Category: Investment Committee

by Haith Nori

 

August was a rather volatile month this year for global markets. The Bank of England continued to increase interest rates. US Federal Reserve Chair Jerome Powell made his speech at the annual Jackson Hole Symposium, reiterating his approach to fighting inflation and the need to endure on the path of increasing interest rates until the 2% inflation target is reached. US debt has been downgraded by Fitch Ratings from AAA to AA+. The Bank of Japan has signalled an end to negative interest rates at the start of next year. Nvidia Corp continues to increase in share price and CEO Jensen Huang comments on the latest partnership with Google. Economists are continuing to downgrade their views on growth projections for China, worsening the outlook for China.

On 2^nd August, Fitch Ratings, one of the three big American credit rating agencies, made the decision to downgrade the US debt rating ’from the highest AAA rating to AA+, citing “steady deterioration in standards of governance.”’ [i] The downgrade was a result of US lawmakers taking their time and negotiating continuously until the final deadline with the issue of the debt ceiling, having placed them on a ratings watch since the start of May when governance worries began. The rating change highlights a slightly higher expectation of default risk from the lowest possible level, albeit still implying a very remote probability.

Following the rate hikes in July by both the US Federal Reserve and the European Central Bank, the Bank of England started off the month (3^rd August) by hiking interest rates in the UK by 0.25% to 5.25%. This was their 14^th hike in a row and leaves interest rates at 15 year highs, with the Bank of England stating that ‘high inflation meant it was unlikely to stop rates any time soon’[ii]. Sterling continued to depreciate after the release of the news, remaining at a lower level for the rest of August. Like Sterling, UK equities also took a negative fall after the release of the news and continued to fall before regaining some of the lost value in the last week of August. Between April to June this year basic wages in the UK rose at their fastest rate of 7.8% which, whilst promising for the general public, also boosts the chances of the Bank of England continuing to increase interest rates. The next meeting for the European Central Bank, US Federal Reserve and the Bank of England will be in mid-September.

On 10^th August US CPI data was released for the 12 months ending in July of 3.2% slightly higher than the June data of 3.0%. Whilst this is a slight disappointment US data is still the closest to the 2% inflation target. On Wednesday 16^th August UK CPI data was released for the 12 months ending in July of 6.8%, down from 7.9% in June, exactly as predicted by analysts. In the Eurozone CPI figures were 5.3% for the 12 months ending in July, down from 5.5% in June. Whilst these figures have been promising all round, Central Banks have stressed the need for interest rates to remain high until inflation is under control. This was the key takeaway to come from Jackson Hole, which took place between 24-26^th August. US Federal Reserve Chair Jerome Powell ‘once again reinforced the “higher for longer” mantra’[iii] in terms of his approach to interest rates and stressed that the committee remain determined to reach the 2% inflation target and are unwilling to stop until the job is done.

The Bank of Japan’s board member Naoki Tamura stated in a speech to Japan’s business leaders, that Japan’s inflation is in clear view of their target and has been ‘signalling the chance of an end to negative interest rates early next year.’ [iv] The comments have been the most compelling as an indication that the Bank of Japan will take action to phase out its unique approach to ultra-low interest rates. Along with the other developed market central banks, the Bank of Japan has a 2% inflation target. Tamura suggests that timing will be important and any such change will be dependent on the conditions of the economy falling into place.

Nvidia Corp, the best performing stock in the S&P 500, currently up 234% since the start of the year, on 31^st August was blocked from selling its A100 and H100 chips to certain areas in the Middle East. This follows an announcement from US President Joe Biden expanding the initial restrictions that were placed on selling to China. Clarification on which specific countries in the Middle East the restrictions have been extended to has not yet been announced. Nvidia stock has continued to increase in share price over the month and the chipmaker has announced (29^th August) a partnership with Google to increase the distribution of its artificial intelligence (AI) technology. This will allow google customers access to the technology that is created by the H100 GPUs. Nvidia CEO Jensen Huang stated “Our expanded collaboration with Google Cloud will help developers accelerate their work with infrastructure, software and services that supercharge energy efficiency and reduce costs”. [v]

Overall, August has been volatile in terms of performance within asset classes. Brent Crude, after the gains made during July remained relatively flat during August. The UK 2-year, 10year Gilt yields and US 10 year Treasury yield have all returned to levels seen at the start of the month following initial increases in yields during August. Sterling continued to depreciate against the US Dollar and Gold also returned to a similar level at the start of the month.

[i] https://edition.cnn.com/2023/08/01/business/fitch-downgrade-us-debt/index.html

[ii] https://www.reuters.com/world/uk/view-bank-england-raises-rates-14th-time-2023-08-03/

[iii] https://www.reuters.com/markets/us/global-markets-view-usa-pix-2023-08-28/

[iv] https://www.reuters.com/markets/asia/boj-policymaker-signals-chance-policy-tweak-early-next-year-2023-08-30/

[v] https://www.cnbc.com/2023/08/29/nvidias-stock-closes-at-record-after-google-ai-partnership.html

 

Author: Tim Sharp

Researcher: Jack Williams

Published: August 24, 2023

It has been an eventful month with markets, surprising the bears once again.

Asia ex-Japan was the best performing region, the Hang Seng rose 6.1% during this period as market participants overlook weak factory and services data, choosing instead to concentrate on Beijing’s latest measures to stimulate consumption and kickstart what has so far been a lacklustre covid recovery.

We remain somewhat sceptical of China as an investable market with geopolitical tensions, slowing growth (albeit still at a higher rate than the majority of nations) and the commercial property downturn continuing.

As of writing this publication, stories of Country Garden (2007.HK) another real estate behemoth in China missing interest payments and scrapping plans to inject cash into the business emerge, sparking renewed fears of a smaller scale Evergrande calamity or economic downturn in the region as the government struggles to regain confidence.

As a team we are very intrigued by the landscape of LATAM equities currently as we seek to benefit from the downturn in rates and a potential rotation back into equities following a period of elevated rates in the region.  The Brazilian Bovespa index gained 3.3% in July following the BCB’s first rate cut of 50bps, Chile too cut rates the week before with their central bank moving to cut by 100bps and minutes from their July meeting suggesting another 75-100bps could be cut in August.

Global fixed income was flat to marginally weak with credit and emerging market bond index spreads falling slightly more, in line with a risk on environment. Listed infrastructure and real estate recovered 4% during the month, although this was mixed at a subsector level and could well be perceived as bargain hunting at these discounted levels. At the time of writing news is emerging of Buffet moving Berkshire into the housebuilding sector, accumulating stakes worth over $814mm in three US names, Dr Horton (6mn Shares), Lennar (152,572 Shares) and NVR (11,112 Shares).

To our relief, and somewhat in-line with our own expectations, the vice-like grip of inflation eased across markets with EU, UK and US readings all surprising to the downside, U.K headline reached 7.9% while core hit 6.9%.

While still extremely data dependant, it is encouraging to see inflation heading in the right direction and adds weight to the argument that within developed markets we could be close to terminal rates and a pause by central banks (excluding Japan) is likely from here while they seek to assess the stickiness of their remaining inflation. Until recently the soft-landing argument was sneered at by many market participants, however this is now being priced as the most likely outcome.

The BoJ continues to run very loose monetary policy stimulating inflation, although this has been favourable for Japanese equity markets with investors looking for value and positive earnings momentum. We continue to find ourselves attracted to Japanese equities due to the favourable mix found within markets. Japan offers attractive valuations on companies engaged in some of the most pioneering industries to which globally we could be at the inflection point of mass adoption, think Robotics, Technology, AI, Automation, Japan has had a foot in this camp for many years now and this could well be a very interesting period for the region. We see the opportunity mix alongside valuations as a big reason for the Nikkei making 33-year highs back in May.

While the committee kept S.A.A unchanged we took this moment to re-visit some of our inflation beneficiaries including an overview of the  food retail sector. We reviewed the razor-sharp margin nature of the businesses, increased governmental and societal pressure for lower food prices and valuation extensions on equities within the space to P/E’s in excess of 30x. . Falling inflation and persistently tight labour markets also present a significant challenge for these businesses. In summary we see better value and opportunity elsewhere in areas such as UK Pharma.

We have also noticed a growing concern amongst market participants and economists that the ECB could be drastically close to a policy misstep. Many believe the economic picture within the Eurozone economy is not as rosy as it is currently being painted by the central bank, combine this with their aggressive tightening regime and could yield a hefty blow to businesses, individuals and equity markets within the region.

A.S.R (Absolute Strategy Research) undertook a comparison of the global financial crisis and the economy post pandemic; it would seem several of the mistakes witnessed amidst the GFC have not been repeated. Post GFC compared to post pandemic saw a major difference, whereas stimulus in the GFC was removed to be replaced by years of austerity leading household incomes and assets to shrink, following the pandemic fiscal stimulus has remained looser for longer replacing what was a long-term deflationary threat with this new inflationary environment.  ASR expect a slower pace rate of cuts than expected, weaker growth and higher for longer interest rates which could spell volatility for investors given current market expectations.

ASR see the current forecast of rates falling while the economy slows as overly optimistic, siding with central bankers. We see the yield curve inversion being solved by principally falling short term rates. Long dated bonds are also pricing in continued falling inflation, however, if inflation surprises by staying higher for longer (it wouldn’t be the first time sticky inflation has caught investors off guard) then there could be a case to be made for long term yields to remain elevated over a longer term, meaning the unwinding of the curves inversion may unfold in a different manner to that of the general consensus. Long term yields are also likely to remain elevated in the presence of high budget deficits which will require funding through an increase in the issuance of coupon securities.

Advancements in technology along with a strong consumer are two clear reasons the market has performed well this year, however as a team we question the underlying statistics leading many to this outcome. The excess savings figure we see as highly subjective and continue to advocate for the study of credit flows to assess strengths and weaknesses within consumer behaviours.

