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Weekly Notes

Weekly Note

The Week In Markets – 10th September – 16th September

The week has been full of news, however, you’d be forgiven if you had missed it as the most covered topic this week has been the proceedings following Queen Elizabeth’s death. Queues to see the Queen’s coffin have hit five miles in length, causing a pause to new entrants.

There is a feeling of déjà vu as we once again begin the weekly round-up discussing inflation. There have been other events going on this year, including Russia invading Ukraine, but by far the biggest focus for investors has been inflation and it has been the dominant driver of asset prices this year, and this week has been no different.

The release of US inflation data sent markets into a tailspin on Tuesday. The figure of 8.3% (year-on-year) was lower than the previous two months, which may help confirm that inflation has peaked, yet it was still higher than the market expected. More importantly, month-on-month inflation remained sticky, nudging up when it was predicted to decline. Digging into the data, one of the biggest drivers of inflation is now shelter/owners equivalent rent. This represents a large portion of the inflation basket and continues to surprise to the upside with year-on-year increases of 6.3% – the highest since 1986. The market reaction to the news was extreme with the US S&P 500 suffering its worst day since June 2020. Bond yields also spiked (prices dropped) as investors priced in yet more US interest rate rises – now expected to reach 4.3% by April 2023. Volatility, particularly in equities has continued throughout the week, with recent gains earlier in September being fully eroded.

Switching to the UK, but staying with inflation, a reading of 9.9% (year-on-year) was slightly lower than expected but still extremely high. Food price inflation rose for a 13th straight month; however petrol prices fell during August, with an average drop of 14p per litre over the month. With energy prices going up in October inflation is likely to increase from here, although the recently announced energy cap should help to limit the increase. The total bill for the energy support package is estimated to be £150bn. The Bank of England is still expected to continue to raise interest rates at their next meeting, due to take place next week, after being postponed due to the Queen’s passing. Disappointing UK GDP data on Monday and weak UK retail sales on Friday resulted in sterling falling against the USD, plummeting to 37-year lows. There was a bright spot within the UK labour market with the unemployment rate falling to 3.6%, the lowest level since 1974. 

Russia President Putin met with Chinese Leader Xi Jingping on Thursday, their first face-to-face meeting since Russia invaded Ukraine. With tensions with the West elevated, this meeting took on added significance. Interestingly Putin highlighted that China may have concerns with their invasion of Ukraine.

Chinese exporters are warning of hard times to come as softer global demand is forcing them to cut workers, shift to lower quality goods and even rent out factories. Industries such as machinery parts and textiles have been hit the hardest, seeing orders dry up. Chinese exports are more vital to China than ever accounting for 30-40% of GDP growth this year, with other pillars of its economy on shaky ground (real estate). In order to support the sector export tax rebates have been expanded and regulation for the efficiency of port operations and logistics have been put into place.

In edgy market conditions such as these the long-term investor is advised to take a step back and consider the opportunity set. Some of the most uncomfortable times are when the best returns can be made. We at RJB, continue to stay committed to this process.

Andy Triggs, Head of Investments & 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.

Weekly Note

The Week In Markets – 3rd September – 9th September

We at Raymond James Barbican are saddened to hear of the passing of Her Majesty, Queen Elizabeth II. The Queen was the longest ever reigning monarch in Britain and will be deeply missed. King Charles III, aged 73, is now the oldest monarch to take the crown.

It has certainly been a week of change in the UK; Tuesday saw Ms Liz Truss overcome Rishi Sunak and become the UK’s new prime minister. Ms Truss is the UK’s 56th prime minister and its third female leader.  One of her first significant acts as PM was to announce plans to tackle the energy price crisis and by Thursday it was revealed to the UK population that the average household would pay no more than £2,500 annually for its gas and electricity bills. This will be effective from the start of October and the price guarantee will last for two years. The plan is expected to cost tens of millions and will be funded by more government borrowing. Newly appointed Chancellor Kwasi Kwarteng is due to detail the plan and expected costs in his fiscal statement later this month.

News from Frankfurt also filtered out as the European Central Bank raised interest rates by 75bps to a total percentage of 1.25%. This is now a record hike designed to combat inflation that has reached double digits in many European countries. This interest hike follows the similar increase made by the US Fed, and investors now expect this move to add pressure on the Bank of England as policymakers will review the UK’s monetary policy next week. Christine Lagarde, the president of the ECB, followed this move with hawkish commentary stating the central bank was prepared to further hike rates in order to tackle rising inflation and bring it down to its 2% target.

