Weekly Notes – Page 12 – Raymond James, Barbican

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

August 26, 2022August 26, 2022

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.

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

August 19, 2022August 19, 2022

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

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

August 12, 2022August 12, 2022

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

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

August 5, 2022August 5, 2022

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

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

July 29, 2022July 29, 2022

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

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

July 22, 2022July 22, 2022

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 5^th 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

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

July 15, 2022July 15, 2022

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 5^th 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 5^th 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

The Week In Markets – 2nd July – 8th July

July 8, 2022July 8, 2022

There seems only one place to start and that is with UK politics, following the dramatic course of events this week, which led to Boris Johnson stepping down as the Conservative party leader. A string of resigning MPs from Tuesday evening through to Thursday morning effectively made Johnson’s role untenable and forced his hand. It will be interesting to watch the race for the leadership role unfold over the coming weeks. Bookmakers’ early favourites for the role include Ben Wallace, Rishi Sunak, Tom Tugendhat and Penny Mordaunt.

The rather muted reaction in UK assets may have been a surprise to some, however, the likelihood is that a political uncertainty discount had already been applied to UK assets. Sterling actually rallied against the USD on Thursday, while UK equities advanced.

US equities have been strong this week, with the market rising for four consecutive days (Monday – Thursday), matching its best winning streak this year. US bond yields have moved higher this week, with the 10-yr US treasury yield back around the 3% mark, which is still 0.5% lower than the recent highs. The US 30-year mortgage rate fell to 5.3%, down from 5.7% a week ago, which is the largest drop since 2008. While the rate is still much higher than it was at the start of the year, it should provide some support to the housing market and make affordability better than it has been over the last month. US Mortgage applications have recently ticked up, although they are still 17% below last year’s levels. One would expect that the tighter mortgage conditions compared to 2021 and higher house prices would lead to slower house-price growth going forward

Global growth fears continue to hang over markets this week and it has put downward pressure on commodity prices, which have been in free-fall since mid-June. US Crude oil briefly dipped below $100 a barrel this week, while Brent crude oil prices dropped a staggering 11% on Tuesday. Economically sensitive copper remains under pressure and is down 20% over the last month. The weaker commodity prices should provide some much-needed relief on inflationary pressures.

However, EU Natural Gas has bucked the recent falls in commodities and has advanced on fears of Russia cutting supplies to Europe. The Nord Stream pipeline is due to shut for approximately 10 days due to ‘seasonal maintenance’, however there are fears the pipeline will not reopen. Germany has begun to ration hot water, dimmed its streetlights and shut down swimming pools, with all households being urged to cut energy use.

US Non-Farm Payroll data, released on Friday, came in stronger than expected with 372,000 jobs added to the US economy in June. The unemployment rate remained at 3.6%. The news will likely empower the US Fed to continue to raise rates in the near term, and this view was reflected in bond markets with yields rising (and therefore prices falling).

There was sad news to finish the week, with ex-Japanese Prime Minister Shinzo Abe being shot and killed while giving a speech. Mr Abe had a strong reputation for his Abenomics policies which included increasing the nation’s money supply, increasing government spending and economic structural reforms aimed at reviving the stagnant economy.

The market moves this week once again pointed to the importance of diversification. The more growth focused equities, including technology, have been some of the stronger performers over the past seven days, while resources, infrastructure and gold, which helped prop up the portfolios in the first half of the year, have lagged.

Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst

The Week In Markets – 25th June – 1st July

July 1, 2022July 1, 2022

This week marked the end of an extremely difficult first half of the year in markets. As challenging as the market was, it is important to continue to be forward-looking, focusing on where markets can go, as opposed to where they are currently. A quick study of history can provide a glimmer of hope here. Since the Great Depression the US S&P 500 has fallen by over 15% in the first six months of the year on five occasions (six if you now include 2022). On each of the five previous occurrences, the S&P 500 posted positive returns for the second half of the year, with the average return being 23%.

Focusing solely on this week, equities continued their yo-yo performance, falling back and giving up most of last week’s gains. The main driver of this was not rising inflation but concerns over economic growth. Consumer confidence data from Europe and the US showed a deteriorating picture, which will likely flow through into weaker consumer spending in the coming months. A combination of high inflation (and future inflation expectations) alongside geopolitical risks have clearly knocked the consumer.