Despite strong returns year to date, earnings on a forward basis are flat, leaving P/E ratios vulnerable. ASR believe any significant upside in the SPX from these current levels would need EPS growth in excess of 15% or forward P/E’s of 20X, which would see equity indices looking stretched to say the least. Now investors can achieve 5.5% on 3-month cash rates and the trailing earnings yield of the SPX is at 4.16%, we question whether investors are being fairly compensated for the any risk taken when risk free options seem so attractive in these times. When compared to bonds ASR state Global Equity Risk Premium is the lowest since 2007 and US ERP is at a 19-year low. Even with the optimism being created by investors, equities look expensive on a relative basis and are generally priced for perfection in our view. This creates an awkward dilemma for any companies trading on elevated multiples that cannot live up to the image valuations have painted. Any disappointments in earnings or guidance would likely be met with a fierce market reaction.

In aggregate we remain underweight equities, overweight short-dated fixed income and overweight alternative strategies.

by Haith Nori

 

July saw global markets deliver positive returns. The encouraging news of inflation reducing in the US, Eurozone and the UK has rippled through global equity markets leaving a progressive outcome. Despite the good news, Central Banks have continued to increase interest rates, factoring the latest data into their plans, with the exception being the Bank of Japan who have maintained their stance on ultra-low interest rates. Half-way through the year, second quarter earnings have so far been encouraging and fears of a recession are slowly fading with the idea of a soft landing seeming to be more plausible. Ukraine has, for the time being, not been allowed to join NATO while the war is still active. The trade war between the US and China is levelling up once more and Russia has pulled out of the UN Grain Deal brokered by Turkey last year in retaliation to what they believed to be an attack from Ukraine.

At the beginning of July, China announced that from August they would impose export restrictions on gallium and geranium to US, which are crucial elements for semiconductors and computer chips used in electric vehicles and military equipment. The news came just before Independence Day. China’s decision was ‘widely seen as retaliation for U.S. curbs on sales of technologies to China’[i].  The US announced that they would stop sales to China of high-tech micro-chips in July, as they feel these should not be used by Chinese Military. The retaliation from China could be the beginning of increased tensions between the two countries. Janet Yellen, US Secretary of the Treasury, travelled to China to meet with Premier Li Qiang, in an attempt to repair economic relations between the two countries, stating China had unfair economic practices but China wanted her to meet them in the middle with the development of trade ties. However, whilst Yellen achieved some success talking with some of China’s main economic policymakers, no trade, investment or technology matters have been agreed.

Russia pulled out of UN Grain deal brokered last year by Turkey called “The Black Sea Grain Deal” set up last year after blasts to the Russian bridge connecting to the occupied Crimean Peninsula by what Russia thought to be Ukrainian Seaborn drones. Their decision ‘raised concern primarily in Africa and Asia of rising food prices and hunger’[ii]. Russia has retaliated by targeting grain infrastructure striking the Ukraine grain port of Odesa.

A NATO summit was held in Vilnius, Lithuania on 11-12^th July where the idea of Ukraine joining the NATO was raised. Whilst the thirty-one members of NATO are supportive of Ukraine being part of the alliance, the US has posed strong opinions that they will not ‘let a warring country into NATO and give too firm a timeline commitment’[iii]. It was indicated that Ukraine would be able to join NATO once the war was over. The leaders of NATO have also declared that the future of Ukraine laid in the hands of NATO’s military relationship. Neither Zelenskyy nor Putin were happy with the outcome.

On 12^th July US CPI data was released for the 12 months ending in June of 3% beating expectations of 3.1%. This has come a long way since its level of 9.1% in June 2022! On Wednesday 19^th June UK CPI data was released for the 12 months ending in June was 7.9%, beating expectations of 8.2% and marking a steady reduction. The positive news gave a boost to UK Equities, with housebuilders benefiting the most as market participants believe that upward pressures on interest rates (and thus mortgages) could be abating. In the Eurozone CPI figures were 5.5% for the 12 months ending in June, down from 6.1% in May. Whilst these figures have been promising, Central Banks are still attempting to control inflation.

On 26^th July the US Federal Reserve made the decision to hike interest rates by 0.25% (as expected) to 5.25%-5.50%, the eleventh time in the last 12 meetings. The last time the Federal Reserve had raised rates this high was in 2007 when there was a housing market crash. Jerome Powell has suggested that this is perhaps not the end and will review if rates are to be raised again in September stating ‘We’ll be comfortable cutting rates when we’re comfortable cutting rates, and that won’t be this year’[iv]. Powell still believes there is a pathway towards a soft landing, which is where inflation falls without a recession being caused as a result. On 27^th July the European Central Bank continued their path by increasing interest rates by 0.25% to 3.75%, this being the ninth consecutive hike in a row and has taken them to twenty-three-year highs.

On 28^th July the Bank of Japan’s Governor Kazuo Ueda decided not to change their ultra-low interest rate policy, maintaining overnight interest rates at -0.1%. He also made the choice to marginally loosen their yield curve control (YCC) by buying 10-year Japanese Government Bonds at a rate of 1.0% in fixed-rate operations, rather than the previous 0.5% rate, shocking markets. By promising more flexibility in the YCC, this is their method for controlling long-term interest rates as ‘This effectively expands its tolerance by a further 50 basis points, signalling the BOJ would let the 10-year yield rise to as much as 1.0%.’ [v] The next meeting for the Bank of England will be at the beginning of August where markets are expecting a 25 basis point hike.

Overall, July saw a positive performance across asset classes. Brent Crude, after starting the month at levels of c.$74 per barrel, increased to over c.85 during the month. UK 2year Gilts have reached a yield of over 5%, with the 10-year yield reaching highs of c.4.65% and US 10-year Treasury note c.4.048%. During July Sterling continued to hit its highest levels over this past year, reaching over c.1.31 against the US Dollar. Gold also regained some of its lost value in June.

[i] https://www.reuters.com/markets/commodities/chinas-rare-earths-dominance-focus-after-mineral-export-curbs-2023-07-05/

[ii] https://www.reuters.com/world/europe/russia-carries-out-air-strikes-second-night-ukraines-odesa-port-governor-2023-07-18/

[iii] https://www.cnbc.com/2023/07/14/zelenskyy-absurd-comment-how-nato-pressured-ukraine-to-show-more-gratitude.html

[iv] https://www.reuters.com/markets/rates-bonds/fed-poised-hike-rates-markets-anticipate-inflation-endgame-2023-07-26/

[v] https://www.cnbc.com/2023/07/31/strategist-boj-should-move-to-new-normal-sooner-current-policy-is-very-harmful.html

 

by Haith Nori

June saw global markets deliver mixed performances, albeit generally reacting positively to the US Debt ceiling issue being resolved at the end of May. A key aspect during this month has been central banks taking their next steps to control inflation. Japanese equities have reached their highest point since August 1990, up c.29% since the start of 2023 with Warren Buffet spotting value in the country and increasing the size of his existing positions in several of Japan’s largest firms. Back in the US, Apple has now reached a market capitalisation of over $3 trillion for the first time ever, assisting with the continued technology rally since the beginning of the year.

On 13^th June US CPI data was released for the 12 months ending in May of 4%, 0.9% lower than that of April, still on the downward trend since June 2022 (9.1%). US. Federal Reserve Chair Jerome Powell is still fixated on achieving a 2% inflation target. On 16^th June Eurozone CPI data was released for the 12 months ending in May of 6.1%, a reduction from April’s 7.0%. On 21^st June UK CPI data was released for the 12 months ending in May remained at 8.7%, unchanged from April, missing expectations of 8.4%.

On 14^th June the US Federal Reserve made the decision to keep interest rates unchanged at 5.00%-5.25% following ten consecutive meeting hikes. Global markets reacted positively to the news with many participants believing a pause was a sensible idea given the huge increase in base rates over the past year. On 15^th June the European Central Bank also continued on its path, increasing interest rates by 0.25% to 3.5% (this being their eighth straight hike in a row). ECB president Christine Lagarde suggests further hikes are likely in July’s meeting. This is the highest level of interest rates in 22 years for the European Central Bank. Following suit, on 22nd June the Bank of England also made the decision to increase interest rates by 0.5% to 5% from 4.5% being the 13^th time in a row that the Bank of England has increased interest rates. This was higher than the expected rise of 0.25% and is the largest rate increase since February. The Bank of Japan kept their ultra-low interest rates unchanged. At the European Central Bank Forum on Central Banking in Sintra, Portugal (26^th-28^th June), policy makers were keen to stress that market participants should not anticipate any interest rate cuts for at least a period of one to two years.

US Secretary of State Antony Blinken made the long-awaited trip to China on 19^th June to meet with President Xi Jinping in Beijing’s Great Hall of People (which is usually reserved for meetings with heads of state). The purpose of the trip was to attempt to ease tensions between the two countries. The initial meeting was planned for February but delayed after the US shooting of the suspected Chinese spy drone. During the meeting ‘China and the United States agreed on Monday to stabilize their intense rivalry so it does not veer into conflict, but failed to produce any major breakthrough’[i]. Both leaders of the two countries, US President Joe Biden and China’s President Xi Jinping cited the meeting as progress as concerns were able to be raised and channels of dialogue were opened. Whilst at this time, no firm plans have been put into action, the face-to-face meeting with US Secretary of State has begun a journey for the two countries to communicate further.

On 21^st June, US Federal Reserve Chair Jerome Powell testified before the House of Financial Services Committee to deliver his semi-annual report to both Chambers of Congress. The next day he appeared in front of the Senate Banking Committee. After US markets had benefited from the Federal Reserve keeping interest rates unchanged, Powell ‘hinted at the likelihood of further interest rate hikes’[ii] leading to further sell offs in US equity markets.

On 22^nd June, the Prime Minister of India, Narendra Modi, made his first official state visit to Washington D.C. to meet with President Joe Biden. The purpose of the meeting for Modi was to raise the status of India and strengthen ties with the US and ‘the two countries announced agreements on semiconductors, critical minerals, technology, space cooperation and defence cooperation and sales’[iii]. One deal that has already been signed off is with General Electric to produce jet engines in India for their military aircrafts with an agreement with Hindustan Aeronautics. Further deals are being planned between the two nations and no doubt will be a boost for the economy in India.

