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Weekly Notes

The Week In Markets – 2nd September – 8th September 2023

The start to September in markets has not kept pace with the rising temperatures we have witnessed in the UK this week. Temperatures have hit above 30 degrees for four consecutive days,  setting a new record in the month of September, with the potential to make it five or six days if the weather keeps up this weekend. Fingers crossed!

As we head towards the next US policy meeting on the 20th of September, the US Fed and market participants alike will be picking apart the data points that are released in an effort to determine whether further rate hikes are warranted. Purchasing Managers Index (PMI) is a leading indicator of economic trends within sectors and have been the leading factor for market moves over the last two weeks. The US services sector for August has surprised to the upside, rising to 54.5, the highest reading since February and indicating an expansion in the services economy. The economy strengthening in theory is good news, it downplays the effect that the rate hikes have had on the economy and should support labour markets and consumers going forward.

Personal Consumption Expenditure (PCE) is not the most common index but is the US Fed’s preferred measure of inflation, as it calculates inflation but considers buying habits and saving levels. PCE for the month of July showed a rise to 3.3%, a jump up from 2.9% in the previous month and confirmed US consumer spending was still resilient with increasing spending in restaurants and concerts. Inflation remains greater than the strict 2% target the US Fed has set and investors will eagerly await the next meeting. 

US initial unemployment claims came in better than expected on Thursday, a further indication of strength in the labour market. While there are signs of pockets of weakness in US labour markets, the overall picture continues to be a positive one, which in theory should help support equity markets in the near term.

Strikes have been a common topic this year and the latest to shock markets is at Chevron’s Australian natural gas plant. Australia is the world’s largest liquified natural gas exporter, and the confirmation of worker strikes over wages and working conditions has led to a spike in European gas prices. The strikes have been designed to place significant pressure on Chevron and force them to cut a deal before production is substantially affected. A total shutdown of the facilities would be chaotic, immediately causing an energy crisis in Australia that would require the government to intervene. The same strike tactics were employed on domestic gas producer, Woodside energy, leading to a deal raising wages and making it harder for the firm to hire contractors, improving existing employees job security.

Shares in Apple tumbled almost 6.5% over the past two days, wiping $190bn from its market cap following the news of a China ban on iPhones. Employees at government owned firms have been told to stop using the iPhone with many companies offering subsidies to incentivise the switch to local brands. Huawei, China’s leading phone manufacturer, have also launched two new phones in the push against Apple with smartphone sales estimated to jump almost 70%. Given Apple is the largest constituent of the major US and global equity indices, weakness in the share price weighed heavily on markets.

Bank of England (BoE) Governor Andrew Bailey indicated this week that UK rates are likely to be “near the top of the cycle” as the BoE expects inflation to continue to drop towards the end of the year. The back-and-forth on interest rate expectations has led to volatility in the bond market; it was only a couple of months ago that certain commentators were predicting UK rates to peak at 7%, the peak rate is now expected to be below 6%. Bailey’s words led to a weakening in sterling versus the USD, falling below 1.25, a 3-month low.

Weakness in Apple this week reinforces our message of diversification and being aware that even seemingly great companies can face headwinds. Our equity exposure in portfolios remains diversified across sectors, styles and geographies. The fixed income component of portfolios is focused on high quality bonds which are now paying attractive nominal yields, which will form the bedrock of portfolios going forward.

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 Week In Markets – 26th August – 1st September 2023

Today we enter the month of September so it’s only right we start off with a fact of the month. The Romans often related different months with different Gods and September is connected with Vulcan, the God of Fire, due its fiery hot weather. It has also been reported that the UK will be hit by a mini heatwave, living up to the September myth.

Last week we reported that the annual Jackson Hole Symposium was taking place on the Friday, with key economic policymakers scheduled to make a speech. Arguably the most powerful man at the event, US Fed Chair Jerome Powell, looked to deliver a less hawkish message than the previous year, stating the Fed would be “moving with care” to evaluate data points. Progress towards the 2% inflation target has been significant as the US Fed brought inflation down to 3.3% from its peak, having raised rates by 5.25% since March 2022. Mr Powell ended his speech once again stating the importance of “holding policy at restrictive level” until inflation falls viably to target, however investors have begun to speculate whether we are already at the terminal interest rate. Markets rallied on the back of Powell’s speech with US equities advancing either side of the weekend and US government bond yields falling (prices rise).