It would not feel like a normal weekly update without mentioning the Nord Stream 1 between Russia and Germany. Last weekend the Nord Stream pipeline was unexpectedly closed for maintenance, and it was announced on Monday that the pipeline would not resume flows. Germany feel that Russia are no longer a reliable supplier and have assured domestic businesses and households that although energy rationing is likely, they have filled 85% of the storage reserves in order to survive the winter period. The Kremlin has since said the resumption of gas supplies is completely dependent on Europe lifting its economic sanctions against Russia, aiming to create discord within Europe.

Uncertainty in Europe’s markets have not stopped car manufacturer Volkswagen from listing a minority stake in Porsche for what could be one of Europe’s biggest IPO’s. With the share sale, the Porsche group would be set to regain direct influence over what used to be a family enterprise before they were forced to sell the sports-car business to VW 13 years ago. VW shares rose 3% by mid-afternoon on Tuesday, with VW hoping to yield funds that would finance ambitious plans in the electric car market and ground-breaking new digital features.

In Shanghai’s major container port of Yangshan, operations were suspended early this week as typhoon Hinnamnor approached the east China coast. This led to excessive winds and rains in China however the greatest damage was done in South Korea as the typhoon battered the southern part of the country. Approximately 12,000 houses and buildings have been destroyed, with flooded roads and landslides.

Rising inflation, Interest rates & energy crisis are just some of the issues challenging investors currently. Despite this we continue to focus on long-term opportunities, while ensuring there is sufficient diversification in portfolios to help protect against some of the known (and unknown) risks highlighted here.

Nathan Amaning | Investment Analyst, Raymond James, Barbican

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.

Weekly Note

The Week In Markets – 27th August – 2nd September

Following this week’s bank holiday Monday, markets have seemingly not taken any time off. On Wednesday, Russia for a second time this year halted gas supplies via Germany’s key supply route (Nord Steam 1) raising the prospect of an incoming recession and energy rationing across Europe.

The Nord Stream 1 pipeline will be out for maintenance until Saturday 3rd September; however, it is being reported that Russia will return flows at 20% of capacity down from the 40% that was returned at the end of June. The German network regulator expects Germany to cope with the three-day stoppage as their storage tanks are currently at 83.65% capacity, not far off their 85% target ahead of the winter season. Russia has already cut supply to Bulgaria, Denmark, the Netherlands and Poland. Further restrictions would exacerbate the energy scarcity that is driving prices across Europe as wholesale prices are up almost 400% since last August. European Union energy ministers are set for an emergency meeting on 9th September to discuss a potential EU-wide energy cap.

Heading across the water to the US, last Friday’s Jackson Hole Symposium was a highly anticipated event and has certainly had a huge effect on the US Equity market this week. Fed Chairman Jerome Powell used only 8 minutes and 28 seconds of his planned 30-minute slot, stating ‘’the Fed are taking forceful and rapid steps to moderate demand, so it better aligns with supply, and to keep inflation expectations anchored. We will keep at it until confident that the job is done’’. With such hawkish commentary, it seems the FED is more than willing to risk a recession & so investor hopes of a central bank pivot were firmly crushed. This commentary fed into US equities this week with the S&P 500 down around 9% from its 16th July high. The Tech-heavy NASDAQ, which is more sensitive to FED policy has dropped nearly 11% over the same period. Mr Powell’s sharp delivery also played on European markets minds with investors now questioning the pace at which European rates will rise.

First Friday of the month sees the release of the US Non-farm Payroll jobs data. The US Economy added 315,00 jobs in August, coming in ahead of consensus, and highlighting the strength of the labour market.  

In the UK, the strikes continue to come thick and fast. Over the last few months, Rail and Tube workers have led strikes with disputes over pay and working conditions. 115,000 Royal mail workers followed suit and walked out on Wednesday 31st August. It has now been reported that thousands of BT and Openreach staff will be striking this autumn as they step up their demands for better pay. Companies are reluctant to hike wages at the high rates that are being demanded as they do not want to further fuel inflation.

