With only three days left of the football transfer window, we are accustomed to waking up to a constant stream of rumours around potential last-minute transfers. However, this week’s swirl of rumours were about potential tax changes in the upcoming Labour budget, creating notable unease across financial and property markets.
Reports suggest Chancellor Rachel Reeves is considering extending National Insurance to rental income, potentially raising £2-£3bn annually. Simultaneously, murmurs of a windfall tax on bank profits have surfaced, echoing previous moves to target sectors perceived as benefiting disproportionately from macroeconomic conditions. As with football transfer gossip, the mere suggestion of these measures, whether or not they materialise, can influence investor behaviour, pricing dynamics and strategic positioning. UK domestic equities are suffering from tax uncertainty, with the mid cap index lagging the large cap index by over 3% in Q3, a reversal of the second quarter of the year where UK mid-cap stocks outperformed by close to 10%.
Over recent weeks we have witnessed a pick up in bond volatility, with long-term borrowing costs increasing for many developed nations, not just the UK. This is despite shorter-term borrowing costs being lowered (through interest rate cuts). Yield-curves continued to steepen this week, likely driven by a combination of persistent inflation concerns, diminishing demand from institutions and foreign central banks and quantitative tightening, with central banks (including the Bank of England) actively selling off its bond holdings. The trend of higher long-term yields will be a concern for governments as it increases their debt servicing costs.
There was a raft of Japanese data on Friday morning. Unemployment came in lower than expected, at 2.3%. Despite such low unemployment, retail sales remained anaemic, only growing 0.3% year-on-year. Tokyo inflation data was in line with expectations at 2.5%. Tokyo is Japan’s most populated city and therefore this inflation data normally provides guidance for national inflation data, which is released later.
Precious metals have seen a modest rebound in pricing this week, with the price of gold and silver moving higher, approaching year-to-date highs once more. Concerns around US Fed independence helped push up prices, with President Trump looking to dismiss Fed Governor Lisa Cook for allegations of mortgage fraud. It’s no secret that Trump wants lower interest rates in the US and this move is seen as an attempt to replace committee members who may not be aligned with his views.
It has been a terrific August for gold and silver producers (companies) who have seen their share prices rise far above the pace of the underlying precious metals. These companies are experiencing very strong earnings growth on the back of high commodity prices and stable costs.
Preliminary GDP data for the US showed the economy grew at an annualised rate of 3.3% in the second quarter. The finalised figure will be released next month. This data underlines current strength in the US economy and was released alongside unemployment claims data which was slightly better than expected. As the year progresses it will be interesting to see if the impact of tariffs begins to show up in company earnings and profit margins.
At a company level all eyes were on Nvidia’s Q2 earnings, released on Wednesday. Nvidia is now the world’s largest company by market capitalisation at over $4 trillion and is over 8% of the main US equity index. Revenue and earnings per share for the quarter beat expectations and revenues are expected to be over $50bn for the third quarter. Interestingly three customers, referred to as customers A, B and C, accounted for a combined 34% of total Nvidia revenue over the past year. It is widely believed these customers are Amazon, Microsoft and Meta. While it may feel comfortable having such a large part of revenue from three prestigious companies, it does carry risks for Nvidia. Within portfolios we look to reduce risks like this through diversification; no over reliance on any one country, company, sector or theme.
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.