Client Login 0204 502 4321

Weekly Notes

The Week in Markets – 2nd January – 5th January 2024

Happy New Year and welcome to the first weekly note of the year. The current high interest rate environment looks to have led to people trading down as discount grocery stores Aldi and Lidl ran up their best ever trading day on Friday 22nd December. It is estimated that half a million shoppers switched permanently from the mainstream Tesco and Sainsbury to the discount stores. Tesco are set to release reports on how they fared over the Christmas period.

It is difficult to sit at the start of the year and forecast what is going to happen. However, that doesn’t stop us from making predictions and planning for a variety of different outcomes. Will inflation remain sticky or fall to the 2% target? Will central banks cut rates more than expected? Will we see the long and variable lags of monetary policy? Will we avoid a recession? Will potential elections influence markets? All valid questions that only time will answer.

On Thursday afternoon, labour leader, Sir Kier Starmer gave his first speech of the year. In his speech “Project Hope” he set out five main missions which include getting Britain building houses again, to decarbonise UK energy by 2030 and getting the NHS back on its feet.  Election years can have significant impact on investor sentiment so it will be important to stay on top of the political landscape this year.

Halifax bank reported UK house prices (year-on-year) rose for the first time in eight months as prices were 1.7% higher than the previous December. This has been due to a tight sellers’ market with not as many houses up for sale. In this higher interest rate environment mortgage rates have surged, and activity has fallen. However, as we have seen the pause in interest rates and investors flirting with the idea rates will be cut soon, buyers and sellers have begun to return to the market. The feeling is that as more people come to market, house prices could fall within the 2% to 4% mark and with mortgage rates continuing to drop, buyer confidence should increase, seeing more movement in the housing market.

US job openings was the first insight of the year into the labour market, with openings falling to 8.79m in November. This will be encouraging for the US Federal Reserve as a sign that the labour market is cooling and strengthen investor expectations of rate cuts later this year. Another positive sign for the US Fed is that the number of people quitting their jobs fell to 3.47m, the lowest level since February 2021. With less people quitting and job-hopping this should help ease wage growth.

We then received mixed market messages this afternoon as December US Non-Farm Payrolls data was released and surprised as 216,000 jobs were added to the economy. This came in largely above market expectations of 170,000. The strength of the number of jobs added to the economy should keep pressure on wages and bonds yields rose on the back of the data as investors mulled over whether an expected six interest rate cuts in 2024 was too optimistic.

The Eurozone may be in bigger trouble than first anticipated as business activity contracted in December. Purchasing Managers Index (PMI) is an index that indicates the direction a sector is heading (whether contractionary or expansionary), and the services PMI is currently still in the contractionary zone at 48.8. This could point towards a recessionary period as growth struggles continue; Q4 2023 GDP data could be negative as it was in Q3 2023.

Eurozone inflation as predicted by ECB President, Christine Lagarde, rebounded to 2.9% (year-on-year) in December. It was anticipated that the rise would occur due to the change in the energy price base, but core inflation (excluding food and energy) dropped to 3.4% in December from 3.6% the previous month. This strengthens the ECB’s decision to continue to hold rates firm.

The Santa Rally certainly delivered in the closing month of 2023, however, the first week of 2024 has been subdued. The tech-heavy NASDAQ 100 has just seen five back-to-back days closing down. The last time this event occurred was in December 2022, and following this the NASDAQ 100 went on to post stellar gains in 2023. We continue to stand by our beliefs on diversification within portfolios, allowing us not to be caught out by short term volatility. After such a strong end to the year, it is natural that there is an element of profit taking and rotation of out last year’s winners. We continue to see great value in many areas of the equity and fixed income markets and believe the backdrop of declining inflation, mild growth and an end to high interest rates should be supportive for asset markets.

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 – 16th December – 21st December 2023

There are just four days to Christmas Day, but celebrations have begun early as markets have continued to soar. Falling inflation within the Eurozone and UK has continued to spur markets on.