 US GDP Growth for Q2 was released on Thursday, growing 2.1%, just below the 2.4% market expectation. The downgrade in US GDP growth will be a data point the US Fed consider before their next meeting in September and could strengthen the argument for a potential pause as the Fed will not want to further hamper the US economy. Investor views are heavily divided between a potential recession and the “soft landing” scenario that we describe as inflation falling close to target, with labour markets and economies remaining stable. There was further “bad news” from the US with the job openings data disappointing. Markets reacted to the weaker data this week positively, believing it pointed towards the US Fed no longer needing to raise rates. Equities carried on the momentum from Jackson Hole and advanced further.

US Non-Farm Payroll (NFP) was released this Friday afternoon with 187,000 jobs created, ahead of market expectations of a 170k increase, signalling the continued strength of the US labour market.

Euro zone inflation data was released on Thursday, defying expectations. The Inflation rate (year-on-year) was 5.3% for August, the same as the previous month but greater than the 5.1% markets expected. Inflation rates from Germany, Spain, Italy and France all came in higher than expected, which will be a cause for concern for the European Central Bank. Higher oil prices could also put upwards pressure on inflation later in the year. The oil price has continued to move higher this week.

Covering news in the UK, this week Nationwide reported house prices fell by -5.3% (year-on-year) in the month of August, the fastest annual drop over the last 14 years. Putting this into perspective, the average house price is more than £14,500 cheaper then reported a year ago. However, the steep rise we have seen in interest rates have made affordability difficult for buyers, with many having to wait until rates settle. House sales are 40% down from 2021 where we saw a housing sales boom after a period of low interest rates, the build-up of household savings due to covid lockdowns and the stamp duty holiday.  

The start of September also signals the transfer deadline for football fans. As an investment team we aim to avoid making last minute panic decisions in portfolios and prefer to have structure and a long-term process around our decision making.

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 Week In Markets – 19th August – 25th August 2023

The final full week of August has been a mixed bag, with markets oscillating on the back of various data releases.

In what was a data-light week, Purchasing Managers Index (PMI) data from the UK, Europe and US took centre stage on Wednesday. PMI data is essentially an index of the prevailing direction of economic trends in the manufacturing and services sectors. A reading above 50 typically indicates expansion, while below 50 signals a contraction. The data released on Wednesday for all the regions was universally weak, falling below consensus, and pointing to contraction in all but US services, which was marginally above 50. Despite weak data, both bond and equity markets rallied strongly on the day, as the market interpreted the data to mean that central banks may not need to increase rates much further, as there are signs the economies are slowing. The US S&P 500 index rose close to 1.65% on Wednesday, while 10-year UK gilt yields fell by over 15 bps, which is a very large one day move. 

On Wednesday evening the hotly anticipated Nvidia quarterly results were released. Similar to last quarter, the company released much better results than expected, and also gave very positive forward-looking commentary, with demand for the chips (often used in artificial intelligence) growing rapidly. This time however, the share price reaction on the day was fairly muted, while the broader technology sector fell on Thursday.

US initial jobless claims data was released on Thursday and once again sent mixed messages to markets, as the better-than-expected results pointed towards a resilient labour market.  

Positive news was released in the UK as OFGEM, the government’s regulator for electricity and gas, announced a new price cap with the typical household bill to fall below the £2000 mark for the first time in 18 months. Falling energy costs will filter into headline inflation over the coming months. Staying with the UK, consumer confidence unexpectedly improved this month and consumer inflation expectations continued to fall. Despite higher interest rates, it appears that consumers are feeling more positive on the outlook now that inflation appears to have peaked, energy prices are falling, and wage growth remains strong.  

Germany is Europe’s largest economy, and their Q2 GDP data was released this morning. The economy contracted by -0.2% (year-on-year), in line with market expectations and flatlined at 0% (quarter-on-quarter) which just edges Germany out of a technical recession (typically defined as two consecutive quarters of negative growth). Consumer spending increased by 0.1% in the second quarter, but it was poor trade data that heavily weighed on the country as exports fell -1.6% and imports fell -1.8% compared to the previous quarter.