On the weekend of 24^th June, Yevgeny Prigozhin, the boss of private mercenary army Wagner, led an ultimately brief rebellion starting in the city of Rostov-on-Don, Russia, moving north towards Voronezh following the path towards Moscow. ‘Wagner fighters have taken control of all military facilities in the city of Veronezh, about 500km (300 miles) south of Moscow’[iv] with which Putin made an announcement accusing Wagner fighters of “treason”. After the initial ambush Prigozhin ordered his army that was advancing on Moscow to stand down to avoid any further casualties. Whilst this has been short lived the act made a large impact calling for countries to prepare a quick response if the situation was to escalate further and ending with a tougher response from Russia on its attack on Ukraine. Mr. Prigozhin was exiled to Belarus in exchange for the criminal case being dropped against the Wagner Group.

Overall, June saw mixed performance across asset classes. Brent Crude, after starting the month at levels of c.$74 per barrel, remained at a similar level throughout the month. Japanese equities have reached a 33-year high and UK 2 year Gilt yields reaching a level of over 5%.UK 10 year Gilt yields reached highs of 4.49% and US 10 year Treasury yields 3.839%. During June Sterling also hit its highest level at c.1.28 against the US Dollar over the past year and gold slightly fell in value.

[i] https://www.reuters.com/world/china/blinken-wrap-up-rare-visit-china-may-meet-xi-jinping-2023-06-18/

[ii] https://www.reuters.com/markets/us/futures-muted-ahead-powells-congressional-testimony-2023-06-21/

[iii] https://www.reuters.com/world/biden-modi-strengthen-ties-with-defense-trade-agreements-2023-06-22/

[iv] https://www.reuters.com/world/europe/how-mercenary-revolt-has-gathered-pace-russia-2023-06-24/

by Haith Nori

May saw a mixed performance across global markets. In equity markets across Europe, including the UK there was a slight decline in overall value. However, US technology stocks continued to increase, as did Japanese Equities. Elsewhere in the US equity market performance was more mixed. Yields increased on both UK 10-year Gilts and US 10-year Treasuries. The US Debt ceiling has been a key focus over the course of the month, with the House of Representatives finally passing the bill at the end of May. The US Dollar, after a weak start to the year, regained value over the month of May. Tayyip Erdogan has now been elected for 5 more years as the President of Turkey, having already been in power for 20 years. The G7 Meeting also took place in Japan where global leaders met face to face and Ukraine’s President Mr. Zelensky continued to request support from other developed countries around the world.

On 3^rd May 2023, the US Federal Reserve made the decision to increase interest rates by 0.25% from 5.00% to 5.25%, marking the highest level of interest rates reached in the past 16 years. On 5^th May the European Central Bank also raised interest rates by 0.25% to 3.25%, this being the seventh straight hike in a row and with the previous three rate hikes all being 0.50%. Following suit, on 11^th May the Bank of England also made the decision to increase interest rates by 0.25% to 4.5%, this being the 12^th time in a row that the Bank of England has increased interest rates. The UK bank rate is now the highest it has been since 2008. The next meetings for the Federal Reserve, the European Central Bank and the Bank of England will be in June 2023.

On 10^th May, US CPI data was released for the last 12 months ending in April. Headline inflation came in at 4.9%, 0.1% lower than that of March of 5%. Previous figures were 6.0% in February, 6.4% in January, 6.5% in December and 7.3% in November, highlighting inflation’s gradual decline since June 2022 (9.1%). On 17^th May, Eurozone CPI data was released for the last 12 months ending in April of 7%, slightly up from March’s 6.9%. On Wednesday 24^th May, UK CPI data was released for the last 12 months ending in April of 8.7% compared to 10.1% for March, 10.4% in February, 10.1% in January. This is down from its peak of 11.1% in October. Whilst this did not meet consensus expectations of 8.2%, it is the largest reduction in CPI data since the pandemic and has dropped below 10% for the first time in 8 months.

Ukraine’s President Volodymyr Zelensky has been requesting support across Europe before arriving in the UK on Monday 15^th May. The UK Prime Minister Rishi Sunak said ‘Britain would provide Ukraine with hundreds of air defence missiles and further unmanned ariel systems, including new long-range attack drones with a range of more than 200km’[i]. The delivery is expected in the following months and will be combined with Britain beginning training of Ukrainian pilots this summer. In addition to the UK, Germany has vowed to send up to $3 Billion worth of arms and France pledged to train and equip Ukrainian battalions with dozens of armoured vehicles.

The G7 meeting was held between 19-21^st May in Hiroshima, Japan where members stood united on various global issues including support for Ukraine, nuclear disarmament, China, clean energy economies, economic security, and climate change. US President Joe Biden has pledged $375 million in a military aid package with other G7 leaders pledging their continued support. Concerns over China were raised, including Beijing’s military activities against Taiwan and its use of economic coercion for its political gains. The G7 heads expressed their desire to work with China constructively but the existing issues needed to be addressed. However, ‘Beijing’s foreign ministry said it firmly opposed the statement by the G7’ and ‘said it had summoned Japan’s ambassador to China in a pointed protest to the summit host’[ii] highlighting the intensity of frustration and China’s newspaper the Global Times dubbing the G7 summit an “anti-China workshop”.

The US debt ceiling, which is the limit set by the US Congress on the amount of Government debt that can be accrued, has been in critical negotiations in May. Ever since the legislative cap was created in 1917, a majority vote is required by both the House of Representatives and the Senate. The vote raises the upper limit of how much the government can borrow. Since 1960, the debt ceiling has been raised 78 times but never reduced. The Democrats want the debt ceiling to be raised but the Republican leaders wish for spending cuts to be agreed first. President Biden is arguing that issues regarding government spending are separate from the issue of raising the debt ceiling.  Currently, the nation’s debt ceiling is $31.4 trillion and a deal is needed to be struck as Treasury officials estimated that if they were to continue spending at the current rate the US could run out of money by Monday 5th June. Finally, on Wednesday 31^st May, The US House of Representatives passed a bill suspending the debt ceiling which will need to be signed by Joe Biden in order to be put into law. ‘The legislation suspends – in essence, temporarily removes – the federal government’s borrowing limit through Jan. 1, 2025’[iii] setting aside the issue until after the next US Presidential Election in November 2024.

Overall, May has seen mixed performance within asset classes. Brent Crude, after starting the month at levels of c.$80 per barrel, decreased over the course of the month ending at c.$73 per barrel. UK 10-year Bond yields and US 10-year treasury yields both continued to increase. Gold fell in value whilst the US Dollar rose.

 

[i] https://www.reuters.com/world/ukraines-zelenskiy-meet-british-pm-sunak-2023-05-15/

[ii] https://www.reuters.com/world/china/china-summons-japanese-ambassador-over-actions-g7-2023-05-22/

[iii] https://www.reuters.com/world/us/us-debt-ceiling-bill-faces-narrow-path-passage-house-2023-05-31/

by Haith Nori

April delivered some light relief following the volatility witnessed over the first quarter of the year. There has been a flurry of Merger & Acquisition deals within the financial industry, including Rathbones buying the UK arm of Investec and Deutsche Bank agreeing to buy London based investment bank Numis. JP Morgan Chase have had their offer accepted on First Republic Bank after being in a bidding war in the final week of April following the Federal Deposit Insurance Corporation (FDIC) reaching out to big banks in the US.

On Tuesday 4^th April, the ‘US unveiled $2.6 billion worth of military assistance that includes three air surveillance radars, anti-tank rockets and fuel trucks, the Pentagon announced’[i]. Countries are still providing support to Ukraine as the war has still not reached a resolution. In the UK, Jeremy Hunt, Chancellor of the Exchequer, confirmed that an additional $500 million in guaranteed loans would be provided by the UK on 13^th April.

On 4^th April, Rathbones agreed to buy the UK Wealth arm of Investec in an ‘all-share deal that values the unit at 839 million pounds ($1.04 billion)’ [ii]. If the deal goes to plan, a very large wealth manager will be created with approximately 100 billion in assets under management. On the flip side, Investec will own 41.25% stake in the combined firm. The deal is still subject to the necessary regulatory approvals and is estimated to be completed in the final quarter of 2023.

On Friday 28^th April, Germany based Deutsche Bank announced that it ‘had agreed to buy Numis Corp (NUM.L), a London-based boutique investment bank, for about 410 million pounds ($511 million) as the German company continues to deepen its links with British corporate clients’[iii]. This is a cash consideration deal valuing Numis at 350 pence per share and is Deutsche Bank’s largest acquisition in more than a decade. The deal will provide Deutsche Bank with strong links to the UK and Ireland which it intends to combine its existing corporate finance business in these areas with Numis, a leading UK corporate broking and advisory house. The deal is again expected to be completed during the final quarter of 2023 subject to regulatory approval.

First Republic Bank, the third bank to fail since March after Silicon Valley Bank and Signature Bank, saw several bidders trying to capitalise on the bank’s demise. The bank had been seized by regulators and the Federal Deposit Insurance Corporation (FDIC) was subsequently appointed the bank’s receiver. In the last week of April, the FDIC had been reaching out to other big banks in the US to gauge interest in acquiring its assets. On Sunday 30^th April, the race had reduced to just four competitors after the FDIC informed potential investors to input their final bids by a deadline of noon. JP Morgan Chase were one of the bidders and had dedicated the task of due diligence on First Republic Bank to over 800 employees. The deal was later accepted by the FDIC and announced in the early hours of Monday morning, where ‘JP Morgan will pay $10.6 billion to the U.S. Federal Deposit Insurance Corp (FDIC) as part of the deal to take control of most of the San-Francisco-based bank’s assets and get access to First Republic’s coveted wealthy client base’[iv]. US President Joe Biden praised the deal, announcing his evaluation that JP Morgan was helping make the US banking system more secure. The deal has received all the necessary regulatory approvals and has since closed.

On 12^th April US CPI data was released for the 12 months ending in March of 5%, down from 6.0% in February, 6.4% in January, 6.5% in December 2022 and 7.3% in November 2022, continuing its gradual decline since June of last year at 9.1%! This is the largest decrease seen for a while, and lower than expectations which shows some positivity. On 19^th April UK CPI data released was 10.1% for the 12 months ending in March, compared to 10.4% in February and 10.1% in January. A decline has been seen but the headline rate remains above double digits and is now back to the levels achieved at the start of the year. There has been a 1% decrease since October’s 11.1% and there is still a long way to go if the Bank of England is to achieve their overall inflation target of 2%. The next meetings for the Federal Reserve, Bank of England and the European Central Bank will be held at the beginning of May where they will once again address the decision of whether to change interest rates.