UK inflation was released on Wednesday, falling to 2-year lows. Headline inflation for November (year-on-year) fell to 3.9%, down from 4.6% the previous month. Core inflation (excludes food and energy prices) fell to 5.1%, beating expectations of 5.6% and October’s previous 5.7%. This strengthens the case for interest rate cuts by the Bank of England (BoE) next year and investors have begun to price rate cuts by the beginning of Q2 2024. UK government bonds, which have been unloved for much of the year, have performed very well over the last six weeks, and this week was no different. The yield on the 10-year UK government bond fell to 3.5%, after reaching 4.7% only weeks ago, as investors reacted to lower inflation and the expectation of rate cuts in early 2024.

Eurozone inflation for November was released on Tuesday, showing inflation is now only just above the 2% target. 2.4% was the final figure (year-on-year) which was in line with market expectations and a fall from the previous month’s 2.9%. European Central Bank (ECB) President, Christine Lagarde, has warned against investors celebrating too soon and pushed back on early interest rate cuts. However, the market has so far dismissed her comments, believing the ECB will be forced to cut rates early in 2024. The yield on the 10-year German Bund dropped below 2% this week.

Assessing Eurozone inflation at a country level, it is tough not to be optimistic with regards to inflation. Year-on-year inflation dropped in 21 of the EU’s member states and remained the same in three more. In the case of Italy, headline inflation (year-on-year) has dropped off a cliff since September, falling from 5.3% to 0.6% in November, again largely driven by energy. It appears that for certain nations, deflation could soon be more of a risk than elevated inflation.

US home sales have risen in November by 0.8% (month-on-month), breaking five consecutive monthly falls. The popular US 30-year fixed rate mortgage rose to a 23 year high of 7.8% in late October but has since dropped off to 6.6% as US treasury yields have fallen. The market expectation that interest rates will be cut in 2024 has also fuelled the housing market, however two thirds of home owners are currently locked into mortgages under 4%. This will mean mortgage rates will have to continue to fall before we see significant shifts in the housing market. US equities have continued to advance this week and bond yields fall, with the US 10-year yield now falling through 4%. The market is now pricing in six interest rate cuts in 2024.  

In the US, two of Hollywood’s big five studios, Warner Bros and Paramount, have held discussions for a possible merger. The main motivation behind the deal is to combine the streaming services, Paramount Plus and Max (formerly HBO) in order to better rival Netflix and Disney Plus, who are dominating the streaming space. Netflix has recently cracked down on account password sharing, leading to more account openings and are up to 247.2m subscribers. The combination of Paramount Plus and Max subscribers would still be under 160m.

The strong moves in December have been pleasing to see, helping push portfolios to their highest levels in 2023. With plenty of cash still on the sidelines, M&A activity picking up and interest rate cuts potentially around the corner there is reason to believe this rally can continue into 2024.

This will be our last weekly round-up of 2023 and we would like to thank everyone for their support over the year.

 

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 – 9th December -15th December 2023

It looks like the Santa Rally well and truly arrived this week, with big moves upwards in both equities and bonds. The key driver seems to be the belief that central banks have now come to the end of the rate hiking cycle and will “pivot” very shortly, beginning interest rates cuts in 2024. There has been a big shift in market narrative from the summer months when “higher-for-longer” was the clear message.

It was a busy week for central banks, however, before they met we did receive US inflation data on Tuesday, which came in at 3.1% (year-on-year), in line with expectations. This was a slight drop from the previous month’s figure of 3.2%. The data cemented the US Fed’s decision to hold interest rates. While this was expected, it was Fed Chair Powell’s statement that led to asset markets bouncing. It’s clear that the US Fed are now willing to cut rates in 2024, even if the economy is not in a recession, with the US Fed currently expecting to cut interest rates three times next year. The market went further than this, and after hearing the speech from Powell, quickly priced in six rate cuts in 2024. The expectation of lower rates, which will support both consumers and corporates sent the Russell 2000 (US small cap index) up over 3% on Wednesday, with a similar return on Thursday. The index is now at a 52-week high, having been at its 52-week low only 48 days ago! Nearly all equity markets joined the party, with the tech-heavy NASDAQ index reaching all-time highs, and the S&P 500 fast approaching its all-time high, which occurred on 2nd January 2022. Lower rates acted as support for bond markets; the US 10-year government bond yield dropped below 4% this week, having hit a 16 year high of 5% only weeks ago. In such a risk-on environment, coupled with lower interest rate expectations, we have seen the USD weaken against a basket of currencies, including Sterling, which is approaching 1.28.