Apart from the bank holiday, investors are looking forward to the commentary from this year’s Jackson Hole symposium. The Jackson Hole symposium is a three-day annual conference that takes place in the state of Wyoming and hosts central bank leaders from all around the world.  US Fed chair, Jerome Powell, and ECB President, Christine Lagarde, are set to speak at different times during the event. Last year, Mr Powell’s speech was well remembered as he stated the Fed’s determination to tackle inflation, before embarking on the steep interest rate path we’ve seen over the last year. This year investors are expecting a less hawkish tone, given inflation has fallen from over 8% this time last year in the US, to 3.4% currently.

Do enjoy the bank holiday.

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 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.

The Week In Markets – 5th August to 11th August 2023

For the football lovers, the Premier league is back this evening. Even better news for Arsenal fans, as Tottenham striker Harry Kane, who consistently scores in the North London derby, has seemingly agreed a deal to join German champions, Bayern Munich. The urge to win trophies and compete in the Champions league was greater than staying to eventually make history and break Alan Shearer’s premier league top scorer record. Tough decision!

Moving on from the exciting transfers news, US inflation data was released on Thursday.  Headline inflation for the month of July came in at 3.2%, a rise from the previous month’s 3% figure. Core inflation (excludes energy and food prices) was 4.7%, slightly below expectations of 4.8%. Housing costs were once again the leading contributor, which was up 7.7% year on year.  Inflation within the US has been on a steady decline from its peak of 9.1% in June 2022, however investors believe the “sticky” part of inflation is now kicking in and we can expect the US Fed to carefully consider if any additional rate hikes are required. With oil prices rising over recent months, it is no surprise to see headline inflation nudge up and this is likely to continue next month.

Last week, Fitch, an American credit rating agency surprised markets by downgrading US credit to AA+. This week, Moody’s, another established credit rating agency downgraded credit ratings of many mid-cap and small-cap US banks, with concerns that the banking sector will be tested by potential liquidity and profitability risks. This came off the back of weaker second quarter results for some smaller US banks, as the elevated interest rates have led to tighter credit standards and therefore lower loan demand from businesses and consumers.

UK GDP was announced this Friday morning and came as a surprise, as for the month of June (year-on-year) GDP increased by 0.9%, beating expectations of 0.5%. In the three months leading up to June, the GDP rate was 0.2% and the office of National Statistics claimed the additional bank holiday in May was a major factor for increased output in June. Sterling erased recent losses to rebound against the USD to 1.27. However, it seems that good news can lead to bad news as the solidified strength in the UK economy may cause the Bank of England (BoE) to continue further with interest rate hikes. The potential for higher rates weighed on the UK large cap index, which has fallen around 1% today. 

China’s post pandemic recovery has stuttered since the start of the year and inflation data this week came in negative, at -0.3%. Producer price index (PPI) is a measure of costs for manufacturers and was -4.4%, better than the -5.4% expected. This now puts China’s economy into the state of deflation – a decline in the price levels of goods and services with global demand for Chinese goods faltering. China’s central bank have pushed back against calls for further policy changes after measures such as the easing of property curbs have been implemented.

Markets continue to be choppy in August, after a strong July. While we monitor and review markets on a daily basis, we prefer to focus on the long-term (multi-years) when it comes to strategic decision making. Referring back to the start of the premier league, consistency within a season is the ultimate key to success and we will all be hoping our beloved clubs can break the Manchester City era of dominance.

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 Week In Markets – 29th July -4th August 2023

This week has ushered in a new month, and with it a change in market sentiment. After a very strong month of July, equity and bond markets have gotten off to a rocky start in August. It’s also been a tough week for UK Prime Minister Rishi Sunak, whose private home was draped in black fabric by Greenpeace protestors as they reacted to the news of Britain committing to hundreds of new North sea oil and gas licenses.