In other asset classes the UK 10-year Bond yield started the month at c.3.429%, ending at c.3.718% showing an increase in yields, returning to levels last seen at the end of February and beginning of March. On the other hand, the US 10-year Treasury yield started the month at c.3.432% and ended at c.3.452% showing little gain (and unlike the UK 10-year bond has not returned to its levels at the beginning of March). The price of Gold, which increased in March, saw little movement during April remaining at high levels. GBP continued to gradually strengthen against the US Dollar over the course of April ending the month at its highest level since the beginning of the year. Global equity markets closed marginally higher in April. In the UK house prices have increased by 0.5% ‘following seven consecutive falls going back to last September’[v].

Overall, April has seen less volatility than has occurred since the beginning of the year within asset classes. Brent Crude, after starting the month back at levels of c.$85 per barrel, increased slightly over the course of April and subsequently fell, ending the month at c.$80 per barrel. UK 10-year Bond yields were higher than US 10-year treasury yields.

 

[i] https://www.reuters.com/world/us-pledges-another-26-billion-weapons-aid-kyiv-statement-2023-04-04/

[ii] https://www.reuters.com/markets/deals/rathbones-investecs-uk-wealth-arm-merge-deal-valued-839-mln-stg-2023-04-04/

[iii] https://www.reuters.com/markets/deals/deutsche-bank-buy-institutional-stockbroker-numis-511-mln-2023-04-28/

[iv] https://www.reuters.com/business/finance/california-financial-regulator-takes-possession-first-republic-bank-2023-05-01/

[v] UK house prices rise after seven months of falls; factory downturn deepens; eurozone inflation rises to 7% – business live (theguardian.com)

by Haith Nori

 

March has seen a continuation of heightened volatility across global markets. Central banks across the developed world are considering more aggressive tactics for increasing interest rates as they are not yet achieving the desired result of reducing inflation quickly enough. Some find themselves re-assessing their originally estimated limits. The collapse of Silicon Valley Bank has created great uncertainty and fear within global markets as no one will want the history of the 2008 financial crisis to repeat itself. Governments acted quickly to prevent a financial crash. The Swiss National Bank stepped in to bail out Credit Suisse with a lifeline of $54 billion. Furthermore, UBS went on to merge with Credit Suisse.

At the beginning of March, at the Congressional Testimony, a hearing of the US Senate Banking Committee and House of Financial Services Committee, Jerome Powell suggested the possibility that interest rate hikes still have a long way to go, signalling that further, larger rate hikes may be needed. Markets reacted negatively to the announcement, sending equity markets lower. After an initial increase in bond yields, over the course of March these fell significantly.

On Friday 10^th March, Silicon Valley Bank (SVB), the 16^th largest bank in the US, collapsed, delivering the largest commercial bank failure since the 2008 financial crash. The bank was based in the Santa Clara region and at the end of 2022 had around $209 billion in assets. The main contribution to the collapse appears to have been a failure of management to properly manage the numerous risks that arise on bank balance sheets during periods of rapidly rising interest rates. The issue was further compounded by SVB’s concentrated exposure to the start-up and venture capital space, an area which has recent faced its own challenges which drove many of these companies to draw down on their deposit balances. The bank was heavily invested in long-dated Treasury Bonds whose value, as the Federal Reserve raised rates, markedly decreased. Silicon Valley Bank’s failure is the largest since Washington Mutual went bust in 2008, a hallmark that triggered a financial crisis that hobbled the economy for years’[i] leaving an uncertain atmosphere for many investors. Global markets in both equity and fixed income have reacted negatively to the news with Joe Biden promising to seek stronger regulations for banks in an attempt to reassure the public on the state of the economy. Nearing the end of the month, on 27^th March, First Citizens bank ‘bought about $72bn of the assets of the failed bank at a discount of $16.5bn’[ii] leaving c.$90bn of securities and other assets with the Federal Deposit Insurance Corporation (FDIC). First Citizens are taking over the running of 17 Silicon Valley Bank branches and also acquiring all $119bn in deposits and loans, which were set up post the collapse of Silicon Valley Bank. Finally, the FDIC have stated the collapse may well lead to $20bn of losses for its deposit insurance fund, which is paid for by banks themselves through sector-wide levies.

On 14^th March, US CPI data was released for the 12 months ending in February of 6.0%, down from January 6.4%, December of 6.5%, 7.3% in November, continuing its gradual decline since June (9.1%)! This is a more promising decrease since January showing progression has picked up again. On 22^nd March, the US Federal Reserve made the decision to raise interest rates by 0.25% to a range of 4.75% to 5%, taking interest rates to their highest level since 2007 and marking the ninth consecutive month of interest rate hikes in the US. This is despite the situation of the Silicon Bank Valley collapse where analysts predicted a potential halt in altering interest rates. In the UK CPI data released was 10.4% for the 12 months ending in February, a slight increase from 10.1% in January. This is slightly disappointing as the figures had been showing a decline each month for the past several months: 11.1% in October, 10.7% in November and 10.5% in December. On 23^rd March, in the UK the Bank of England announced another 0.25% increase in interest rates to 4.25% from 4%. Also, on 16^th March the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 3.0% as they had originally signalled.

On Wednesday 15^th April, Jeremy Hunt the UK Chancellor announced the 2023 UK Budget making various changes. Notably, the UK Pension allowance has increased from £40,000 to £60,000 per annum effective from April 2023. Energy price support will continue at the current rate for the next three months to June 2023, limiting typical household bills to £2,500 per annum and corporation tax will increase from 19% to 25% from April.

On 16^th April, the Swiss National Bank swooped in to provide a $54 billion bailout to Credit Suisse in order to ‘shore up liquidity and investor confidence, after a slump in its shares had intensified fears about a global banking crisis’[iii]. A few days later UBS came to Credit Suisse’s further aid as the bailout from the Swiss National Bank was not enough, and ‘UBS will pay $3.2 billion for 167-year old Credit Suisse and assume at least $5.4 billion in losses from unwinding its portfolio of derivatives and other risky assets’[iv]. This leaves the Swiss Nation with only one universal bank; UBS Group AG.

In other assets, there has also been increased volatility. During March Gold reached its highest level for several months, Brent Crude dropped sharply at the beginning of the month to c.$73 and has since recovered slightly to end the month c.$79.77. The Dollar, after initially showing signs of strength, has decreased in value against the UK Pound, the Euro and the Yen. Both US 10 year Treasury notes and UK 10 year Gilts followed the same pattern of starting the month at strong levels reducing in yield to then slightly recover at the end of the month but still c.0.5%/0.4% lower in yield.

Overall, March continued the volatility witnessed in February across asset classes. The news of the Silicon Valley Bank collapse shocked global markets yet most Central Banks continued with planned interest rate hikes. Both Silicon Valley Bank and Credit Suisse have been bailed out. Brent Crude dropped sharply below $75 per barrel having started the month at c. $84 per barrel but recovered some of its losses by the end of March. Since the start of March, 10 year bond yields have generally fallen.

 

[i] https://www.reuters.com/business/finance/global-markets-banks-wrapup-1-2023-03-10/

[ii] https://www.theguardian.com/business/2023/mar/27/silicon-valley-bank-bought-by-first-citizens

[iii] https://www.reuters.com/business/finance/credit-suisse-borrow-up-54-bln-it-seeks-calm-investor-fears-2023-03-16/

[iv] https://www.reuters.com/business/finance/ubs-swallows-doomed-credit-suisse-casting-shadow-over-switzerland-2023-03-20/

by Haith Nori

February saw a continuation of increases in equity markets in Europe after a positive start in January, while US markets have moved in the opposite direction. At the beginning of February many central banks including the Federal Reserve, the Bank of England and the European Central Bank all increased interest rates once more. After an initial drop in yields, US and UK 10 year bond yields at the beginning of February have recovered to levels higher than seen in January as many other 10 year bond yields have reached highs not seen in years. The US Dollar has once again strengthened as the price of gold has fallen. Global tensions continue to rise as Russia’s invasion of Ukraine reached its one year anniversary (24^th February). Rishi Sunak is also attempting to push forward Brexit negotiations, having delivered the ‘Windsor Framework for Northern Ireland and Great Britain’.

On 1^st February, the US Federal Reserve made the decision to raise interest rates by 0.25% to 4.75%, marking a notable reduction in pace from their previous increase of 0.5%. Markets responded positively to the news, with the Technology sector in particular outperforming others, however February saw a more general decline alongside US Equity indices. On 14^th February we received a Valentine’s gift. US CPI data was released for the 12 months ending in January of 6.4%, down from December of 6.5% and 7.3% in November, continuing its gradual decline since June (9.1%)! Whilst this is still a decrease it is much lower than expectations and suggests a long-awaited slowing in the rate of progression. On Thursday 2^nd February, in the UK the Bank of England announced an 0.5% increase in interest rates to 4%. As expected, they did not follow the US in targeting a reduced pace of 0.25%. Furthermore, in the UK CPI data released was 10.1% for the 12 months ending in January down from 10.5% in December, 10.7% in November and 11.1% in October. On this occasion, this was softer than consensus expectations and the reduction pattern is continuing in the UK. Also, on 2^nd February the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 2.5%, and the ECB have ‘pre-announced another increase of the same size for March 16’[i]. The ECB continues to  present itself as being particularly hawkish under the stewardship of Madame Lagarde.