Both the Bank of England (BoE) and European Central Bank (ECB) followed suit and held rates steady. However, there was a difference in commentary with both Andrew Bailey (BoE) and Christine Lagarde (ECB) stating they are yet to consider interest rate cuts. It appears the market isn’t convinced of this and are pricing in cuts starting next year. Weaker than expected UK GDP data on Monday highlighted that the lagged effects of higher rates are beginning to bite and supports the view that the BoE will be forced to cut rates to support the economy as we look into 2024. Much like the US, we saw bonds rally, with the UK 10-year government bond yield dropping as low as 3.7% this week. Equities advanced, with the more domestic focussed UK mid-cap index benefitting the most, rising over 3% on Thursday. In general, small and mid-cap equities are seen as more interest rate sensitive and therefore stand to benefit the most from lower rates going forward. While positioning here has been painful at times, it’s pleasing to see the recovery over the last six weeks.

It wasn’t just bonds and equities that performed well this week, we saw gold rebound after a lacklustre start to the week. The prospect of inflation with lower rates (falling real yields), coupled with a weaker dollar boosted the precious metal, with the price per ounce moving back above $2,000. Commodities such as copper also performed well on the back of a weaker dollar and the expectation of more supportive policy from developed market central banks.

Purchasing Managers’ Index (PMI) from Europe and the UK, released this morning, highlighted that most countries were seeing contraction in manufacturing and services sectors, once again pointing towards a slowing global economy. This will do little to dampen the views that interest rates will need to drop next year to help ease the strain on economies and support economic growth.

After months of oscillating markets, there has been a shift since the start of November, with the consensus now firmly pointing towards a peak in interest rates, with cuts just round the corner. In terms of inflation, the narrative is that the battle is largely won, the white flag has been waived, and we will approach the 2% target in 2024/2025. Indeed, Eurozone inflation is already at 2.4%, a whisker away from target. The positive correlation we have seen between bonds and equities has now worked in investors favour (as opposed to 2022), with both asset classes rising together. Within portfolios it’s been pleasing to see a broadening out of equity market participation with some of the small and mid-cap funds performing well. While it hasn’t always felt comfortable to be invested in 2023, portfolios are now at their highest levels for the calendar year.

Andy Triggs, Head of Investment & 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 – 2nd December – 8th December 2023

As we delve deeper into December, it’s always interesting to learn facts about Christmas spending. Over the Christmas period, Brits eat approximately 175 million mince pies. The UK also uses over 220,000 miles of wrapping paper per year. Despite the cost-of-living crisis, spending is expected to rise to a total of £27.6bn fuelled by credit cards transactions.

In the UK, Nationwide house price data showed prices have surprisingly risen for the third month in a row. House prices in the UK surged over the Covid period as the pandemic led to more households looking for greater living space and moving homes. This was also fuelled by government tax incentives and (at the time) low interest rates. Fast forward to today and with mortgage rates considerably higher than two years ago, affordability has become tougher. 

In the US, Spotify, the music streaming company, have announced further cuts to the workforce. They plan to lay off around 1,500 employees, this follows cuts of 600 employees in January and 200 in June. CEO Daniel Elk, admitted to over hiring over the past three years with the firm now expecting an operating loss over Q4. Spotify have big ambitions to reach one billion users by 2030 and part of the strategy included hefty podcast contracts for A-List celebrities such as Michelle Obama, Megan Markle and Prince Harry. Two major podcasts – “Heavyweight” and “Stolen” have already been told their contracts would not be renewed. Spotify users can almost certainly expect a price hike for streaming services!

November US Non-Farm Payrolls data was released this afternoon with 199,000 jobs added to the economy, coming in above market expectation of 180,000. This is a jump up from October’s figure of 150,000 and goes against the previous trend of a slowdown in hiring. The US labour market strength continues to surprise.

As we mentioned in the monthly note for November, consensus for developed markets have clearly shifted and this is becoming more evident as we saw the S&P 500 index close at a 12-month high level on 1st December, just shy of 4600. This is under 5% away from the all-time peak set in December 2021 and has been driven by the expectation we have seen the peak in rates, with potential cuts next year. We saw the US 10YR treasury hit 5% in October and since then the yield has dropped to 4.17%.

