The start to September in markets has not kept pace with the rising temperatures we have witnessed in the UK this week. Temperatures have hit above 30 degrees for four consecutive days, setting a new record in the month of September, with the potential to make it five or six days if the weather keeps up this weekend. Fingers crossed!
As we head towards the next US policy meeting on the 20th of September, the US Fed and market participants alike will be picking apart the data points that are released in an effort to determine whether further rate hikes are warranted. Purchasing Managers Index (PMI) is a leading indicator of economic trends within sectors and have been the leading factor for market moves over the last two weeks. The US services sector for August has surprised to the upside, rising to 54.5, the highest reading since February and indicating an expansion in the services economy. The economy strengthening in theory is good news, it downplays the effect that the rate hikes have had on the economy and should support labour markets and consumers going forward.
Personal Consumption Expenditure (PCE) is not the most common index but is the US Fed’s preferred measure of inflation, as it calculates inflation but considers buying habits and saving levels. PCE for the month of July showed a rise to 3.3%, a jump up from 2.9% in the previous month and confirmed US consumer spending was still resilient with increasing spending in restaurants and concerts. Inflation remains greater than the strict 2% target the US Fed has set and investors will eagerly await the next meeting.
US initial unemployment claims came in better than expected on Thursday, a further indication of strength in the labour market. While there are signs of pockets of weakness in US labour markets, the overall picture continues to be a positive one, which in theory should help support equity markets in the near term.
Strikes have been a common topic this year and the latest to shock markets is at Chevron’s Australian natural gas plant. Australia is the world’s largest liquified natural gas exporter, and the confirmation of worker strikes over wages and working conditions has led to a spike in European gas prices. The strikes have been designed to place significant pressure on Chevron and force them to cut a deal before production is substantially affected. A total shutdown of the facilities would be chaotic, immediately causing an energy crisis in Australia that would require the government to intervene. The same strike tactics were employed on domestic gas producer, Woodside energy, leading to a deal raising wages and making it harder for the firm to hire contractors, improving existing employees job security.
Shares in Apple tumbled almost 6.5% over the past two days, wiping $190bn from its market cap following the news of a China ban on iPhones. Employees at government owned firms have been told to stop using the iPhone with many companies offering subsidies to incentivise the switch to local brands. Huawei, China’s leading phone manufacturer, have also launched two new phones in the push against Apple with smartphone sales estimated to jump almost 70%. Given Apple is the largest constituent of the major US and global equity indices, weakness in the share price weighed heavily on markets.
Bank of England (BoE) Governor Andrew Bailey indicated this week that UK rates are likely to be “near the top of the cycle” as the BoE expects inflation to continue to drop towards the end of the year. The back-and-forth on interest rate expectations has led to volatility in the bond market; it was only a couple of months ago that certain commentators were predicting UK rates to peak at 7%, the peak rate is now expected to be below 6%. Bailey’s words led to a weakening in sterling versus the USD, falling below 1.25, a 3-month low.
Weakness in Apple this week reinforces our message of diversification and being aware that even seemingly great companies can face headwinds. Our equity exposure in portfolios remains diversified across sectors, styles and geographies. The fixed income component of portfolios is focused on high quality bonds which are now paying attractive nominal yields, which will form the bedrock of portfolios going forward.
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.