China is set for another lockdown as the city of Chengdu recorded 157 new covid infections. China is the last major economy wedded to the zero-Covid policy and 21 million people are now subject to mass testing and lengthy quarantines. Entertainment venues including bars and cinemas are also certain to be shut into the winter period. This will continue to stifle China’s post pandemic economic recovery, with President Xi Jinping, who is set for his third term, continuing to pump government resources to support the business sector.

Although global news around markets continues to be lacklustre, we believe there are opportunities to be found. It is also a reminder that being diversified not only through asset class, but region and investment style is key. We will continue to maintain this thought process and are focused on the long-term strategy that can sometimes be forgotten in the short-term mist.

Nathan Amaning | Investment Analyst, Raymond James, Barbican

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.

Weekly Note

The Week In Markets – 20th August – 26th August

The US Jackson Hole symposium is the markets most anticipated event of the week. Mr Jerome Powell, Fed chairman, is due to make his keynote speech today where he could give an indication of the FOMC’s next move in terms of a further 50 or 70 basis points rate hike. Given there is another US employment report and inflation print before the next Fed Meeting at the end of September, we will also hope to hear about the longer-term outlook for policy.

We are now under 2 weeks before the new Prime Minister is announced, and their first call of action will be to tackle the UK’s rising energy cap. Both candidates (Mr Sunak and Ms Truss) have refused to give any detail into exactly how they would do this until they were ‘in office’. This move has certainly heightened UK household’s concerns. This morning Ofgem announced that the average household bill will hit £3,549 from October – an eye watering rise of 80% on the current price cap and a huge blow for consumers already struggling with soaring inflation. Energy prices have fuelled rampant inflation that has now been forecast to rise in Q1 2023 to 18%.

Diving deeper into the UK market, shares of Micro Focus soared more than 90% at today’s market open after OpenText (Canadian Software Company) agreed a $6Bn deal to purchase the company. Micro Focus is a firm that has grown by acquiring mainframe computer software used by banks, retailers and airlines but OpenText believe they can ‘stabilise Micro Focus business and accelerate its cloud transition’. There has been a continual trend of foreign companies purchasing UK Tech names.

Europe faced some bad news as business activity shrank this month. Germany’s manufacturing industries are leading the decline as PMI fell to 47.6 in July. Any score below 50 indicates falling activity. The French economy also edged into negative territory at 49.8. Supply bottlenecks, consistent inflation and rising interest rates continue to drain demand for companies and their customers.

China have stepped up their efforts in economic stimulus by announcing a further 1 trillion yuan ($146BN) to lessen the impact of repeated covid lockdowns and property market crisis. It is seen that this investment will offset the previous sharp contraction in government revenue and support infrastructure growth. China’s GDP target of 5.5% is almost certainly out of reach with economists forecasting growth slowing to 3.7%.

Given tough times as such, our investment approach and portfolio construction stays consistent. We aim to ensure that there is a diverse blend of assets held in portfolios and our long-term investment time horizon also allows us to potentially look past weak data with a level of optimism for future returns.

 

Nathan Amaning | Investment Analyst, Raymond James, Barbican

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.

Weekly Note

The Week in Markets – 13th August – 19th August

This week has been filled with news across all regions, the most recent news being that this morning Andy Triggs, our Head of Investment, received his first born. A huge congratulations to him and his family.

The UK Inflation rate report (year on year) for July was released on Wednesday at 10.1%, beating the forecast of 9.8% and leaping from 9.4% in June. This is the first time it has hit double digits in over 40 years, mainly fuelled by a 12.7% increase in food prices and contributing to record falling UK consumer confidence over the last 20 years. This data comes in straight off the back of labour market data showing real levels of wages falling rapidly and magnifies the difficulties households are facing, even before the expected sharp energy bills rise in October.

Following this data, we can expect strikes to continue towards the end of the year as London’s transport network grinds to a halt again this weekend. Train workers and now bus workers are continuing to hold strikes in a dispute over pay and working conditions. The strikes are seeping into other job sectors as Postal workers are now arranging a series of strikes, presenting further problems for the Government as they worry big wage increases may further fuel inflation.

Moving into Europe, Germany’s industrial sectors are facing a potential standstill as manufacturers of car parts, chemicals and steel struggle to absorb the energy price increases. Power and gas prices have more than doubled since the Nord Stream 1 pipeline resumed at 30% capacity in July. Electricity prices have now soared past 540 Euros per megawatt hour. Only two years ago it was under 40 Euros.