Staying with the UK, the Bank of England (BoE) met on Thursday and announced a further 25bps (0.25%) rise to interest rates. There was certainly more of a split decision with this vote as six of the nine members voted for the 25bps increase, two members voted for a stronger 50bps increase whereas Swati Dhingra, as usual, was the odd one out, voting for a pause in rates. UK rates are now at a 15-year high of 5.25% with extremely hawkish commentary coming from Governor Bailey. He held firm in a message that the UK population will not want to hear; the bank rate will remain “sufficiently restrictive” in order to reach the inflation target of 2%. The positive is that investors now believe the peak in interest rates will be 5.75%, a month earlier this expectation was at 6.5%. A further 0.25% rise is expected at the next meeting in September.

The housing market is interlinked with interest rates, and it was no surprise therefore to see UK house price data highlight falling property values. Nationwide, the UK leader in mortgage lending, reported average house prices was down 3.8% in July (year-on-year). Mortgage rates remain high which is impacting potential homebuyers. To put it into perspective, first time buyers on a 6% rate would see mortgage payments account for approximately 43% of disposable income.

Eurozone inflation for the month of July (year-on-year) fell to 5.3%, in line with expectations and below the previous month’s figure of 5.5%. Fabio Pancetta, a European Central Bank (ECB) member, spoke this week, making the case for a pause in interest rate hikes. The ECB is due to meet next month, and investors believe a pause in rates could be on the horizon as Pancetta argued sustaining rates at the current level would be enough to see inflation fall to the 2% target without “hurting the economy or jeopardising financial stability”.

The tough start to August was kicked off by the surprise downgrade of US debt by credit ratings agency Fitch. The downgrade from AAA to AA+ was driven by “a steady deterioration in standards of governance”. Investors have previously considered US government debt to be one of the best safe haven assets, so this downgrade could impact this, although we think this is unlikely. Further downside pressure was put on US bonds as it was announced the US was planning to ramp up issuance (increase supply) following the extension of the debt ceiling. There is a risk that funds will be pulled from equities to purchase the new issue of government bonds and as such we saw equity markets suffer.  The S&P 500 fell 1.4% on the day whilst the tech-heavy Nasdaq index fell 2% and this ripple effect crossed the waters as the FTSE 100 also closed down 1.38%. After a strong period in equities, it is natural to experience pullbacks and consolidation.

US Non-farm payrolls (NFP) were released this Friday afternoon with 187,000 jobs created, below market expectations of a 200k increase. The data release still signals a robust labour market however this is the second consecutive month that NFP has come in below expectations. The US Fed are likely to continue to measure the impact of the rate hikes on the economy, including the US inflation print next week. ahead of their September meeting. Until then, a pause or further increase in interest rates is anyone’s guess.

To round up the week, our key message is as important as ever. Maintaining a long-term investment mindset to markets best allows to take advantage of the short-term instability. We will continue to blend asset classes in portfolios and take advantage of new opportunities that arise.

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 Week In Markets – 22nd July to 28th July 2023

It has been a busy week in the sporting calendar with the FIFA Women’s World Cup underway in Australia and New Zealand as well as the fifth Ashes Test taking place at the Oval.   

Data releases have been quiet on the UK side this week; however, we did see results from some of the largest UK listed companies such as Lloyds Bank and Shell. Shell reported a 56% fall in profits to £3.9bn, a result of falling energy prices, leading to a slowdown of their share repurchase programme. Shell experienced record profits last year, benefitting from the then rise in energy prices after Russia invaded Ukraine leading to fears on supply shortages. The banking sector has been in the spotlight for much of this year, driven by the collapse of Silicon Valley Bank. It was pleasing to see Lloyds post a robust set of results which included an increase to their dividend. The bank did however set aside £660m as a provision for bad loans, highlighting that they do expect the economy to remain under pressure in the near term.

An event highly anticipated this week was the US Federal reserve meeting on Wednesday determining the next move of US interest rates. Rates were raised by 25bps as US Fed Chair Jerome Powell noted the economy “still needed to slow and the labour market needed to weaken” before we see a cut in interest rates. This is now the 11th rate hike in the last 12 meetings after we saw a pause in rates in June. Despite weaker than expected inflation data in July, the US Fed highlighted their determination to tackle inflation with this latest rise. The Fed may have felt vindicated with their decision on Thursday as both GDP data and unemployment claims data was much better than expected, highlighting the current resilience of the world’s largest economy. The belief that inflation will fall, employment will remain robust, and a recession will be avoided – the so called ‘soft-landing’ scenario – is increasing.