In Bond Markets, ‘Germany’s 10-year yield, the benchmark for the euro area, rose 7 basis points (bps) to 2.66%, its highest since July 2011’[ii] and the same has been seen in both France and Spain where yields have hit their highest levels in many years. Both the UK 10 Year Gilt and US 10 Year Treasury Note yields have surpassed their January levels, both increasing to just under 4% after an initial drop at the beginning of February. The US Dollar has regained its losses from January against Sterling, the Euro and the Japanese Yen. Gold, after reaching a high level at the beginning of February has returned to levels at the start of January. Prices for gold at the end of February ‘were headed for their biggest monthly decline since June 2021 as a stronger dollar and fears that the U.S. Federal Reserve would keep raising interest rates weighed on the non-yielding asset’s appeal’[iii]. We are seeing a very uncorrelated performance from assets including what was once considered the safe havens.

On 11^th February, Fumio Kishida, Prime Minister of Japan, nominated Kazua Uedo as the next Governor of the Bank of Japan, who is set to take the reins after 8^th April when Haruhiko Kuroda steps down. This has come as a surprise as originally the Deputy Governor Masayoshi Amamiya was viewed as being the front runner.

After several countries, including the UK, the US and Germany agreed to send military battle tanks to aid Ukraine in January, President Volodymyr Zelenskyy of Ukraine has been touring Europe in an attempt to drum up more military support. Firstly, he flew to the UK to meet with Prime Minister Rishi Sunak whom, after their meeting, is providing NATO-style training to thousands of Ukrainian soldiers and marines from the UK. Rishi Sunak is also considering his options to offer fighter jet planes. Zelenskyy then flew to Paris meeting with Emmanuel Macron and Olaf Scholz before flying to Brussels where he addressed the European Parliament, meeting with twenty-seven heads of state asking for European Unity. In the run up to the one-year anniversary of Russia’s invasion of Ukraine (24^th February), US President Joe Biden travelled to Kyiv on Monday 20^th February and later met with NATO leaders on the eastern flank to highlight geopolitical tensions. We are seeing clear escalations in the Russia invasion of Ukraine.

On 27^th February a new Brexit deal was signed by the UK and European Union known as the Windsor Framework, which attempts to deal with the problems created by the Northern Ireland Protocol, binding international law obligations. One of the key issues has been checks on goods travelling from Great Britain had created a border with Northern Ireland and hence certain goods were no longer able to reach them. The Windsor Framework will, as Rishi Sunak has said, ‘ease trade between Britain and Northern Ireland, firmly root the province’s place in the United Kingdom and give lawmakers there a say in whether they must implement EU law, with London having a veto’. [iv] There is a long way to go and this needs to be approved by all parties but is a positive step forward for Brexit and will hopefully open up more lines of trade.

Overall, February has been reasonably volatile across various asset classes, with Large-Cap UK Equities in particular having hit an all-time high. Brent Crude fell sharply in value at the beginning of the month (below $80 per barrel) but has since recovered to c.$84 a barrel. 10 year bonds are increasing in yield, with various countries now having reached all-time highs. The US Dollar has gained strength back from its lows of January against Sterling, the Euro and the Japanese Yen. Geopolitical tensions are rising with Russia’s invasion of Ukraine.

[i] https://www.reuters.com/markets/rates-bonds/hawkish-ecb-comments-push-up-rate-hike-expectations-2023-02-17/

[ii] https://www.reuters.com/markets/global-markets-wrapup-1-2023-02-28/

[iii] https://www.cnbc.com/2023/02/28/gold-faces-worst-month-in-nearly-two-years-on-us-rate-hike-dread.html

[iv] https://www.reuters.com/world/uk/risk-taken-uks-sunak-announces-windsor-framework-2023-02-27/

by Haith Nori

January has seen an increase in global equity markets after a slightly volatile December. Central Banks are hosting their next interest rate meetings at the beginning of February, giving January a little rest. China has continued to open up after intense lockdowns with a release of 3% GDP growth in 2022, the second slowest rate of economic growth since the 1970s. Many emerging market economies are also coming back into the limelight offering lowly valued equity markets and attractive sovereign bond yields.

On 12^th January, promising data presented itself for US inflation which, for the 12 months ending in December, came in at 6.5%, down from 7.3% in November and continuing its gradual decline since June, marking the sharpest monthly fall in US CPI figures since mid-2020! Furthermore, in the UK CPI data released was 10.5% for the 12 months ending in December, down from 10.7% in November and 11.1% in October. Whilst progress is slower than in other parts of the world, a trend is beginning to emerge in the UK inflation data. The next meeting about interest rates will be 31^st January – 1^st February for the US Federal Reserve and 2^nd February for both the European Central Bank and the Bank of England. Global markets are waiting with bated breath to see how Central Banks approach their next steps in controlling inflation and if we are to see a reduction in the scale and frequency of hikes. ‘UK wages grew at the fastest rate outside the pandemic period at the end of 2022’[i] up 6.4% on an annual basis, marking the largest increase since 2001. The rise in wages strengthens the case for the Bank of England’s Monetary Policy Committee to keep raising interest rates, although any further hikes should be finely balanced in the context of weaker economic growth expectations and a more challenging housing market. Whilst wage growth is good news for households in the UK, figures have still failed to keep up with inflation. Both the US 10 Year Treasury Note and the UK 10 Year Gilt have decreased in yield since the beginning of January 2023. On Wednesday 18^th January, the Bank of Japan made no policy changes as expected, keeping its yield curve control targets in place (0% for 10year yield and -0.1% for short term interest rates).

Emerging market debt has come back onto investors radar screens following a difficult period in which the US dollar rose strongly. When the dollar rises, many developing countries local currencies tend to depreciate given typically high external debt positions, which are most often financed in dollars. They will see higher imported inflation with food and oil prices. Dollar strength tightens financial conditions for some emerging market countries and can affect the availability of credit. ‘The dollar has depreciated 7% since its highs in October, pushing EM assets higher’ [ii] as the two have historically have an inverse relationship. Analysts have suggested there could be room for further outperformance from emerging markets as the dollar may continue to depreciate. Many of the emerging market countries began increasing interest rates early in 2021, long before the Federal Reserve and many other Central Banks of developed countries across the world, which has resulted in many emerging market countries offering some very attractive yields. Examples, of where some 10 year Government Bonds are yielding are: Brazil c.13.19%, Mexico c.9%, Egypt c.20.1%, Zambia c.30.19% and Turkey c.10.7% to name just a few.

The CBOE (Chicago Board Options Exchange) Volatility Index (VIX), which is a real time index representing market’s expectations for volatility over the coming 30 days, has been on a steady decrease since October which coincided with the US dollar’s all-time high. Gold has also been on a steady increase in price since October. Both Sterling and the Euro have increased against the dollar steadily since the end of September 2022. China has continued to show positive signs of growth since it began to re-open after lifting its zero-covid policy. This has been especially helpful for business over the period of Chinese New Year.

The International Monetary Fund (IMF) on Tuesday 31^st January raised its Global Growth outlook for 2023. This is due primarily to demand in the US and Europe, alongside China’s re-opening and a significant easing in European energy costs. The IMF has ‘said global growth would still fall to 2.9% in 2023 from 3.4% in 2022’, [iii]  however this is an improvement from the October 2022 prediction of 2.7% with the warning of the world tipping into recession. Following the 2023 prediction, the IMF has also stated that global growth would accelerate to 3.1% in 2024. Whilst progress is slow, there is at least some positivity that can be taken from their outlook, in which they revised China’s growth forecast much higher for 2023, from 3% to 5.2%.

Many countries have been answering the calls of Ukraine for additional support in the ongoing crisis with Russia. Germany made an announcement on 25^th January to supply 14 military battle tanks and encouraged other European countries to do similar The US later that day also declared further aid with the supply of 31 tanks. Finland, Poland, the United Kingdom, Spain, the Netherlands and France are also considering making contributions. This is a major development in the situation.

Overall, January has welcomed back some positivity within global markets. Brent Crude dropped sharply in value at the beginning of the month but has recovered its value above the December highs, ending at just under $85 per barrel back up from the lows of December ($76.10). US and UK bond yields continue to fall and are becoming less attractive relative to some emerging market bonds, which have the potential to deliver very attractive real returns to investors.

[i] https://www.ft.com/content/b25fd8d7-f7bd-4501-8a32-21d338846f85

[ii] Look who’ emerging as the biggest star of 2023–Points of no return, John Author’s

[iii] https://www.reuters.com/markets/imf-lifts-2023-growth-forecast-china-reopening-strength-us-europe-2023-01-31/

by Haith Nori

Global equity markets in December saw a slight decline from their November highs in the run up to the holidays. Central Banks have hinted at slowing their interest rate hiking programme with the FOMC, BOE and ECB all raising interest rates by 50 basis points, lower than previous interest rate hikes of 75 basis points. This may pave the way for a potential end in sight. China has been easing lockdowns, re-opening areas around the country and lifting international travel restrictions. China’s re-opening should be better for business globally. The Bank of Japan also made a surprise announcement to change its bond yield control policy.

The US Federal Reserve made the decision to increase interest rates by 0.50% on 14^th December 2022 which confirmed what the markets were expecting. This is the first 0.50% increase as the past four consecutive meetings, the US Federal Reserve have increased by 0.75%. Promising data has presented itself for US inflation for the 12 months ending in November 2022 of 7.3%, continuing its gradual decline since June. The decision to opt for a 50 basis point hike shows positive signs that inflation is reducing and confirmed that the beginning of a reduction in the pace of policy tightening has started. For the first time UK CPI data was encouraging, releasing a figure of 10.7% for the 12 months ending in November. Whilst this figure is still very high, we have seen a reduction from October’s figure of 11.1%. On 15^th December 2022, The Bank of England also decided to raise interest rates by 0.50% to 3.5%, as analysts had been expecting, which, like the US, was also a reduction from the previous hike of 0.75%. On the same day the ECB made the decision to join the interest rate train by also increasing interest rates by 0.50%, pledging ‘further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation’[i]. Global Equity Markets reacted negatively to the interest rate news, which was all released in two consecutive days. The UK 10 year Gilt yield, the US 10 year Treasury Note yield and the 10 Year Bond yield all increased after the news was released and ended the month higher than at the beginning of the month. Global Markets reacted negatively to the Central Bank announcements in December 2022 but had a late surge, or Santa Rally, in the run up to the Christmas holidays. Sterling continued to decrease for the latter half of December against the dollar following the interest rate decisions, whereas the euro, after an initial decline, recovered to the end of December. Reaching the end of 2022, the US equity markets have had their worst year since the financial crash in 2008.