Factories in China’s southwest have completely shut down after reservoirs used to generate hydropower ran low & power demand for air conditioning surged due to scorching temperatures. Companies in the Sichuan province have been ordered by President Xi Jinping to ration power for up to 5 working days. This adds to the setback of Chinas economic recovery following their strict approach to Covid outbreaks earlier this year. The economy grew just 2.5% over a year in the first half of 2022, which is less than half the annual target of 5.5%. This makes the outlook for a potential third five-year term as leader less promising for President Xi Jinping.

News in the US Markets has been more promising as markets have rallied since the turn of August. The S&P 500 hit its 4200 marker for the first time in over 4 months & the Nasdaq has risen in excess of 20% from its 16th June low and is now back in an industry defined ‘bull market’. These moves were fuelled by comments made by the US Fed indicating they could adjust the pace of quantitative tightening based on market conditions.

The weather this week can often reflect markets, with hot and humid temperatures but with occasional days of heavy rain and thunderstorms. We believe that in these times, diversification of asset classes is key to helping support and insulate portfolios.

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.

Weekly Note

The Week In Markets – 6th August- 12th August

If investors were told twelve months ago that US inflation would be 8.5% in July 2022, very few would have believed it, and even fewer would have believed that this would be seen as good news by the market. Yet that is the world we find ourselves in today. It appears we have been conditioned to high and increasing inflation. Wednesday’s US inflation data came in at only 8.5% – both below consensus and lower than the last print – and was well received by markets, taking the view that inflation may have now peaked.

Digging a little deeper into the inflation data, while year-on-year inflation came in at 8.5%, month-on-month inflation was 0%, against an expectation of 0.2%. Monthly inflation has been running at around 0.5% in 2022 so it was pleasing to see this trend come to an end. Energy prices in the US have been falling recently and this was the largest contributor to the soft monthly data. It was reported this week that US gasoline prices fell below $4 a gallon for the first time since March 2022. All in all, the lower-than-expected inflation data provided a boost to markets, with investors pricing in a more dovish US Fed. The S&P 500 and tech-heavy US Nasdaq index rallied over 2% on Wednesday. With lower interest rate expectations government bond yields fell, while the USD weakened over 1% against Sterling.

UK GDP released on Friday morning came in at -0.1% for the second quarter. Given the Bank of England’s comments last week, there was little surprise of the mild contraction in the UK economy. The expectation is that the UK economy will continue to face headwinds over the next 6-18 months due to inflation and the cost-of-living crisis, largely driven by rising energy bills. UK equities rose marginally on Friday morning, with much of the bad news already anticipated, and therefore priced in to some degree. We have previously written about UK M&A activity, and there was another takeover this week of a UK company by a foreign buyer. A Canadian engineering firm bid for RPS at a premium of 76%. It was pleasing that the stock was held in one of our UK equity funds.

Staying with company news the mighty Netflix has appeared to have met its match this week as Disney announced their monthly subscribers had hit 221 million, overtaking Netflix. This is based on a combination of Disney+, Hulu & ESPN, with Disney planning to continue turning the screw, announcing prices of $7.99 going forward. This is cheaper than the standard Netflix price and it will be interesting to see how this price war plays out.

Chinese inflation has been relatively muted compared to the developed world. This week its latest inflation was reported at 2.7%. Given China is the manufacturing hub for the world, it was interesting to see its producer price index, also reported this week, ease to a 17-month low. The very fluid lockdown situation in China continued this week. Certain areas of the popular tourism hotspot Hainan extended lockdowns on Friday.

The current heatwave that is sweeping the UK and Europe has put further strain on supply chains. Water levels in the Rhine river have reached dangerously low levels. The Rhine acts as a transport link, with cargo boats carrying coal and gas to Europe. If these vessels are unable to operate due to the low water levels, it could further strain energy supplies to Germany at a time when they are desperately needed.  European natural gas prices moved higher towards the end of week as concerns about supply rose.

The markets focus remains on inflation and the responses from central banks. Last Friday the very strong US jobs data led the market to expect a more hawkish US Fed, who would continue to raise rates aggressively to combat inflation and a red-hot labour market. This week the pendulum swung the other way with data leading investors to believe the US Fed may now be less aggressive in their rate hike cycle, as inflation may have already peaked. We try to stay clear of the short-term noise and ensure that we are not overly exposed to either outcome.