There was some positive news with regards to China’s COVID-19 curbs, with announcements that quarantine time for incoming travellers would be halved. On the ground we also saw Walt Disney’s Shanghai Disney Resort announce it would reopen on Thursday after being shut for three months. The apparent easing of restrictions and reopening of the world’s second largest economy should be supportive for global growth.

The European Central Bank forum on central banking has been taking place throughout the week, with key central bankers speaking. The recurrent theme was on their collective commitment to tackle inflation and attempt to bring it down closer to their 2% target. US Fed Chair Powell stated that he believed the US economy was in “strong shape” and could withstand higher interest rates without economic growth stalling, however, he did say they must accept a higher recession risk in order to tackle inflation. Bond markets continued to shift on their views on future interest rate policy, with the yield on the 10-yr US Treasury note falling below 3% on Thursday, while UK and European government bonds also saw steep decline in yields. The market now expects US interest rates to peak in March/April 2023 before coming down once more. The terminal rate is now below 3.5%, while two weeks ago it was closer to 4%.

The troubled UK economy showed little improvement this week with the nation posting a record current account deficit in Q1 2022. Sterling surprisingly didn’t really react to the news, although much was in the price already, with the currency down over 10% versus the USD in the first half of the year.

As investors it is important to recognise that markets are forward looking and not get too bogged down in the here and now, and instead focus on where asset prices could be in the next 1-3 years. With this mindset, value is starting to appear in a wide range of assets, following significant de-ratings over the first half of the year.

Andy Triggs, Head of Investments

The Week In Markets – 18th June – 24th June

June 24, 2022June 24, 2022

For most people this will have felt like just any other week, but as I sit here collecting my thoughts on what has happened, it feels like there has been a shift in market positioning and narrative. There were however some consistencies with previous weeks – elevated inflation – with UK CPI hitting 9.1% in May, a new 40-year high. Fuel prices are nearly 33% higher than May 2021, the largest annual jump in prices since 1989. This rise in inflation continues to raise pressure on households and intensifies demand for wage rises to offset higher prices.

Inflation aside, there were some different dynamics this week. Commodity prices, which have been on a tear this year, have been selling off aggressively. The falls have been broad based; wheat is down 13% over the past seven days, copper has fallen 11% and even oil is off over 10%. The reason for this is most likely due to the market pricing in a higher probability of a global slowdown/recession. In that environment, demand for commodities would fall and prices have adjusted to reflect this. It’s worth remembering the supply dynamics in the sector are still extremely tight, and that should be supportive of prices over the longer-term. Lower commodity prices, and in particular lower oil prices, may take some of the pressure off central banks as inflation may begin to moderate.

One of the biggest changes has been in bond markets. Jerome Powell, Chair of the US Fed, spoke to congress this week and declared that the Fed’s fight with inflation was “unconditional”. One might expect that bond yields would have risen (and therefore prices fallen) after such a statement, however, we saw global government bond yields collapse. The best explanation here again is that in a slowing global economy, inflation will begin to moderate, and the US Fed will not be able to take terminal interest rates as high. The yield on the 10-yr US Treasury bond was at 3.49% just 10 days ago but fell as low as 3% yesterday. Falling bond yields acted as a boost to the more growth focused equities, which have struggled this year. The tech-heavy Nasdaq index rallied around 1.5% yesterday. It’s interesting to see that the best performing funds in portfolios this week have been holdings in technology focused equities and UK government bonds, while the laggards have been holdings in resource equities – a complete role reversal compared to the last six months.

Economic data was generally weak, with US existing home sales falling to a two-year low. Housing affordability has tightened dramatically, as house prices have risen and mortgage rates jumped, so it is not a surprise to see housing activity slow. Purchasing Managers Index (PMI) data from Europe and the US came in well below expectations. US Manufacturing data was at the lowest level since June 2020 and services data was at a five-month low. The bad-news-is-good-news scenario seemed to be in play on Friday morning, with European and UK equities rising over 1% following the data releases.

This week once again pointed to the importance of diversification, with recent losers becoming winners and vice-versa. Our approach has always been to diversify across geography, style and asset class, tilting towards our preferred areas, as opposed to taking large portfolio positions. This is especially important at times of heightened volatility and uncertainty. By not losing in the short-term, you can win in the long run.

Andy Triggs, Head of Investments