Elon Musk made an astonishing announcement that he would generate a survey amongst his 122 million followers as to whether he should step down as CEO of Twitter and pledged he would honour the decision of the results of the poll, be it negative or positive. A total of c.57% voted yes and Musk has since stated that he will step down once a suitable replacement is ready to take the reins.

On 20^th December 2022, The Bank of Japan shocked markets ‘with a surprise tweak to its bond yield control that allows long-term interest rates to rise more, a move aimed at easing some of the costs of prolonged monetary stimulus’[ii]. Following the unexpected news, Japanese shares reacted negatively whilst both Japanese bond yields and the Yen increased. This caught many investors off guard given that analysts widely expected no change to yield curve control, especially in the run up to Governor Haruhiko Kuroda stepping down in April 2023. The decision was meant to ignite the dormant bond market. Hopefully, stability will be restored.

In the UK, manufacturing has seen a decline as there is less demand for new business. December saw the fifth consecutive month of contraction, as ‘British manufacturers are starting 2023 on the back foot, after they reported one of their sharpest falls in activity since the 2008-09 recession last month, reflecting a sharp fall in new orders and ongoing job cuts’[iii].  Unemployment rates have also risen in the UK as there are less vacancies available.

With China coming out of lockdown and ending their Zero-Policy Covid restrictions the country is seeing stocks improve in price on the basis that business, both domestic and international, will hopefully resume. Travel restrictions have been lifted allowing international travel from China but many countries including the US, the UK, Italy, India, Israel, Spain, Canada, South Korea, and France are all imposing the need to have a negative Covid Test and in Spain’s case, proof of vaccination. This is a positive step forward as ‘China may finally return to normal as the nation joins the rest of the world in learning to live with the virus’[iv]. There is still a long road to recovery ahead for China, but Global Markets will benefit from the good news and the new opportunities it will present.

Overall, December has still been slightly volatile for Global Markets but did not experience too many significant market shocks. Brent Crude continues to trade below $85 having dipped to a low of c.$76.10. The Federal Reserve has hinted at maintaining lower levels of interest rate hikes whilst the ECB stated there is still a large fight against inflation to go. Central Banks are continuing action to bring inflation down but at a calmer pace. The re-opening of China brings positive news to Global Markets. Japan has made a surprise move in its control of bond yields causing a shock. Bond yields have increased since the start of the month following the interest rate decision release.

[i] www.reuters.com/markets/europe/ecb-slow-rate-hikes-lay-out-plans-drain-cash-2022-12-14/

[ii] https://www.reuters.com/markets/rates-bonds/japan-set-keep-ultra-low-rates-doubts-over-yield-cap-grow-2022-12-19/

[iii] www.reuters.com/markets/europe/uk-manufacturing-ends-2022-low-orders-shrink-pmi-2023-01-03/#:~:text=LONDON%2C%20Jan%203%20(Reuters),orders%20and%20ongoing%20job%20cuts.

[iv] https://edition.cnn.com/2023/01/02/china/china-2023-lookahead-intl-hnk-mic/index.html

by Adam Jones

As 2022 draws to a close we wanted to briefly highlight the exceptional uncertainty in investment markets as we head into 2023. We retain a cautious stance in portfolios overall but also see compelling arguments as to why things might turn out to be far less gloomy than seems widely expected.

Despite global PMI’s stabilising but still being in contractionary territory in November, December ISM Services data pointed to a very robust US consumer, whose confidence in spending has apparently yet to be curtailed by tighter monetary policy. Except for housing there appear few signs of restraint in broader US activity, giving rise to suggestions that the lag in monetary policy effectiveness may be longer than originally thought (and may not be evident until the end of H1’23). Recent declines in both oil prices and headline inflation data might also provide additional support for ongoing strength in consumption trends.

Source: Hottinger Investment Management / Refinitiv Datastream

 

In China, zero-covid policies have weighed on economic sentiment so much that recent street protests have led to a relaxation in policy that saw the Hang Seng index in Hong Kong become the strongest performing equity market in November, although most of these gains have since been erased given the recent uptick in new cases. On the economic front, one of the metrics we follow closely is known as the ‘credit impulse’ which simply measures the growth in new credit being provided to an economy relative to its GDP. In China the credit impulse has risen materially over the past few months and has historically led expansions in the global monetary base as defined by M2 (a measure of money supply which includes both cash deposits and instruments which are easily convertible into cash). While we do not consider ourselves to be explicit monetarists, it is interesting to note that expansions in global M2 have themselves tended to lead many of the major business cycle indicators such as manufacturing and output.

Should inflation continue to dissipate as global economies stabilise, this dynamic could turn out to be very supportive for risk assets in general. In this scenario investors, whose perspectives are almost universally bearish according to some measures of sentiment, are potentially at risk in being under-allocated to global equities.

This is the period when strategists and economists publish their forecasts for 2023 and Absolute Strategy Research (one of Hottinger’s key research partners) are not alone in believing that core inflation in US and Europe will be below 3% by the end of next year. Supply chains have generally normalised, the tightness of the labour market has not led to a wage spiral, falling commodity prices, and falling housing costs all combine to create a disinflationary trend. Central banks tend to be slow to cut rates, preferring to see consistently worse data and we believe there is a possibility that there are demographic changes involving retiring baby-boomers that could keep the labour market tighter than expected and over a longer transition period.

Source: Hottinger Investment Management / Refinitiv Datastream

 

Looking at corporate bond markets we also note that despite US high yield credit outperforming investment grade credit this year (even while lower-rated credit spreads have doubled), overall spreads remain well below levels witnessed in prior periods of forthcoming recession. We believe part of the explanation for this dynamic is that many businesses took advantage of exceptionally low refinancing rates post-Covid in 2020 to lock in lower rates over longer time frames (and hence significantly extended the maturity profile of their debt). If this is the case, then it stands to reason that a tighter monetary policy environment is likely to exert less of an effect on the corporate sector than it may have done historically.

The counterargument to this more optimistic view of 2023 is that savings rates in the developed world have now fallen back to (and in some cases below) pre-Covid levels in many countries. When coupled with recent witnessed spikes in credit card spending data this suggests a growing need for consumers to supplement the cost of living through short term finance. This is not typically a sustainable trend over any reasonable period, and we speculate may be a contributing factor to the weakness in US November retail sales last week.

Source: Hottinger Investment Management / Refinitiv Datastream

 

So, while global equities may have rallied approximately 10% over the last 2 months our baseline view remains that this represents a bear market rally. Equity and credit markets appear unwilling to price a more recessionary earnings outlook and cyclical sectors have barely underperformed more defensive sectors. It is only government bond markets which strongly suggest a forthcoming recession, with the yield curve having now inverted by more than 70bps (that is to say that 2yr bond yields are now greater than 70bps lower than 10y yields). In our opinion there are inconsistencies in 2023 forecasting based on the idea that investors have no reliable evidence of the monetary policy lag that will likely catalyse recession.

At the crossroads there are several scenarios, ranging from a soft landing to long and variable monetary policy lags causing a deep recession in 2023. The distribution of potential outcomes remains exceptionally wide due to high levels of prevailing uncertainty. Indeed, the last time an inflationary environment required so decisive a tightening cycle as that we have recently witnessed was back in the early eighties. We would argue that the global economy has evolved markedly since then in terms of demographics, labour market structure, global trade, technology, information dissemination and the implementation of monetary policy itself (forward guidance as an example). Such comparisons are therefore difficult and potentially misleading.

We remain cautious at this point, with an asset mix in favour of quality over cyclical growth, a preference for strong balance sheets, high cash flow yields and low levels of gearing with an overweight position in cash and government fixed income, where rates have become attractive for the first time in many years. We believe that despite a level of prevailing pessimism the spectrum of potential outcomes may lead to increased volatility and swift market reactions that would make disengaging from markets in a meaningful way a risky strategy for the long-term investor.

by Haith Nori

November has welcomed back some much-needed positivity within the Global Equity Markets. In China, c.412 million people have further been affected by lockdown measures, due to their zero Covid policy, as cases have increased rapidly. There is civil unrest as people are protesting against President Xi Jinping and demanding that he resigns due to the handling of the current Covid situation. Russia continues to attack Ukraine, attempting to target their energy infrastructure, and has reportedly left Kyiv without running water or electricity. In the UK, the Autumn Budget was finally released announcing a number of significant changes. In the US, the FOMC have signalled a reduction in the pace of its aggressive interest rate hiking cycle. COP 27 has embraced world leaders once again who are attempting to act collaboratively to reduce climate change.

Since the start of November, sterling has strengthened against the dollar. The dollar has also weakened against both the euro and the yen as well ‘after U.S. economic data provided further evidence that inflation was starting to ease, improving investor appetite for riskier assets and reducing demand for the safe-haven greenback’[i]. Bond yields have begun to decrease with the US 10 year note, now offering a yield of c.3.6% and the UK 10-year Gilt offering c.3.1%. This is a dramatic change when just a few months ago, they were both yielding above 4%! Interest Rates are still increasing and in theory, the yield should increase but we are seeing an unusual correlation. The Federal Reserve is hinting at slowing the interest rate increases to reduce over tightening. After the minutes were released 23^rd November from the Federal Reserve’s November meeting, European stocks went on to hit three-month highs. The US Federal Reserve increased interest rates by 0.75% for the fourth consecutive time which takes them to the highest levels since 2008. Jerome Powell has hinted at a change in policy at the next meeting or two. In the UK, the Monetary Policy Committee voted 7-2 to increase interest rates by 0.75% to 3%, the largest rate hike since 1989. On Thursday 10^th November, the US released CPI data for the 12 months ending in October of 7.7%, which was lower than expectations and lower from September of 8.2%. This is positive news as, even though we are seeing small changes over the past 5 months, there has been a clear decrease: 9.1% in June, 8.5% in July, 8.3% in August, 8.2% September. There is still a long way to go for the CPI figure to reach the overall target of 2% but finally a positive trend has been witnessed. In the UK, the CPI data released November 16^th for the 12 months ending in October was 11.1%, the most since October 1981, up from 10.1% in September, and 9.9% in August. The main driver of the headline figure has been ‘surging household energy bills and food prices pushed British inflation to a 41 year high’[ii]. The data was released one day before Jeremy Hunt released the Autumn Budget where the hope is that his tax hikes and plans to reduce spending will assist in reducing the CPI figure. The next meetings for the FOMC, BOE and ECB will all be held in mid-December where they will assess whether to increase interest rates once again.