 

Andy Triggs, Head of Investments, & 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.

Weekly Note

The Week In Markets – 30th July – 5th August

It has been a busy week for press conferences in the UK. Not only are premier league managers talking in front of the cameras ahead of the start of the new Premier League season tonight, Bank of England (BoE) Governor Andrew Bailey delivered his verdict on the UK economy after the BoE raised interest rates by 0.5%, the biggest rise in 27 years.

The BoE members voted 8-1 in favour of a 0.5% interest rate increase, which has taken the headline rate level to 1.75%, the highest since 2009. Their outlook for the UK economy was gloomy, with predictions that inflation would now reach over 13% later this year and that the economy would shortly enter recession. UK equities, despite the negative outlook for the economy, finished the day higher, while UK government bond yields fell (prices rise) and sterling declined versus most major currencies. The UK housing market will likely be negatively impacted by higher interest rates as the cost of borrowing for homebuyers will increase. This coupled with rising energy costs and already high house prices makes house affordability difficult. We may already be seeing the early signs of a slowdown with reports from Halifax this week showing UK home prices dropped by 0.1% in July compared to June, the first monthly decrease in over a year.

This week saw US House Speaker Nancy Pelosi visit Taiwan, making her the highest ranking American official to visit in 25 years. The visit has led to a rise in geopolitical tensions with China, who embarked on live fire exercises in close proximity to Taiwan. China has also placed certain trade sanctions on Taiwan and sanctions on Nancy Pelosi.

Despite this difficult backdrop equity markets continued to advance this week, albeit at a slower pace than last week. The gains were fuelled by continued belief that central banks will change tack sooner rather than later with their approach to interest rate hikes as weaker economic data forces their hand. We will have to wait and see whether this will happen, although hawkish comments from US Fed member Bullard suggested they haven’t given up on raising interest rates to combat inflation. Speaking on Tuesday, Bullard said the US Fed “are going to be tough” on inflation and that “we can take robust action to get back to 2%”.

Heading into Q2 earnings season there was a lot of concern about how companies would be coping with rising costs, labour shortages and supply issues, but by and large it’s been a better-than-expected earnings season. BP produced stellar results this week, beating profit expectations, allowing them to increase its dividend by 10% and announce a further $3.5bn share buyback plan.

The main economic data was saved until the end of the week with US Non-Farm Payrolls being released. The data showed 528,000 jobs had been added, more than double the expected number. The extremely large increase in employment will give the US Fed confidence that the economy is in a strong position and that they will need to keep on their aggressive interest rate hiking path to tame inflation. In the immediacy we saw government bond yields rise and the US Dollar strengthen as investors re-calibrated their interest rate and inflation expectations. 

Stock markets have staged a mini-recovery over recent weeks following a very tough first six months of the year. We do think markets will continue to be choppy given the current high level of uncertainty in the global economy. There is long-term value appearing in most asset classes, but we are mindful that there is the potential for things to get worse before they get better, and this leads us to continue to be well diversified across our sector, style and geographical positioning. We also continue to be active in our fixed income allocations, looking to take advantage of the extreme volatility we are seeing in this asset class.

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.

Weekly Note

The Week In Markets – 23rd July -29th July

The UK economy played second fiddle this week to football and athletics. The England women’s national football team dispatched Sweden on Tuesday and now face Germany in the final on Sunday evening. On Thursday the Commonwealth Games kicked off in Birmingham. It is the third time the UK has hosted the games, which sees 72 countries take part with over 5,000 athletes competing.

The US stock market has been first out of the blocks this week, posting some big moves towards the end of the week. The tech-heavy Nasdaq index rose over 4% on Wednesday and followed this up with another strong showing on Thursday, rising over 1%. Bond markets have also rallied this week, picking up the baton from last week and carrying on with the trend of falling yields (and therefore rising prices). The drivers of these market moves have been centred around the US Fed and the potential for a shift in their approach to inflation. The US Central Bank met on Wednesday and announced a much anticipated 0.75% increase to interest rates, however, it was their comments that caught the eye and helped support markets. For the first time this year they recognised a “softening” economy, which has been driven be a slew of weak US economic data. The interpretation here is that the US Fed’s tightening actions so far are now feeding into slowing demand and as such inflation may fall in the near term without the need for continuing aggressive interest rate hikes. If concerns about inflation and higher interest rates have been the major headwind for asset prices this year, it makes sense that asset prices may rebound if these concerns begin to subside.