Euro zone inflation has followed the trend and tumbled down to 2.4% following ten straight interest rate hikes from the European Central Bank (ECB). This week ECB board member, Isabel Schnabel, gave a dovish speech, stating further interest rate hikes should be off the table. Just a month ago she had a different tune, with the view that one last hike was an option to tackle the last part of the inflation fight, but she has since switched her stance following the greater than expected drop in inflation figures. Bond yields have fallen reflecting this view as the Germany 10YR Bund fell to 2.16%, the lowest level in 6 months.

As we round up the weekly, it’s important to point out Gold reached an all-time high of $2,137, driven by a weakening dollar. Next week looks to be a busy week as US inflation and UK GDP data prints will be followed by the US Fed and Bank of England’s last policy meetings of the year. We continue to consider a wide range of asset classes to reduce portfolio volatility and capture investment opportunities. Diversification in asset class, style and management is key in order to navigate the markets.

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 – 25th November – 1st December 2023

Today we enter December, the last month of the year. The origin of the name December can be traced back to the Latin term “Decem”, which means ten, because it was the tenth month of the original Roman Calendar. For investors December has historically been a profitable month, with the so called “Santa Rally” pushing asset prices higher; many will be hoping for Santa to deliver once again.

The festive period seems to be a long way away for Bank of England (BoE) Governor Andrew Bailey, as he spoke earlier this week. Inflation in the UK is currently at 4.6% after a considerable drop in October, however, Mr Bailey has conceded getting inflation to the target of 2% from this point will be “hard work”. A large part of inflation falling has been due to the decline in energy prices, lowering prices at the pump and also importantly household energy bills. However, there are still inflationary pressures in the system which could be difficult for the BoE to crack without negatively impacting the economy and labour market. The impact of higher interest rates continues to bite on households, but market expectation is that we will see rates stay in a restrictive zone until a potential cut in rates early next year.

Rail worker strikes have been a prominent feature this year but are they finally coming to an end? Members of the RMT union have agreed a pay deal, ending an 18- month row.  Workers were not just protesting for an increase in wages but for further job security and improved working conditions. Guarantees have been included into the agreement and this may be the catalyst for other train unions to agree deals.

The latest update to Q3 US GDP was released on Wednesday and showed the economy had grown more than initially reported, coming in at 5.2%, boosted by business investment and spending. This is the fastest pace of expansion since Q4 2021, despite the pressure of higher interest rates. The US Federal reserve will certainly look at the results before their next monetary policy meeting this month and may be concerned about “an economy that keeps on rolling”. Despite this, investor odds for a rate cut before May 2024 have increased to 77.1%. 

The November Beige book by the US Federal reserve provides an economic outlook on the US economy. The main takeaways from the latest entries were consistent with what we have been seeing in markets. The labour market remains tight, especially for skilled labour, households are displaying greater price sensitivity with the higher interest rate environment, the looming risk of a recession remains, and geopolitical instability remains a key concern.

Last week we reported on the postponement of the OPEC meeting and this Thursday, Saudi Arabia, Russia and other members of OPEC agreed to voluntary oil cuts totalling 2.2 million barrels per day for 2024.  The organisation, now in unison, are focused on lowering supply with concerns over weaker global economic growth in 2024 in order to avoid a supply surplus. Brazil will also be the latest country to join the organisation in the new year. Staying with commodity markets, gold is set to remain on track for its second monthly gain, with the price getting very close to its all-time high.

Warren Buffet’s right-hand man, Charlie Munger passed away this week. Once described by Bill Gates as the “broadest thinker I have ever encountered”, the Berkshire Hathaway vice president helped build the conglomerate into the giant it is today. One of his most famous quotes came from the annual meeting in 2017 – “A life properly lived is just learn, learn, learn” as mistakes are vital to becoming a success. He was well respected among his peers and is certainly an investing icon to study.

Temperatures have dropped however our optimism for markets hasn’t as we continue to see data releases strengthen the case for interest rate cuts in the new year. 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. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 18th November – 24th November 2023

We start this weekly covering the Autumn Statement, delivered by Chancellor Jeremy Hunt. Mr Hunt has been Chancellor for 13 months and if you remember back to his appointment under then Prime Minister Liz Truss, his first acts were to shred her disastrous economic plans.

