, China is continuing to struggle with persistent deflationary pressures. Data released this week showed prices fell (deflation) by -0.3% over the year. The producer price index (PPI) which measures factory gate prices dropped by -2.7%, a 15th consecutive decline, highlighting that downward pressures on prices are unlikely to dissipate in the near term.

A bright spot this week has been the Japanese stock market. Tokyo core CPI data showed inflation at 2.1%, falling from the previous month and highlighting inflation is well under control in Japan. This coupled with low interest rates and low equity valuations helped spur the Japanese equity market higher. The Nikkei 225 (Japan index) is trading at levels not seen since February 1990 and has already rallied 7% in January alone.

Markets continue to wrestle with views on inflation and interest rates. After a couple of months of very soft data, Thursday’s US inflation print has made investors question whether falling inflation is still such a sure bet. The trend certainly appears to be lower for inflation, but whether we will see six interest rate cuts in the US this year remains to be seen. As always we will be active in our exposure and stay diversified in our approach.

Nathan Amaning, Investment Analyst.

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

2024 Outlook

The first Investment Strategy Quarterly of the year discusses 10 themes for 2024, plus a look at bonds, energy security, and market performance in a presidential election year. Read all this and more in Investment Strategy Quarterly: 2024 Outlook.

Foundations for the future

In the last Monthly Market Commentary of the year, Raymond James’ European Strategist, Jeremy Batstone-Carr, looks back over November and discusses a shift in investor sentiment, contrasting economic performances, fiscal policy decisions in the UK and Europe, and more.

Sailing on strange seas

Our latest Investment Strategy Quarterly looks at various geopolitical and macroeconomic themes, including consumer debt and employment, pension planning, and next year’s US election. Read all this and more in Investment Strategy Quarterly: Sailing on strange seas.

The Week in Markets – 30th September – 6th October 2023

We have now entered the tenth month of the year, October and it’s certainly now tradition to educate on history of the month. The Anglo-Saxon’s name for October was Winterfylleth, meaning winter and full moon. It’s certainly beginning to feel like winter after record high temperatures just three months ago.

The beginning of the week saw members of the US Fed come out and speak on the future of rates as Fed Governor, Michelle Bowman, confirmed she would be in favour of future rate hikes if “progress of inflation had stalled”. The main reason behind the pause in US rates during the September meeting, was for the Fed to assess the impact of the rate cycle. Investors now believe the door is still open for a further rate hike before the end of the year and the market narrative “higher for longer” has dominated markets.

US jobless claims data was released on Thursday afternoon, coming in at 207k, just under forecasted 210k. This points towards still-tight labour market conditions which will not be welcome news for the Fed. News has fed through to US treasury bond yields as we have seen huge daily moves this week. On Thursday we saw the US 10YR treasury set a 16 year high at 4.88%.

US Non-Farm Payroll (NFP) was released this Friday afternoon with 336,000 jobs created, smashing market expectations of a 170k increase, further indicating the strength of the US labour market. This is the largest monthly increase since February 2023.

German-based company, Birkenstock, the luxury sandals brand is planning its IPO next week on the New York Stock Exchange. The sandals brand has become extremely popular over the past couple of years in line with the comeback of the Crocs brand. Birkenstock has the backing of heavyweights as the Louis Vuitton private equity firm, L Catterton, will own approx. 83% of the brand after the offering. This is another example of companies choosing not to list in their native country and rather make the switch to the US!

UK Prime Minister, Rishi Sunak, this week was accused of the most “damaging U-turn in the history of UK infrastructure” as he announced the scrapping of the northern leg of the high-speed train (HS2) project. The train was planned to run from Birmingham to Manchester, cutting travel time to approx. an hour and there was hope for it to become a vital connection between the South and the North. The decision was announced with several other new policies such as the scrapping of A-level qualifications to create a new “Advanced British Standard” and a tax-free bonus for new teachers up to £30,000. Certainly, bold decisions to make before the election in 2024.

A new month certainly does not mean any changes to our investment philosophy. The message of diversification is as key as ever with the moves we have seen in the bond markets. This also reiterates the importance of long- term investing as opportunities are created by short term moves.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The centre holds

In this month’s Market Commentary, Raymond James’ European Strategist, Jeremy Batstone-Carr, discusses the global financial markets, takes a look at the UK and US economies, plus he examines recent challenges in China.

The Week In Markets – 12th August – 18th August 2023

It has been a tricky week in markets, with equities and bonds coming under pressure in developed markets, while data from China continues to indicate that the world’s second largest economy is weakening.

Last week’s confirmation of deflation in China was backed up this week by weaker than expected industrial production. There was also the surprise development that China will no longer be reporting on youth unemployment while they “optimise labour force survey statistics.” The last figure from June showed youth unemployment was 21.3%, and one questions whether China would have suspended youth unemployment data if the reading was a little more positive! In response to the continued weakening data there was surprise policy rate cuts for the second time in three months to try and stimulate the economy.

There was mixed data from the UK this week, with wage growth data coming in at the highest level since comparable records began in 2001. The figure of 8.2% (including bonuses) for the three months between April and June will make for uncomfortable reading for the Bank of England (BoE) and is likely to lead to further interest rate rises. Despite the acceleration in wage growth, unemployment nudged up to 4.2%. Wage data was followed by inflation data, with headline inflation continuing to fall, coming in at 6.8%. While it is pleasing that inflation continues to trend lower, core inflation (excludes food and energy) stayed at 6.9%, while services inflation increased to 7.4%. The impact of this was for bond markets to change expectations once again for peak UK interest rates, which have now moved out to 6%. 

On Wednesday we saw the yield on the US 10-year Treasury bond hit a 15-year high on the back of stronger than expected industrial production data and the release of the latest US Fed meeting minutes. The US economy continues to perform ahead of expectations which has led to a more consensual view that a US recession is less likely. This has led to inflation expectations over the longer-term increasing, pushing yields higher. UK government bonds also sold off this week, with the 10-year government bond yield breaching 4.7%, the highest level this year. Like the US, the UK economy is growing faster than economists had expected; the higher economic growth is expected to lead to more sticky inflation.

Much like 2022, higher bond yields have been a headwind for equities recently. The tech-heavy Nasdaq index, which had a very strong H1 2023, closed at a six-week low on Wednesday. There was some excitement in the IPO market, with Vietnamese electric car maker Vinfast listing this week. The share price more than doubled on open and at one point during its first trading day the share price had risen from $10 to $37! This valued the loss-making EV carmaker at more than Ford and BMW.

This was a tough week for most asset classes, continuing the weakness in August, after a strong July. The day-to-day noise can be uncomfortable and focusing on it too much can encourage short-term decision making, which we believe is often not in the best interest of returns. The bigger picture continues to point to economies proving resilient to higher interest rates, while inflation, in general has been trending lower from recent peaks over the last 12 months. This is accompanied by some of the highest yields available on bonds in 15 years and below average valuations for much of the equity market, all encouraging signs for future returns.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Great Expectations

July has proved a strong month for investors in the financial markets, particularly across the stock markets of Western developed economies. Returns were generated against a backdrop of economic resilience, especially in the United States where, despite the Federal Reserve having raised interest rates in excess of 5.00%-points in little over a year, growth has persisted and even exceeded expectations.

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