The delayed UK Government’s Autumn budget, announced on 17^th November, saw changes to the National Living Wage, several Tax changes and the cap on energy bills increasing to £3,000 from £2,500 for 12 months from April 2023. The key points that will have a significant impact in the new tax year (6^th April 2023 to 5^th April 2024) are the reduction in the Capital Gains Tax Allowance, Dividend Tax Allowance, and the Additional Rate Income Tax threshold. For individuals the Capital Gains Tax Allowance will be reduced from £12,300 to £6,000 and for most trusts from £6,000 to £3,000. The Dividend Tax Allowance will be reduced from £2,000 to £1,000 and, finally, the Additional Income Tax Rate threshold will reduce from £150,000 to £125,000. Effectively, these measures are an attempt at creating a budget tightening of £55 billion to restore the country’s credibility under new Prime Minister Rishi Sunak’s Government with Jeremy Hunt announcing these measures as being ’tough but necessary’[iii].

COP 27, which concluded on 20^th November, saw a number of global leaders agreeing to work together once more to combat climate change. One key take away is that nations have, for the first time, agreed to establish a fund which is dedicated to providing pay-outs for developing countries that experience damage from issues relating to climate change, such as, storms, floods, and wildfire. China and the US have rekindled their relationship as China’s President Xi Jinping met with US President Joe Biden in Indonesia agreeing to ‘restart cooperation on climate change after a months-long hiatus due to tensions over Taiwan’[iv].

China has become a point of discussion around the globe. Over this past year China has been in and out of lockdowns both national and local due to its Zero Covid policy. After the latest surge in Covid cases and new lockdowns put in place, anti-lockdown protests rallied in multiple cities around China. Finally, at the end of November the Chinese Government have announced they are now attempting to ramp up their efforts to vaccinate the elderly. On the back of the announcement the Hang Seng closed 5% higher on Monday 28^th November.

Overall, November delivered some positive returns for global equity markets, which are now up 11% from the October 12th lows. Brent Crude has returned to trade below $90 per barrel having fallen from c.$98 per barrel at the start of the month. Sterling has ended the month trading c1.21 against the dollar which is a significant rise since its tumble after Kwasi Kwarteng’s budget announcement at the end of September. Both the Yen and the Euro have also strengthened against the dollar since the beginning of November. Bond yields are decreasing whilst central banks hint at slowing the pace of interest rate hikes to hopefully give a soft landing at the beginning of 2023.

[i] www.cnbc.com/2022/11/15/forex-markets-federal-reserve-interest-rate-hikes-inflation-japan-yen.html

[ii] www.reuters.com/world/uk/uk-consumer-price-inflation-hits-111-october-ons-2022-11-16/

[iii] www.reuters.com/world/uk/uk-consumer-price-inflation-hits-111-october-ons-2022-11-16/

[iv] www.reuters.com/business/cop/key-takeaways-cop27-climate-summit-egypt-2022-11-20/

By Haith Nori

October has continued the volatile theme witnessed in September. The situation in Ukraine has continued to deteriorate with Russia having annexed certain areas of Ukraine. The explosion on the Crimean Bridge was crucial for deliveries of arms to Russian troops. Russia has since threatened nuclear warfare, which is seeing countries rally to Ukraine’s aid, especially the US. The Defence sector is seeing strong gains whilst the US, the UK and the EU are all increasing their budget on defence to ensure protection. With the world on the brink of nuclear warfare, companies are attempting to create armaments purely for the purpose of destroying missiles before they land, hence protecting lives. The Bank of England have continued to provide emergency support to gilt markets. The UK government have reversed their initial budget plan of cutting the 45% tax rate and Liz Truss has resigned as Prime Minister, and after a short period of time Rishi Sunak was appointed as the UK’s new Prime Minister. OPEC have had a meeting to cut production by 2 million barrels of oil a day. Germany has authorized 200 million Euros, the German Stabilisation Fund, to dedicate to energy during the current crises which is being unwelcomed by other members of the EU. 15 countries are urging the EU to introduce a price cap on energy. With the hyped activity surrounding Elon Musk and his takeover of Twitter this year, the $44 billion acquisition is now complete with Musk firing top executives in the business.

In the UK, there has been a lot of turmoil since the new government has taken office. Since the new budget was released, we have seen the value of the pound drop to ‘levels not seen since the 1980s’[i]. At the end of September, it hit its lowest point of $1.035 after the budget was announced. Later in October, the UK pound recovered to levels seen before the new finance minister, Kwasi Kwarteng took office. However, confidence in the UK is clearly feeling the pinch as the UK government has reversed its bold plans of axing the 45% tax rate. The Bank of England have stepped in to buy both long dated gilts and Inflation-Linked Gilts, stating this would end on 14^th October, with Governor Andrew Bailey telling ‘pension fund managers to finish rebalancing their positions’[ii]. The aim of the fiscal policy from the new government is to support both households and businesses during the current period of increased energy prices. To add to the chaos, a new finance minister, Jeremy Hunt, was appointed who tore up almost of the original budget plans and Liz Truss announced her resignation on Thursday 20^th October, making her the UK’s shortest serving Prime Minister. Following the resignation came a short period of uncertainty in the race for the new prime minister to be appointed in the hope that some levels of normality can be restored within UK Politics. The uncertainty has made the UK appear unstable which does not bode well for investor confidence. Rishi Sunak was appointed the new Prime Minister to lead the Conservative Party officially on Tuesday 25^th October, where he has decided to keep a number of ministers in their existing posts in order to try to bring the party together and install confidence once more. For instance, Jeremy Hunt has remained as Chancellor of the Exchequer. Some positive news came as the value of Sterling recovered some ground as investors welcomed Sunak’s victory. This may well be the beginning of confidence being restored in the UK. However, all eyes will be focused on the fiscal statement announcement which was scheduled for 31^st October but has been delayed until November 17^th following the appointment of Rishi Sunak’s new government. This, in theory, will be designed to stop markets spiralling out of control once again. Whilst the delay may initially seem frustrating it will allow the government to carefully prepare their announcement.

On Thursday 13^th October, the US released CPI data for the 12 months ending in September of 8.2%, little changed from August’s 8.3% (9.1% in June and 8.5% in July). The US has also experienced many companies releasing quarterly earnings throughout October. For example, it was a brutal earnings week for large Tech names (other than Apple who beat revenue expectations). Alphabet and Microsoft provided disappointing revenue, with Alphabet declining c.7.4% and Microsoft declining c.6.9% following their individual announcements. Meta Platforms declined c.22% on the 27^th October and Amazon also saw declines. Combined, the four big Tech names ‘lost over $350 billion in market cap after offering concerning commentary for the third quarter and the remainder of the year’[iii]. In the UK Shell posted profits of £8 billion for the quarter with the share price increase c.5% on 27^th October. UK CPI data was released on 19^th October dropping to 10.1% for the 12 months ending in September after 9.9% in August and matching the July 40 year high. The ECB met on 27^th October and made the decision to increase interest rates by 0.75% to the highest rate in over a decade. Both the Bank of England and The Federal Reserve will hold their meeting in the first week of November before announcing their decision on interest rates.

In Japan, the Yen has been declining against the dollar for some time. The Bank of Japan has intervened for the second time on 21^st October spending ‘a record 5.4 trillion to 5.5 trillion yen ($36.16 billion to £36.83 billion) in its yen buying intervention’[iv]. The dollar maintained its value but weakened after S&P Purchasing Managers Index data showed a fourth consecutive contraction.

Overall, October has witnessed the volatility continue with further unprecedented affairs, especially in the UK. At the end of the month Global Markets saw a late rally despite mixed corporate earnings season; European equities increased c.9%, US equities increased c.8% and UK large cap equities increased c.3%. Investors seem to be reconsidering the possibility of a soft landing in the US in 2023. We still believe a focus on diversification across asset types, styles and strategies remains of critical importance to portfolios. Bond yields remain to high in value. After the OPEC meeting the price of Brent Crude is trading c.$95 per barrel. Sterling has become extremely volatile against the dollar.

 

[i] https://www.forbes.com/sites/qai/2022/10/07/the-british-pound-has-fallen-to-its-lowest-level-against-the-us-dollar-since-1985heres-why/?sh=4edb4d5c74a7

[ii] https://www.reuters.com/world/uk/bank-englands-bailey-tells-pension-funds-they-have-3-days-rebalance-2022-10-11/

[iii] https://www.cnbc.com/2022/10/28/big-tech-falters-on-q3-2022-results-as-meta-has-worst-week-ever.html

[iv] https://www.cnbc.com/2022/10/24/forex-markets-currencies-japan-yen-bank-of-japan-intervention.html

By Haith Nori

September has seen significant increased levels of volatility return to Global Markets once more. Central Banks in Europe, the UK and the US all scheduled meetings in September following the Jackson Hole meeting. Liquid Natural Gas (LNG) deliveries have taken a turn for the worst with Nord Stream 1 in Germany being closed by Russia, sending energy prices higher in Europe. China have been selling Russian LNG back to Europe at a much larger cost. More and more ships have been able to leave Ukrainian shores delivering agricultural products to African, Asian and European countries. The UK has appointed a new Prime Minister Liz Truss at the beginning of September. Global tensions between countries continues as the US have made a deal of $1.1billion weapons sale to Taiwan, angering China and Russia are buying rockets and weapons from North Korea. Furthermore, China has once again been entering into local lockdowns in the Chengdu and Shenzhen areas due to its zero Covid policy. Queen Elizabeth II, the United Kingdom’s long reigning monarch sadly passed away on September 8^th, seeing the country in mourning, the cancellation of key sport events, and pushing the BOE base rate decision back a week later out of respect.