“Autumn statement for growth” was the main theme as Mr Hunt announced the key measures of the 110 policies. Arguably the greatest change was the reduction to National Insurance contributions from 12% to 10%. This is set to be implemented from the beginning of 2024 affecting 28 million people, an average saving of £450. Prime Minister Rishi Sunak, sat to the right of Mr Hunt, was acknowledged by the Chancellor for delivering on his promise to the UK to halve inflation in 2023. Further promises were made to grow the UK economy and the OBR have adjusted forecasts for GDP from shrinking by 0.2% to growing by 0.6% in 2023. As pre-announced, the national living wage is also set to rise to £11.44 from April 2024. The increase is aimed at easing some of the cost-of-living burden people are facing.

On Thursday it was announced that UK energy regulator, Ofgem, will raise the price cap by 5% in January 2023. While energy prices are lower than 12 months ago, it’s worth remembering that households were given around £400 in support for energy bills last winter – this time there are no equivalent measures. The Labour party has discussed further windfall taxes on oil and gas companies as a way to help with energy bill support.  

Oil prices have trended lower from the spike we saw in early October when brent crude rose to $96 a barrel, and we saw a 4% dip on Wednesday as OPEC (Organisation of Petroleum Exporting Countries) postponed their output policy meeting. The meeting has been pushed back to next week Thursday as producers around the world struggled to agree on output levels heading into 2024. It is rumoured that African countries such as Nigeria and Angola have pushed against consensus for greater oil output. We also saw inventory data released from the US which showed a much higher level of oil inventory than anticipated, potentially signalling softer oil demand.

Sam Altman, the CEO of Open AI, has had a tense week as he was fired and rehired from the firm in just five days. The developer of ChatGPT was fired last Friday over concerns the artificial intelligence (AI) development was too rapid, lacking the safety required. Mr Altman is certainly a popular figure as over 80% of his 750 strong workforce threatened to resign if his reinstatement was not imminent. Microsoft, Open AI’s largest investors also intervened as they hired Altman on Monday in a de facto role. The possibilities of AI are incredible, and it is key there is stability within the management teams developing it.

Nvidia released their Q3 results this week and once again delivered stellar revenue and earnings growth. However, there was some cautionary messaging from the company around Chinese restrictions, which would be a headwind to 2024 growth. The share price has been exceptional in 2023, however, despite the very strong Q3 numbers the China news held the shares back. While Nvidia is currently a clear market leader in GPU chips for artificial intelligence, it will be interesting to see how the competitive landscape evolves over the coming years as more competitors enter the market place.

In a week light of economic data there were some positives to be taken from manufacturing and services PMIs which came in above estimates in Europe and the UK. US jobless initial claims data was lower than expected, another positive sign for the labour market. While the global economy is far from firing on all cylinders, it is yet to show any major signs of cracking, despite what economists predicted 12 months ago.

There was much excitement heading into the Autumn Statement, although this quickly fizzled out as the Chancellor played with a straight bat. Nevertheless, there are some policy measures which should help ease some of the burden on consumers, while also stimulating investment from businesses. The reaction from markets to the statement were fairly muted, with bonds and equities broadly trading sideways this week. Trading volumes have been thin in the US, with the market shut for Thanksgiving yesterday. Next Friday sees us move into December, with many investors hoping that the Santa Rally, which appears to have begun a little early this year, can continue.

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 – 11th November – 17th November 2023

We began this week with unexpected news, the return of former Prime Minister, David Cameron to parliament. He resigned in 2016 after the UK voted to leave the EU as he had backed the remain campaign. Current Prime Minister, Rishi Sunak appointed him the new Foreign Secretary in a cabinet reshuffle on Monday.  His first meeting this week has been over in Kyiv to meet President Zelensky, confirming the continued support the UK aim to give the Ukrainians.

UK inflation figures were released on Wednesday, coming in below expectations as headline inflation for October dropped to 4.6% (year-on-year), down from 6.7% the previous month. This was the largest one month drop since April 1992 (2.1%) and this figure meant Mr Sunak has delivered on his promise to halve inflation before the year end. Core inflation (excludes energy and food) fell to 5.7% (year-on-year) from 6.1% in September. Last week we saw the UK economy stagnate with flat GDP data and further to the inflation figures, investors are almost certain we have seen the peak in interest rates. This is a far cry from the summer months when peak rates were expected to be 6.5%.

