It has been a busy week in markets and for the team at Raymond James Barbican. On Thursday, the team participated in an industry wide football tournament that was organised to help raise funds for a cancer research trust, Sarcoma UK. After impressing in the group stages and winning the group the team were knocked out in the quarter finals on penalties.
One of the biggest shocks this week was the release of the UK’s inflation rate. Headline inflation (year-on-year) for April was 8.7%, the first time it has fallen below 10% since August 2022. However, the drop in inflation was less than anticipated and core inflation (excludes the price of food and energy) was the main cause of concern as it rose from the previous month to 6.8% in April. UK government bond prices have fallen (yields rise) on the back of the data with the 2yr government bond yield rising above 4.5% as investors are now expecting further interest rate rises from the Bank of England (BoE). Rising inflation is also a key worry for the Prime Minister Rishi Sunak, who promised to halve inflation by the end of this year, requiring it to fall to 5%. It may have been too great of a promise as the Conservative party have lost seats in local elections and are under pressure heading into the national election next year.
Rising bond yields (falling prices) have been a theme this week with US government bonds also suffering following the release of US Fed meeting minutes. While there was acknowledgement that the need for further interest rate rises “had become less certain” it also wasn’t ruled out and this was enough to cause a sell-off in bonds.
UK Retail sales surprised this morning, rising 0.5% in April (month-on-month). This is up from the -0.9% in March which the Office for National Statistics believe were hindered by unusually heavy rain, keeping shoppers at home. This rise certainly suggests there has been little impact from the surge in inflation at this moment in time. Pound sterling has risen against USD to 1.235 since the news, following weakness earlier in the week. Households have been resilient, however it’s evident the squeeze will begin as 1.5m households face an increase in mortgage interest payments this year.
Ryanair, Europe’s largest airline by passenger numbers, have released a report stating they expect 10% traffic growth this year as they posted better than expected net profits of €1.43bn. Robust demand for airlines tickets show travel has not been affected despite rising interest rates and Ryanair plan to operate almost 25% more flights than pre-Covid levels this summer. CEO Michael O’Leary had a bearish tone on the future, however, as he believes demand for European short haul flights could drop this winter and early 2024 as consumer spending becomes strained.
The German economy is the largest in Europe and the fourth largest in the world after the United States, China and Japan. However, after revised figures, GDP in the country fell by -0.3% in Q1 2023. This follows the -0.5% in Q4 2022 meaning they are in a technical recession. The warm winter weather eased the pain felt from their over reliance on Russian energy but even a rebound in industrial activity and the easing of supply side issues were not enough to help the Germans avoid recession. The German Chancellor, Mr Scholz, appeared to be more optimistic about future growth in the economy stating the massive expansion of clean energy “would unleash the strengths of the economy” coupled with investments in semiconductor and battery factories.
The recent artificial intelligence (AI) excitement has led to a very narrow market rally, led by some of the mega-cap US growth stocks. Nvidia is one of the stocks that represents the AI rush. On Wednesday it released better-than-expected results and saw its share price rally around 25%, adding around $200bn to its market cap, which is now approaching $1 trillion. The company now trades at an eye-watering valuation and while the narrative is certainly compelling, we only need to look back a few years to see how it can be dangerous to get too carried away with powerful stories. During COVID-19, stocks such as Zoom and Peloton saw their share prices rise by significant amounts on the back of the work-from-home story, only to see falls of 80% or more since reaching highs.
The current market conditions have been challenging for portfolios this week, with bonds struggling while equity markets in general have also been weak. The bright spots have come from the technology sector and areas of Japan. We continue to be mindful around the lagged effects of rising interest rates and acknowledge the inflation and interest rate outlook could look very different in the coming months.
Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst
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