Inflation has been the hot topic on all Central Bank’s minds, and they have taken drastic action. Markets have reacted negatively surrounding the meetings which were scattered throughout September. On Thursday 8^th September the ECB confirmed a 75 basis point rate hike to 1.25%, which was the largest since its creation in 1999, signalling further rate hikes to come. On Tuesday 13^th September the US released CPI data for the 12 months ending in August of 8.3%, slowing down for the second consecutive month (9.1% in June and 8.5% in July). However, the rate of decline was lower than expected and US markets reacted negatively closing down c.4%, having their worst day since June 2020. In the UK CPI data was released on 14^th September dropping to 9.9% for the 12 months ending in August from 10.1% in July ‘offering some respite to households and the Bank of England after inflation hit a 40-year high the month before’[i]. On 21^st September the FOMC made the decision to increase interest rates in the US by 75 basis points, for the third consecutive time taking the target range to 3%-3.25% being the ’highest the fed funds rate has been since the global financial crisis in 2008’[ii]. The Bank of England has also raised interest rates by 50 basis points on 22^nd September raising the rate to 2.25%. Many anticipated a 0.75% rate hike from the BOE but this came as ‘the bank said it believed the U.K. economy was already in a recession, as it forecast GDP would contract by 0.1% in the third quarter, down from a previous forecast of 0.4%’ [iii]. The Swedish Central Bank (The Riksbank) has also surprised markets with a historically hawkish 100 Basis Points interest rate hike which is its biggest in three decades. The Bank of Japan (BOJ) has maintained ultra-low interest rates to support the country’s fragile economic recovery but intervened in the currency markets on 22^nd September to buy Yen, deploying some of its $1.3 trillion in reserves, for the first time since 1998. The Yen strengthened against the Dollar c.2% after the announcement.

After August’s dramatic increase in bond yields both the UK 10 year Gilt and the US 10 year Treasury yields continue to trade over or nearing 4% which is looking attractive given it is near to overtaking the yield on equity markets. The US 10 year Treasury has reached a level not seen since 2011 breaking the 3.5% mark. The strength of the US Dollar continues to rage on in the foreign exchange markets and it is on track to have its best year since 1984. Sterling has decreased against the Dollar hitting its 37 year low ‘after the new U.K. Government announced a radical economic plan in a bid to boost growth’[iv], including a number of tax cuts. The BOE stepped in to buy £65 billion of UK long dated gilts to help stable the gilt market ‘after the new government’s tax cut plans triggered the biggest sell-off in decades’[v].

Raising interest rates though, whilst being effective to control inflation, may not be able to reduce the ever growing price of LNG and hence energy, especially in Europe. With Russia closing Nord Stream 1 on Monday 5^th September which delivers LNG into Germany, initially stating indefinitely, caused a phenomenal increase in the cost of energy. Gazprom’s Deputy Chief Executive Officer Vitaly Markelov claimed they would not resume shipments until Siemen’s Energy repairs faulty equipment.  Furthermore, Nord Stream 2 has experienced various leaks further depleting the supply of LNG and Poland, Denmark and Germany are not ruling out sabotage. China, having excess LNG, saw an opportunity to sell Russian LNG back to Europe at a higher cost being the Expensive Middle Man. To further muddy the waters, Russia offered China their LNG in both Yuan and the Ruble. With the new appointment of Liz Truss as Britain’s Prime Minister, she has initially stated she will combat the cost of energy in the UK by putting a freeze on energy bills at £2,500 until October 2025. Ships began to set sail from Ukraine from August 1^st, by the end of August more than 50 ships had left Ukraine, and now over 200 have left successfully delivering to African, Asian and European countries carrying c.5.3 million tonnes of agricultural products. At least we can see one area improving in the hope of reducing global hunger and effectively reduce food prices!

Overall, September which has notoriously been one of the worst months for Global Equities, has seen great levels of volatility return. Global equities fell 9.46% in dollar terms during the month closing out the quarter 6.58% lower. We still believe a focus on diversification across asset types, styles and strategies remains of critical importance to portfolios. Central Banks are still taking aggressive action to try and combat inflation with most stating the end is still not in sight. Bond yields continue to increase in value, the price of Brent Crude is trading at c.$90 per barrel, and Sterling continues to decrease against the dollar.

[i] www.reuters.com/world/uk/uk-consumer-price-inflation-falls-unexpectedly-2022-09-14/

[ii] https://edition.cnn.com/2022/09/21/economy/fed-rate-hike-september/index.html

[iii] www.cnbc.com/2022/09/22/bank-of-england-raises-rates-by-50-basis-points-in-seventh-consecutive-hike.html

[iv] https://www.cnbc.com/2022/09/23/british-pound-plunges-to-fresh-37-year-low-of-1point10-.html

[v] https://www.reuters.com/markets/europe/bank-england-buy-long-dated-bonds-suspends-gilt-sales-2022-09-28/

By Haith Nori

August has seen some level of order being restored to markets but could simply be a bear market rally. Central Banks continue to shock the economies by taking aggressive action to control inflation. The first ships have been allowed to leave Ukraine, ending the Russian blockade on the Ukrainian Ports. Nancy Pelosi, speaker of the United States House of Representatives has made a political statement by visiting Taiwan to publicly show support for the island’s independence, however, this may ignite the buried tension between China and the US.

Inflation once again remains a key factor in Global Economies. The cost of energy is rising and a bleak forecast for January 2023 has been painted that energy bills will reach a new record high having serious implications for the cost of living. Food prices also remain at a higher cost causing a shift in consumer spending to more affordable options. Ships carrying much needed grain have finally left the Ukrainian shores with the first carrying 26,000 tonnes of corn to Lebanon. Since the sea blockade was lifted on August 1^st more than 50 ships have set sail from Ukraine delivering to not only the poorest regions, the immediate plan, but branching out to the rest of the world. This marks a major breakthrough since the Russian invasion as this now will help address global hunger and restore some normality. At the beginning of August, the UK joined the US and EU in a ‘shock’ increase in interest rates, the largest in 27 years, up 50 basis points to 1.75%, the sixth time since December 2021. In the US, markets were shocked by the Non-Farm Payroll figures on 5^th August, adding 528,000 jobs, versus the 250,000 expected providing positive efforts to reduce unemployment. On 10^th August the US released the CPI data for July of 8.5% vs 9.1% in June. Equities rallied and Treasury yields decreased with signs of ‘decelerating U.S. inflation prompted bets that the Federal Reserve would “pivot” raising rates at a slower pace than previously expected’[i]. In the UK CPI data was released on 17^th August which saw Consumer Price Inflation jump to ‘10.1% in July, its highest since February 1982, up from an annual rate of 9.4% in June, intensifying the squeeze on households’[ii]. The Bank of England will continue to increase interest rates if they need to, keeping a tight control on inflation. Analysts at Citi Bank have suggested that the CPI figure in the UK could reach as high as ‘18.6% in January, more than nine times the Bank of England’s target’[iii]!

On 26th August at the Jackson Hole meeting in Wyoming, Federal Reserve Chair Jerome Powell gave a very ‘hawkish’ speech sending US markets into a downward spiral, reiterating the central bank’s commitment to halting inflation and price stability. The next Federal Reserve meeting will be on September 21^st where they will review the decision to increase interest rates once more. After the last interest rate hike of 75 basis points in July, Powell mentioned ‘another unusually large increase could be appropriate at our next meeting’[iv]. There will be several economic data inflows to review before that meeting which will guide the next decision. European and Asian markets also fell after the meeting. The outlook from the meeting that many investors were hoping for that there would be one large rate hike in an attempt to bring inflation back to normal, sadly was not witnessed suggesting further surprising rate hikes to come. Also at the Jackson Hole meeting, Isabel Schnabel, an ECB executive board member, called for ‘strong determination to bring inflation back to target quickly’[v], adding that the persistence of inflation must not be underestimated and that sacrifices would be needed to tame surging inflation. Clearly, not only the US will be continuing to tighten monetary policy after the Jackson Hole meeting.

In the UK Fixed Interest Markets two year Gilt yields increased by more this month than any other month since May 1994. On August 24th two year Gilt yields hit 2.959%, their highest level since November 2008, up from 1.72% at the start of the month.

Countries around the world are attempting to assist with the energy crisis in Europe. The US, in particular, has shifted more Liquified Natural Gas (LNG) to Europe in the month of June than it did for the whole of 2021 and is planning more in the second half of the year. Currently, Europe has filled their reserve tanks 70% for the winter but to fully refill will come at a cost of c.50-55 billion Euros with the end consumer taking the brunt of the cost. With Russia still limiting the distribution of LNG to Europe, it is essential for them to find alternative options. Olaf Scholz, Chancellor of Germany signed a green hydrogen deal with Canada on Tuesday 23^rd August. This is a promising step towards both an alternative and sustainable source of energy, but the first deliveries will not be until 2025, meaning the current situation still needs to be urgently addressed.

Overall, August has seen a correlation in asset markets. We still believe a focus on diversification across asset types, styles and strategies remains of critical importance to portfolios. However, global markets have eased after rallying back in July. Central Banks are still taking aggressive action to try and combat inflation with most stating the end is still not in sight. The two year UK Gilt yield has hit its highest level since November 2008 while Brent Crude has fallen below $100 a barrel. At the Jackson Hole meeting Powell gave a very hawkish view suggesting further interest rate hikes are coming in order to halt rising inflation with the potential of other central banks following suit. Sterling has been depreciating in the run up to the announcement of the new Prime Minister in the UK scheduled to be announced on September 5th.

 

[i] https://www.reuters.com/markets/europe/global-markets-midday-wrapup-1-2022-08-10/

[ii] www.reuters.com/world/uk/uk-cpi-inflation-rate-rises-101-july-2022-08-17/

[iii] https://www.reuters.com/world/uk/uk-inflation-hit-18-early-2023-citi-forecasts-2022-08-22/

[iv] www.bloomberg.com/news/articles/2022-08-26/read-fed-chair-jerome-powell-s-speech-at-jackson-hole-symposium

[v] www.ft.com/content/5afd5140-605f-447d-a30c-cc7355ceea59