UK wages including bonuses slowed to 7.9% in the 3 months leading to September. This slowed from 8.2%, a previous record increase. Employment also rose by 54,000 jobs over the same time period, this was a slowdown from the 80,000 jobs created previously.  The data suggests the UK labour market is still tight with businesses struggling to hire new workers, helping to push up wage growth. While wage data is still strong, with unemployment broadly trending higher in 2023 it is unlikely the Bank of England (BoE) will increase rates at the next meeting. The days continue to tick down towards the 22nd of November, the date of the Autumn Statement, where the Chancellor says he aims to “get people back into work and deliver growth to the UK”.  We will have to wait and see whether the Chancellor pulls any rabbits out of the hat to support UK equity markets.

After a quiet period for mergers and acquisitions (M&A) in the UK the market sprung to life with two deals this week. The luxury chocolate company Hotel Chocolat was snapped up by Mars for £534m, a 170% premium to the previous days share price. This is a huge premium, although the price paid is still below what the company was valued at the start of 2022. It’s another sign of the value that still exists within UK equities. We also saw UK pub chain, Youngs agree to acquire City pubs in a deal that came with a 46% premium. With inflation appearing to be stabilising alongside interest rates, we may see a flurry of further M&A deals into year end.  

US inflation data was softer than expected on Tuesday and drove a rally in markets. US headline inflation for the month of October fell to 3.2% (year-on-year), with core inflation dropping to 4%. This data again gave investors greater confidence that the US Federal Reserve are not going to increase rates further, and markets are now pricing in four 25 bps Fed cuts next year. The Russell 2000 (small cap index) jumped 5.4% on Tuesday, with the S&P 500 rising 1.9% and the tech-heavy Nasdaq rising 2.4%, the largest daily percentage gains since April. Global equities also joined the rally with the mid-cap UK index rising 3.4%. In general, all assets have rallied this week, with bond yields falling (prices rising) and equities rising. The strong moves over the last three weeks are a timely reminder about the risks of moving out of markets on a short-term basis.

This Friday morning UK retail sales disappointed, falling by -0.3% (month-on-month) possibly pointing towards a more challenged consumer. The apparent bad news was treated as good news by the markets with the UK equity market advancing around 1% on Friday. Government bond yields fell, with the 10-year UK government bond yield now approaching 4%.

This was always going to be an eventful week, with key data releases occurring, resulting in a strong week in markets. It may be too early to call a Santa rally with markets still having to digest events and speeches next week. Our focus remains on diversification within portfolios across asset class, sectors, styles and regions.  The benefits of long-term investing have allowed us to take advantage of the short term opportunities.

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 – 4th November – 10th November 2023

While the pace of data releases almost returned to normal this week, following last week’s barrage of numbers, the information that was released was no less interesting.   UK GDP was released this morning and was flat (0%) over Q3. This was higher than the forecasted -0.1%, which means the UK will avoid a recession in 2023.

The UK economy is certainly weak at the moment as eyes are turning towards the Autumn statement on the 22nd of November when the Chancellor, Jeremy Hunt, is expected to announce growth measures for the UK. The pressure is mounting on the Conservative party as Mr Hunt noted, “The Autumn Statement will focus on how we get the economy growing healthily again”. The Bank of England (BoE) will certainly take note of the slight avoidance of a recession, however, there are data releases such as inflation that they will be keener to see; there’s an expectation of a sharp decline in headline inflation as we head into year end.

US Fed Chair, Jerome Powell, spoke twice this week following the decision to hold rates stable at the last Monetary Policy Committee meeting. On his second time addressing the International Monetary Fund, climate activists stormed the stage positioning for the end of fossil finance. Mr Powell was able to continue his speech minutes later claiming a balance was needed as the Fed weigh up “the risk inflation could reignite versus the central bank causing unnecessary economic damage”. Investors are bullish about another pause in interest rate hikes with the US Fed scheduled to meet once more before the year end.

