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
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