Following the US Fed decision, we saw the European Central Bank (ECB) also raise their benchmark interest rate by 25bps to 3.75%, the highest level seen over the last 20 years. ECB President Christine Lagarde usually follows the meeting with a hawkish tone and this meeting was no different. She claimed to want to “break the back of inflation and we will get there, come what may”. Eurozone inflation fell to 5.5% in the month of June, which was a positive sign, however the outlook for economic growth has begun to look challenging with countries such as Germany suffering slowing growth. Most recently Russia’s withdrawal from the Black Sea grain initiative could lead to a pickup in food prices, which would provide further inflationary pressures.

On Friday morning we saw the Bank of Japan (BoJ) hold interest rates at 0.1%, however they announced a loosening to their yield curve control policy. This is BoJ Governor, Kazuo Ueda’s, first major policy change since he took control in April this year and the effects saw the yields on the 10yr Japan government bonds rise to their highest levels since September 2014 (prices fall). Investors are now left to consider if this move is the beginning of more structural policy change and a potential tightening cycle.

After last week’s fireworks in markets, driven by lower-than-expected UK inflation data, this week has been relatively benign in markets. The latest rise in interest rates from the US could very well be their last, while it looks as though the ECB are towards the end of their hiking cycle as well. The key question as we head into the end of the year and beyond is whether the impact of the lagged effects of interest rate rises causes excessive economic damage. Time will tell, but we believe the best way to approach this is to include a range of assets in portfolios that can perform in a variety of market conditions and avoid being too concentrated in risks and exposures. 

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.

The Week In Markets – 15th July – 21st July 2023

It was Wimbledon finals weekend and we saw Carlos Alcaraz win an epic five-setter, claiming his first Wimbledon title. Carlos Alcaraz denied Novak Djokovic a fifth successive Wimbledon title and became the first champion outside of the “Big four” of Djokovic, Federer, Nadal and Murray to win the Wimbledon men’s final since 2002. With this win, history has been made and this could be a symbolic moment for the sport with the passing on of the crown.

It’s felt like a long time since we were able to report on better-than-expected UK data, but we are able to do that this week. UK inflation data was released on Wednesday and came in below consensus. Headline inflation fell to 7.9% in June from the previous month’s 8.7%, with core inflation (excluding food and energy prices) falling to 6.9%, below the 7.1% expected. The data had a profound impact on UK markets, with the large cap UK index rising close to 2% on the day, while the more domestically focused mid-cap index rose over 3%. We also witnessed a big re-pricing within bond markets. Prior to the data the expected terminal rate for UK interest rates was 6.5% – this fell to 5.75% on Wednesday. This should hopefully feed into mortgage rates over the coming weeks. Chancellor of the Exchequer, Jeremy Hunt, as ever doubled down that the government and Bank of England (BoE) have had to make tough decisions on inflation in recent months and there is still a way to go to reach the inflation target of 2%.

We have also seen the release of UK retail sales this week, another key measure on the health of the economy. Month-on-month, consumer spending was 0.7% greater in June, coming in ahead of expectations. There was a bounce up in food sales, department stores and furniture stores.

Tata group are an Indian conglomerate that own Jaguar Land Rover and this week they announced a deal to build an electric vehicle battery plant in Britain, a major boost for the UK car industry that currently lags the US and EU in the green space. It will become the first Tata gigafactory outside of India, potentially creating up to 4,000 jobs at a total investment of £4bn. The factory has plans to scaleup and provide almost half of the battery production needed in the UK by 2030, in line with Britain’s plans to ban the sales of new petrol and diesel cars from the same year.

US retail sales gave a different story this week as they rose 0.2% (month-on-month) in June, lower than the 0.5% expected. Sales at supermarkets and service stations fell and spending at restaurants and bars slowed. Online sales led the way and surged 1.9%, the most over the last six months, and we are likely to see further gains next month due to Amazon hosting their Prime day promotion – the biggest one to date. With retail sales still rising albeit not as strong as before, the US Fed is still likely to increase interest rates next week following on from a ‘skip’ at their last meeting.