Oil this week has slid to the price of $76.34 at the time of writing, and on Tuesday fell 4%, the lowest since late July. Rising OPEC crude exports helped ease fears about a tightening market as we are seeing an extra one million barrels per day of supply since their August lows. US crude oil stocks rose by almost 12 million barrels last week. This is a good sign for the US as falling prices help to reduce inflation, helping them get closer to the 2% target. Investors, however, will remain on alert as the current geo-political conflicts could threaten supply.  

Inflation figures for China were released on Thursday at -0.2% (year-on-year) as their economy dropped into deflation. It appears weak demand remains a challenge for Chinese policymakers as exports and factory activity contracted. Beijing have already ramped up measures to support the broader economy, such as one trillion-yuan of sovereign bond issuance, but there are calls for further supportive measures in order to prevent the economy falling further and threatening business and household spending.

WeWork is a company that provides flexible office space for workers, becoming the largest tenant of office space in New York and London over the last few years. This week saw the company file for bankruptcy. When WeWork was founded in 2010, the conditions were perfect as commercial property had been emptied out following the global financial crisis. However, securing long term office leases in prime locations around the world and then finding enough short-term tenants, whilst making a profit, just became too large of a task. The fall from grace of WeWork has been stark – in 2019 the company was valued at $47bn. Wecrashed, a show on Apple TV, is a remake of the true events and certainly provides more insight into the demise of the business.

After last week’s fireworks in equity and bond markets, this week has been a little more subdued. Hawkish rhetoric from US central bankers helped push equities and bonds lower at the end of the week. As we approach peak interest rates, with the possibility of rate cuts in the not too distant future, we have taken the opportunity to step-out of some short-term money market holdings, into short and mid maturity government bonds, effectively locking in attractive nominal yields, while making portfolios slightly more robust in positioning.

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 – 28th October – 3rd November 2023

This week we transitioned from October to November, leaving behind a very difficult month in markets, with the first few days of November proving very strong for equity and bond investors. We are just two days away from Guy Fawkes night, the conspirator who attempted to blow up the Houses of Parliament in 1605. November has certainly started with a bang as we have had multiple data releases and events causing fireworks in markets.

Arguably the most anticipated news of the week was the US Federal Reserve meeting on Wednesday. The base rate of 5.5% is a 22-year high and this went unchanged as the Fed opted to pause once more, following on from the previous meeting where rates were held steady. Market expectation was that the Fed would continue the pause to further see the impact higher rates were having on the economy. We have seen the US economy stand resilient despite the steepest rate rises in four decades, just last week we reported US GDP at 4.9% in the third quarter. Fed Chair, Jerome Powell was hawkish with his commentary as he stands firm on achieving the target inflation rate of 2%, however markets are convinced we have now seen the peak in rates, estimating only a small chance of an increase in the December meeting.

The Bank of England met on Thursday and followed suit as they also held rates steady at 5.25%. There was a change in the voting dynamic as Sarah Breeden succeeded Sir Jon Cunliffe on the monetary policy committee (MPC), and she was one of six to vote for rates to remain unchanged. Inflation played a vital role in the decision as it fell steeply in the month of July before staying sticky in the following months. It is estimated that inflation will drop further to 4.25% by the end of 2023. UK GDP projections for Q4 have weakened to 0.1% so the MPC must consider if this is now the peak in rates, as they do not want to overtighten policy, which could tip the UK into recession. There has been a huge change in UK rate expectations over the last 6 months, with the market believing in July that interest rates would be close to 7% by Q1 2024, which has now slipped to 5.25%.

Inflation in Germany has fallen to 3.8% in October (year-on-year), down from 4.5% in September. This is positive for the Euro zone as rates across Europe fall towards the 2% target, with the European Central Bank making it three out of three central banks to pause rates. The German economy however is still being weighed down as GDP fell by -0.1% for Q3. It has only grown twice over the last six quarters. There are concerns that the current geopolitical uncertainty will add further pressure to the economy as Germany still suffers from elevated energy prices since the war in Ukraine started.

Take a moment to guess what the Netherlands inflation rate for October was. Just two months ago it was 3% and preliminary results for the month of October came in at -0.4% (year-on-year). We can attribute this steep fall to the change in energy prices as gas and electricity peaked in October 2022. However, with a major European economy falling into deflation, it is a reminder how quickly outlooks can change.

