This week the main anticipated event was the release of UK inflation data for April. A dream scenario would have been inflation to fall to the 2% target rate which would seemingly be enough to convince the Bank of England to cut rates this summer. However, all UK economic data was pushed to one side with the shock announcement that a UK General Election will be called on 4th July.
An eventful Wednesday started with UK inflation data which showed headline inflation had fallen to 2.3%, from 3.2%. Despite being close to target, the fall was not as large as expected and there was further disappointment with higher-than-expected core and services inflation. It appears the hike in minimum wages has led to sectors such as hotels and restaurants passing on the costs to consumers through higher prices. Markets are very reactionary as data prints are released and there is now the belief that a June rate cut is off the table. However, there is still key labour market data and CPI data before the next Bank of England Meeting.
UK Prime Minister, Rishi Sunak, later that day called a surprise general election in a move considered to be a high-stakes gamble. When Mr Sunak first came into power, he wanted the UK population to judge him on five promises including halving inflation, growing the economy and reducing debt. “Now is the moment for Britain to choose its future” he stated, as he will battle labour leader Sir Kier Starmer over the next six weeks for the chance to build on that progress.
As Mr Sunak was making his speech he was getting drenched by the rain and we can attribute poor UK weather to the most recent weak UK Retail sales data. For the month of April retail sales fell -2.3% (month-on-month), a significant surprise as expectation was only a -0.4% fall. The Office for National Statistics report shows that footfall in clothing, sports, games & toys and furniture stores were all affected by the heavy rainfalls and storms across the month. There are hopes the UK will see better weather as we approach summer and strong wage growth combined with falling inflation should boost consumer spending.
The UK has seen an uptick in mergers and acquisitions (M&A) activity this week, namely video games service company Keywords Studios, which has accepted a £2bn offer from Swedish private equity group EQT. The company has grown to one of the largest companies on the London stock exchange AIM market, providing services to developers of popular video games including Fortnite, League of Legends and Assassins Creed. The bid came at a 73% premium to the latest share price and pleasingly the company was a top 10 position in our favoured UK smaller companies fund, leading to strong gains in the fund on Monday. The week was littered with further M&A news flow, with XP Power rejecting a £468m offer as well as the bigger news that Hargreaves Lansdown had rejected a bid from private equity at the end of April, with the possibility of a further bid very possible. Not to be outdone it appears that BHP may still be in for Anglo American, and the possibility of an agreement cannot be ruled out. The elevated M&A activity continues to highlight the value both private equity and listed corporates see in UK equities, even if fund flows continue to move capital away from UK equities.
Europe’s purchasing managers index is an indicator of the economic trend in the manufacturing and services sectors. Composite PMI for May reached a 12-month high at 52.3 beating the market expectation of 52 and continuing the positive expansionary trend. This is positive data for the European Central Bank to consider before the anticipated 6th of June meeting where they may cut rates.
Death, taxes and Nvidia beating earnings is the new catchphrase as the company beat revenue expectations once again in Q1. Nvidia’s quarterly earnings reports have become a way for investors to gauge the strength of the AI boom. The better than expected results led to Nvidia’s market cap rising by more than the value of the UK’s largest listed firm in a single day, with the share price reaching $1000. Over the past year, the largest firms Microsoft, Google and Amazon have battled to purchase Nvidia’s processing chips as they aim to take the lead in the Artificial intelligence race (AI) and the latest development of AI models capable of creating videos and engaging in human conversation will certainly spur more orders.
After a strong May, markets pulled back in the second half of the week, with concerns around sticky inflation acting as a negative headwind to bonds and equities. Commodities also pulled back, with gold, silver and copper all taking a breather after recent strong performance.
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.