Staying with the US the country fell into a technical recession following the release of Q2 GDP data. Weaker than expected Q2 GDP showed the economy contracted in real terms. Two consecutive quarters of real GDP contraction is the technical definition of a recession. The White House has dismissed that the US is in a recession, with Janet Yellen stating, “when you are creating almost 400,000 jobs a month, that is not a recession”. The market took the news in its stride, with the weak data supporting the view that the US Fed may indeed ease off on interest rate hikes.

There was a false start this week as Russia quickly cut gas supplies to Germany, days after flows had resumed following a period of maintenance. The restrictions kicked in on Wednesday, meaning there is now only 20% of the volume of gas flowing into Germany from Russia compared to the start of the year. This cut in supply was predicted by many European politicians, but Germany is concerned this reduction in gas will mean they are unable to fill their reserves sufficiently ahead of winter. Energy rationing has already begun for both households and businesses but could lead to industries shutting down over the next few months. Germany could certainly be on the tip of a recession.

Eurozone data showed the area had grown by 0.7% in Q2, while inflation hit a new record high of 8.9%. The stronger than expected growth, coupled with elevated inflation will put pressure on the European Central Bank to continue to move interest rates into positive territory over the coming months.

Company earnings on both sides of the pond continued in earnest this week. Natwest produced much better than expected results as the bank benefitted from higher interest rates and announced a special dividend, with the shares rising 7% on Friday morning. Shell also produced strong results, posting record profit as high oil and gas prices boosted revenues. The company announced a $6bn share buyback programme. Positive results from US firms Apple and Amazon were somewhat offset with poor results from Meta (Facebook) who announced their first ever revenue drop driven by poor advertising revenue. 

In these uncertain times we once again continue to focus on diversification and ensuring portfolios are not overly exposed to any particular theme or narrative. The last few weeks have once again highlighted how markets can whipsaw, with leaders and laggards rotating and market narrative shifting. We believe slow and steady is the best way to win the race.

Andy Triggs, Head of Investments & 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.

Weekly Note

The Week In Markets – 16th July – 22nd July

The conservative leadership race continued in earnest this week, whittling down the candidates to the final two, meaning the next Prime Minister will be either Liz Truss or Rishi Sunak. Despite collecting the most votes in each of the rounds, Sunak is seen as the underdog, with Truss now bookies favourite to be installed into 10 Downing St on 5th September. This could all change over the next six weeks as the final two attempt to convince a ballot of 160,000 Tory Party members they deserve to lead the Party.

Elsewhere in the UK inflation data once again surprised to the upside, which has been a constant trend this year. At 9.4%, inflation is now at a 40-year high and will put pressure on the bank of England to raise rates by more than 0.25% at their next meeting, with a 0.5% raise now being pencilled in. As we have written about in recent weeks, the market’s focus appears to have shifted from inflation concerns to growth concerns, and this was once again evident in the bond markets this week. Despite elevated inflation, we’ve seen steep falls in UK government bond yields over the last three days. Indeed, this trend has been witnessed across the developed world. Yields on the UK 10-yr government bond have fallen below 2% for the first time since May 2022, while the US equivalent yield has fallen through 3% this week, currently at 2.81%. While inflation in the short-term is likely to be stubbornly high, there is a greater belief in the market that the actions of central banks will subdue growth, curb demand and ultimately bring down inflation over time.

The past week has felt a little bit like the previous decade, with falling bond yields leading to strong rallies in growth stocks. This has led to the US market, which has a large exposure to these types of equities, having a strong week. More broadly we have seen strength across most equity markets, with the UK large-cap index hitting a three-week high on Wednesday.

Europe has been in the spotlight this week with all eyes on the Nord Stream pipeline which was due to restart after 10 days of maintenance. There have been concerns that Russia would not switch the gas back on to Germany and Europe after the maintenance, however by Friday gas volumes flowing to Germany were back at pre-maintenance levels. It should be noted that this level was still only at 40% capacity, but for now at least, it means there is still gas flowing into western Europe. There were further positive developments by the end of the week with reports that a deal had been agreed between Russia and Ukraine to allow grain exports to leave the currently blockaded Black Sea ports. This would go a long way to help alleviate concerns around a potential food crisis and put downward pressure on grain prices. As we have seen with potential agreements and deals since Russia invaded Ukraine in February, nothing can be guaranteed, and the situation could change quickly.

