What a difference a week makes. Last week’s concerns around a potential US hard landing and recession have now been shelved following data that pointed towards lower inflation and modest growth, which was well received by equity markets.
The Japanese equity market, which suffered its second worst day in history last Monday, has continued to regain its poise this week. The main index finished the week very strongly and is close to 20% higher than the closing level on 5th August. While the equity market has recovered, the currency has once again weakened versus most major currencies, after a sharp rally that started in July. The Yen looks cheap on a wide range of metrics, but after the Bank of Japan stepped away from any further interest rate rises, the currency has weakened. GDP data for Japan was very strong this week, with the economy growing at an annualised 3.1% in Q2, boosted by consumption and this helped support the equity market.
Wednesday was a key day for data with both UK and US inflation data being released. UK inflation was slightly softer than expected, with headline inflation coming in at 2.2% vs an expected 2.3% figure. The same was true with the US – inflation was 2.9% against an expected 3% print. This was the first time in over three years that US inflation has been below 3% and likely cements an interest rate cut in September from the US Fed. Overall the data from the UK and US is pleasing; wage growth is now outpacing inflation, which should support consumption, while borrowing costs should begin to fall as interest rates are reduced, which will help businesses and consumers.
On Thursday the positive US jobs and retail sales data helped alleviate any concerns about a US recession and supported equity markets. Retail sales came in ahead of expectations, while unemployment claims were lower than anticipated. US equities posted a very strong Thursday, led by the small cap index, which rose nearly 3% on the news. Slow, but positive, economic growth, with falling inflation and interest rates is a positive cocktail for equities and this is the narrative supporting risk assets currently.
In the UK Q2 GDP and retail sales data was broadly in line with consensus and highlighted that the UK has now emerged from recession and is enjoying mild growth.
Fixed income markets sold off towards the end of the week, driven by strong economic data and the diminishing chances of aggressive rate cuts. At one-point last week there was the possibility of an emergency rate cut by the US Fed, and at least a 0.5% interest rate cut in September. Now the market is pricing in only a 0.25% cut in September and this negatively impacted government bond prices. However, the asset class has done its job recently in diversifying equity risk.
At a company level, Starbucks sacked their CEO after only a year in charge. The company has been struggling to maintain its market position and has suffered poor results over recent quarters, leading to a declining share price. Costs for Starbucks, particularly barista wages, have caused problems, while the ability to push pricing further appears limited, meaning profit margins have been impacted. The news of the immediate change of CEO led to the share price spiking around 25%, adding $20bn of market cap – clearly investors were thrilled with the leadership change.
Gold has been in a period of consolidation but made new highs once more this week, closing above $2,500 an ounce. The precious metal is in demand from areas such as China, with the central bank and consumers accumulating holdings in gold. Oil has nudged higher this week on the back of escalating geopolitical tensions. It may surprise many to read that the biggest oil producer in the world currently is the US, and last week they were producing a record breaking 13.4 million barrels of oil a day on average.
It’s been a positive week for risk assets, regaining their upward momentum following the Japanese flash crash last week. While short-sharp corrections can cause panic, it is important to stay objective and focus on the long-term during these bouts of volatility. Some of the most painful days in markets are quickly followed by some of the best, and that has been the case over the last two weeks.
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.