Japan inflation was released this morning and will certainly catch investors eyes as core inflation came in at 3.3% for the month of June (year-on-year). This was in line with expectations, but it is now the 15th consecutive month core inflation has been above the 2% target. An increase in utility bills in addition to increases in food prices is diminishing households disposable income and this data will be closely analysed by the Bank of Japan (BoJ). Sustained inflation for such a period of time has investors debating whether the BoJ will phase out their controversial yield curve control. 

There has been further M&A activity this week in the UK market, with US private equity firm Searchlight Capital agreeing to buy the UK listed asset manager Gresham House in a £470m deal. Given the relative cheapness of UK assets currently it is no surprise to see firms swooping in and picking off UK businesses and we would expect this trend to continue if we don’t see a re-rate of UK equities.

It has been a positive week for portfolios, boosted by strong performance from UK assets, while sterling weakening has also been a driver of returns. US mega-cap growth stocks have seen big swings this week, with Microsoft reaching a new all-time high earlier in the week, although this was offset with large falls in Tesla, Netflix and Nvidia on Thursday.

To round up the weekly, I refer to Carlos Alcaraz’s historic performance again. Alcaraz was certainly the underdog heading into the final and underdogs can undoubtedly be overlooked in the investment world. We maintain the message that it is important to have diversification within portfolios and certainly include underdogs, such as UK equities, alongside the fan-favourites, such as US technology.

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 Week In Markets – 8th July – 14th July 2023

Last week we entered the month of July but seemed to miss the opportunity to mention a famous fact about the month. July was renamed in honour of Julius Caesar, who was born in July, changing it from the previous name Quintilis. The historic facts keep coming as we are just days away from the 54th anniversary of Apollo 11, the first spaceflight to land on the moon.

The UK unemployment rate for the month of May was released on Tuesday, coming in at 4%. This was a rise from the month before (3.8%) and if we were analysing this data alone we would assume that the UK labour market has begun to weaken. However, strong wage growth put things into perspective as we have seen a 7.3% (excluding bonuses) jump in wages in the three months to May. This is the highest release since the report began in 2001 and could be enough to convince the Bank of England (BoE) to further raise interest rates as they fear a wage-price inflation spiral could ensue. Yields on the two-year government bond initially rose at the start of the week on the back of this strong wage data.

On a more positive note, US inflation has continued to descend with headline inflation down to 3% (year-on-year) and core inflation (excludes food and energy prices) falling to 4.8%. Both the fall in headline and core inflation were greater than consensus expectations. A significant drop in inflation was a result of the fall in energy prices which rose in 2022 after Russia’s invasion of Ukraine but has since dropped 16.7% over the last year. The US Fed’s decision to pause rates at the last meeting was a calculated decision in order to determine the impact the rate rises had on the economy to date. Although there are signs that the economy has responded to the significant interest rate hikes, the US are still shy of the 2% target, and we could see the Fed raise rates further in order to get over that line.

US Producer Prices Index (PPI) rose 0.1% in the month of June and were also up 0.1% on a year-on-year basis, further encouraging signs that inflation in the US could continue to fall. PPI measures the costs of goods for manufacturers; if their input costs are not increasing there is little need for the manufacturers to increase the price of finished goods. The PPI increase was the smallest year-on-year rise since August 2020.

The better-than-expected US inflation and US PPI data acted as a boost to both equities and bonds, and the impact was felt across the pond with UK assets also joining the party. This week we have seen Morgan Stanley release a note stating that UK equities and credit are the cheapest in the world. They suggested that falling inflation in the second half of the year could act as a catalyst for a re-rate of UK assets.

The risk-on nature of markets, coupled with an expected imminent end to the US Fed hiking cycle led to the US Dollar weakening against most major currencies, including sterling. We have seen the rate reach new 15-month highs of $1.31. A firmer UK currency is normally associated with stronger domestic equity performance. It’s worth noting as well that import prices should come down as the currency appreciates, which would help the battle with UK inflation.