The European Central Bank met on Thursday and surprised markets by raising rates by 0.5%, which was more than expected. This was the first interest rate rise in Europe since 2011 and symbolically moved rates to zero and out of negative territory for the first time in eight years.

Staying with Europe, the Italian political situation remained in turmoil with Draghi officially stepping back. There are new elections pencilled in for September with the potential for more extreme parties to gain traction given the current cost-of-living and energy crisis in Italy.

While the UK has basked in the sun this week with the mercury rising to 40C, it’s been pleasing to see equities also rising this week. The rally has been broad based, with most sectors and regions participating, although the growth focused areas of the market, such as technology, have been the stand-out performers. In a week where we’ve faced risks surrounding gas supplies to Europe, UK inflation at 9.4% and less than spectacular US corporate earnings it may surprise many to see markets higher. It’s a timely reminder that the market is forward looking and reflects where we are likely to get to, not where we are at today.

Andy Triggs, Head of Investments & 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.

Weekly Note

The Week In Markets – 9th July – 15th July

A busy week with politics dominating the headlines in UK and Europe, while inflation data and company earnings were the focus across the Atlantic.

The race for the Conservative leadership kicked off this week, with initial voting rounds commencing and candidates being whittled down.  There are now only five candidates remaining, with Sunak, Mordaunt and Truss amongst the favourites. We do now know the new Prime Minister will be in place by 5th September.

Political turmoil was not confined to just the UK, with Italian Prime Minister Mario Draghi offering his resignation after losing the support of coalition partner, the Five Star party. The Five Star party do not believe Draghi is doing enough to aid with the cost-of-living crisis. In an interesting twist, Draghi’s resignation was rejected by the Italian President – the current picture is a little unclear but there should be more clarity next week with Draghi due in parliament on Wednesday.

All eyes were firmly focused on US inflation data on Wednesday. As has been the trend this year, the data came in higher than consensus, and reached yet another new 40-year high. The 9.1% inflation reading was above the expected 8.8% and will cause further headaches for the US Fed. The market is now digesting the potential for a 100bps (1%) interest rate hike later in July. The bond market’s reaction was muted compared to recent months, with markets looking through the headline data and focusing on the likely global slowdown which could ease inflationary pressures later in the year. President Biden said that US inflation was “unacceptably high” but stated that it is also “out-of-date” and doesn’t reflect the recent drop in oil and gas prices. 

US earnings season kicked off, and initial results from some of the major US banks highlighted potential risks in the global economy. JP Morgan’s results came in below expectations with the bank boosting its reserves to cover potential future loan losses. Morgan Stanley missed profit estimates for the first time in nine quarters. It wasn’t all doom and gloom however, with Pepsico beating revenue and earnings forecasts – consumers are clearly not cutting back on things like fizzy drinks (Pepsi) even as prices rise!

A trend of 2022 has been the strength of the USD ($) versus a basket of global currencies. The currency is at a 20-year versus global currencies and during the week reached parity with the Euro (€). Sterling (£) continued its slide against the USD briefly falling below 1.18. The strength of the USD is a problem for countries who need to import food and energy (which is priced in USD). It’s part of the reason why the recent falls in oil prices are yet to be reflected at the pumps in the UK. Brent Crude oil prices have fallen 15% over the last month on global economic slowdown concerns. Copper, which is very economically sensitive, continued its slide this week, falling another 1.5% on Friday morning. The metal is now down 23% over the last month and 27% compared to one year ago. Gold has struggled of late and is heading for its 5th weekly decline. The stronger USD has acted as a headwind for the precious metal.

There was a rare moment of sunshine for the UK economy with GDP rising 0.5% in May and returning to growth. This positive data was coupled with stronger than expected manufacturing and construction data.

The summer months are normally characterised by thin trading volumes and low volatility, as investors and workers go on holiday and take time off. However, with the current backdrop of high inflation and geo-political risks, there is little likelihood of a quiet summer. We believe in these volatile times active management and pro-active asset allocation can help support and insulate portfolios.

Andy Triggs, Head of Investments & 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.

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