The US Fed will have felt vindicated in their decision to pause, with US Non-Farm Payrolls data coming in weaker than expected on Friday. 150,000 jobs were added to the economy, against an expectation of 180,000. The slowdown in hiring is an indication that interest rates are continuing to bite, and the US economy is likely slowing as a result. 

It has been a very strong week in markets, with confirmation of central banks holding rates steady, coupled with a weakening in data, leading investors to believe that the headwind of rising interest rates may now be behind us. By the close of play yesterday the UK mid-cap equity index had risen 5.8% during the week, and at the time of writing is up another 1% today. The US S&P 500 index was up around 4.5% and again has nudged higher today. These weekly returns from equity markets are similar to the one year returns available on cash at the moment; it’s a reminder about the dangers of attempting to time markets. It wasn’t just equities that performed well, with bond yields falling (therefore prices rising). We wrote about the US 10-year Treasury yield reaching 5% last week; that has now fallen to 4.5%, providing significant capital uplift this week.

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 – 14th October – 20th October 2023

Many of our readers will have likely noticed the recently rising prices at the petrol pumps. The impact of increasing oil prices in recent months fed through into UK inflation data this week, where headline inflation remained at 6.7%. While this is still the lowest level of inflation since February 2022, it was higher than expected, which was in part driven by oil prices, that have recently marched up to nearly $100 a barrel.

The UK’s inflation rate does remain an outlier when compared to most other developed market countries (USA, Germany, France), with energy and services once again leading the charge. The services sector includes rent prices, and this has consistently been a leading contributor to inflation. The Bank of England (BoE) paused on interest rate hikes at their last meeting, buying themselves time to assess the impact higher rates are having. Slightly higher inflation may encourage the BoE to hike rates in November, although it is still expected that inflation rates will fall as we head towards the end of the year.

UK wage growth data was released on Tuesday at 7.8% (excluding bonuses), meaning wages are growing at a faster rate than inflation for the first time since 2021. Chancellor, Jeremy Hunt, was very proud of this stating “It’s good to see inflation falling and real wages growing, so people have more money in their pockets”. However, future expectations for wage growth could see a slowdown as UK companies are becoming more reluctant to hire new staff; there was a slowdown in job vacancies to 43,000 in September hinting at a declining jobs market.

US Retail sales for the month of September was up 0.7% (month-on-month), smashing the market expectation of 0.3% as US households stepped up the purchases of motor vehicles and spent more at restaurants and bars. Any talks of a potential US recession is certainly over for now as the economy continues to show its strength. Despite the strong data, investors are more confident the US Fed will avoid another interest rate hike in their November meeting. The question remains, is the economy getting used to interest rates being “higher for longer”?

Sustained momentum in the US economy was also fuelled by a decline in the weekly jobless claims to 198,000. The number of Americans filing claims for unemployment benefits for the first time is now at a nine-month low showing the labour market is resilient as we head towards the end of October. This data is fantastic news for the economy, but we’ve seen that good news can be bad news for markets. The currently strong US economy helps fuel the “higher for longer” narrative, and as a result of this we have seen US bond yields continue their recent weakness. The yield on the 10-year US government bond reached new 16 year- highs, rising as high as 4.99% on Thursday. Concerns around US fiscal deficits have also led to rising bond yields. It will be interesting to see if the bond vigilantes lead to a change in fiscal approach in the US, similar to the situation 12 months ago in the UK following Liz Truss’ unfunded spending plans.  

“There are a million ways to make a million dollars in markets”, was once stated by industry expert, Jack Schwager. This statement is completely true and there are several approaches to investing, however we are consistent with our specific approach. We stress the importance of diversification within portfolios across asset class, sectors, styles and regions. This week has proved painful for investors as most asset classes have struggled, although there have been bright spots, such as gold and alternative strategies, including trend-following. Geo-political risks remain at the forefront of investor minds in the short-term. Concerns around potential oil embargos have led to increasing inflation expectations, which has hurt government bonds (which are typically a safe haven asset). Energy equities have outperformed the market and gold has been the asset of choice for safe-haven searching investors.

On a final note, for the England rugby fans, miracles can happen, although we think it unlikely we will be discussing an England win against South Africa in the semi-finals. Fingers crossed.

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.

Loading...