China’s post pandemic recovery is quickly losing steam and the central bank have been called upon to use policy tools such as medium-term lending facilities in order to weather the storm. China’s exports fell at their fastest pace, down 12.4% in June as the global demand for goods falls. Exports to the US are the top destination for Chinese goods however they have fallen significantly, and domestic consumption is sluggish. The Chinese government set a GDP growth target of 5% this year after falling short in 2022, however, expectations for the economy heading into Q3 2023 are being revised downward. China year-on-year PPI data came in at -5.4% this week. The fall in factory gate prices could see China effectively exporting deflation to the rest of the world as the prices of their goods falls.

Rounding up the weekly, we have certainly had more positive news this week, particularly around US inflation, resulting in a bounce back in markets. As always we maintain the necessity for diversification within portfolios in order to benefit from market moves, while also aiming to protect portfolios from heightened volatility.

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

The Week In Markets – 1st July – 7th July 2023

This week we entered the seventh month of a year that has certainly been full of surprises. We haven’t been bombarded with a multitude of data releases like previous weeks, however, we’ve seen markets respond significantly to the data, creating a challenging week for both equities and bonds.

This week saw the high street lender Halifax release housing data which showed UK house prices fell 2.6% on a year-on-year basis. This is the biggest annual decline since June 2011 and with continued elevated interest rates we could see further weakness in the housing market. In reaction to the Bank of England (BoE) raising interest rates to 5%, banks will have to adjust mortgage rates to reflect this. The average five-year fixed rate mortgage has now risen to above 6% – we last saw these levels in November 2022 following the reaction to then Prime Minister Liz Truss’ “mini” budget. High street bank bosses, just like investors, are expecting further interest rate hikes by the BoE this year in an effort to tackle inflation, with concerns that fixed rate mortgages could reach 7% by the end of summer. While this may not be an immediate problem, given the high proportion of households on either a fixed-mortgage, or no mortgage at all, if rates are held at these high levels for an extended period of time, more and more consumers will be negatively impacted. It is estimated there are around 2.4 million fixed mortgages that will need to be refinanced between now and the end of 2024.  

Staying within Europe, Germany, which is Europe’s largest economy, recently fell into a technical recession. This week we saw the release of the nation’s manufacturing Purchasing Managers Index (PMI), an index that calculates the expansion or contraction in the manufacturing sector. For the month of June, we saw the Manufacturing PMI revised down to 40.6, down from 43.2 the previous month. A PMI figure below 50 highlights a contraction, with Germany’s PMI now contracting at its fastest pace in over three years. There was better news for Germany’s services sectors, which continues to expand, albeit at a slowing pace. The data came in at 54.1, down from 57.2 for May.

On Wednesday the latest US Fed meeting minutes were released, as well as a press conference from the US Fed member John Williams. Both the meeting minutes and Williams’s comments were seen as hawkish with the Fed member stating “we still have more work to do”. US government bonds sold off on the news, with further interest rate hikes now expected this year.

Bond markets continued to weaken on Thursday following the release of very strong private payrolls data, which pointed to 497,000 private payrolls added in the month of June. This was considerably ahead of expectations and highlights the strength of the private labour market. It wasn’t just US government bonds which sold off, UK and European bonds resumed their recent slump as a ‘higher-for-longer’ mantra was adopted by investors. We are now witnessing higher yields in the UK than compared to the aftermath of the mini-budget last year. 

Staying with US labour data, this afternoon has seen the release of the closely watched US Non-Farm Payrolls data. For the first time this year, the data came in slightly lower than consensus, with 209k jobs added against an expected 230k. However, the data still points to a healthy labour market, while wages grew at 4.4% year-on-year, which is now real wage growth in the US given inflation is at 4% currently. The data has re-affirmed the belief that there will be further interest rate hikes from the US Fed.

It has been a difficult week in markets with positive correlations between equities and bonds resuming, driven by concerns around inflation and further interest rate hikes. With yields at the highest levels since the financial crisis and valuations in most equity markets trading at discounts to history, it feels as though patience and time are two characteristics that investors need to focus on.    

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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