The World In A Week - Winter is (still) coming

Written by Cormac Nevin.

Last week was another challenging one for markets, as the MSCI All Country World Index fell -1.5% in GBP terms.  In local terms, the Equity Index was down -2.9%, illustrating the strong fall in GBP vs other major currencies over the week.  Sustained rises in interest rates also resulted in a negative week for Fixed Income, with the Bloomberg Global Aggregate Index down -0.9% in GBP Hedged terms.

Markets continue to fret about the energy crisis, particularly in Europe, as we approach the winter. These worries were compounded by Russia’s decision to indefinitely suspend flows of natural gas through the Nord Stream 1 pipeline to Germany, which prompted a renewed surge in wholesale gas prices. The reasons given were spurious concerns about very minor leaks, but European leaders are not in any doubt that this move is in retaliation for sanctions over the ongoing war on Ukraine.

OPEC has also floated the idea of supply cuts to oil production, citing concerns over global demand given the ongoing COVID-19 lockdowns in China.  Political changes in the UK, Italy, and mid-term elections in the US will give the markets plenty to focus on towards the end of the year, but we remain convinced that the diversification of our portfolios will allow us to react to events as they arise with our typical long-term approach.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 5th September 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Recessionary fears mount

Written by Millan Chauhan.

Last week UK Gross domestic product (GDP) data was released for the second quarter of 2022 which saw the UK economy contract by 0.1 per cent having risen 0.7 per cent in the first quarter. In the month of June, UK GDP fell 0.6 per cent which did include two lost working days due to the two additional national holidays as part of the Queen’s platinum jubilee celebrations. Expectations for GDP in June were -1.3 per cent. Economists are now predicting that the UK will move into an official recession towards the end of the year, following the release of third quarter GDP data.

Whilst GDP data is useful for monitoring economic growth and consumer price inflation (CPI) is useful for assessing the level of inflation, they are lagging indicators and are a reflection on older patterns and behaviours. Whereas leading indicators such as the treasury yield curve have been a reliable predictor of previous economic downturns. In the US we have seen the yield curve invert, a phenomenon where short-term yields are higher than longer term yields. Under normal economic conditions, one should expect to yield a higher percentage in a longer term asset compared to a shorter term one. In the US, the difference between the 2-year treasury yield and the 10-year treasury yield is at its highest level in 20 years. We last saw this level of inversion back in the 2000s in the midst of the technology crash.

In the US, economic data was at the centre of attention as inflation data was released for the month of July which came in at 0.0 per cent, however this brought the annualised headline inflation rate in at 8.5%. Is this a sign that we are beginning to see inflation start to slow down?

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 15th August 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week – Hot summer and cold winter

Written by Cormac Nevin.

Markets continued to stage a broad-based recovery last week, as returns for June continue to be strong in what has been a challenging year to date. The MSCI All Country World Index returned +1.5% last week in GBP terms and was assisted by a rebound in global growth equities. Bonds also rallied as treasury yields fell, and even riskier high yield bonds rallied strongly.

While the debate regarding whether we will see a recession in the US this year is ongoing, it appears more likely that this will come to pass in Europe sooner rather than later. Measures of business confidence have fallen to lows not seen since the depths of the COVID-19 market selloff over 2 years ago. Germany in particular is being hit particularly hard by soaring energy costs due to its reliance on Russian natural gas. Inflation in Germany has risen to 8.2% in June, and is also putting a major squeeze on consumer incomes. In addition, the recent dry spell has reduced the water level on Germany’s main rivers which has caused shipping disruptions on the Rhine.

In Italy, the Eurozone’s third largest economy, the spectre of political uncertainty has returned. Mario Draghi resigned as the Prime Minister last Thursday which triggered the dissolution of parliament after three of the largest parties in parliament boycotted a confidence vote in his leadership. This led to a sell-off in Italian debt, and cost of borrowing vs German debt costs has been widening in what is a heavily indebted economy.

There is now a scramble across Europe to build up stores of energy in advance of winter, as it is not apparent how much energy Russia will be willing or able to provide given the ongoing war in Ukraine.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 25th July 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Point of impact

Written by Millan Chauhan.

Last week, we saw central banks implement another interest rate increase as they attempt to slow down inflation.  In theory, the effective implementation of a higher interest rate depends on how swiftly savers and spenders change their consumption behaviour.  Savers will now be financially compensated and spenders may reduce their consumption levels, especially at company level where borrowing becomes more expensive with higher interest rates. Reduced consumption and demand for goods and services will therefore begin to slow down inflation, but there is a time lag associated while consumer and producer behaviours adjust to the new information.

The Federal Reserve implemented a 0.75% rise, 0.25% above expectations. In the US, the likelihood of a 0.75% raise was priced in at 2% until last Monday when the Wall Street Journal reported that officials from the Federal Reserve were weighing up the possibility of a 0.75% rate rise. Higher mortgage rates are often a very direct consequence of rising interest rates and last week US mortgage rates surged to their highest levels in 35 years with the 30-year fixed rate jumping to 5.78%.  In the UK, the Bank of England raised rates by 0.25%.  As expected, we have begun to see banks and building societies raise their main fixed-rate mortgages as the market expect further rate rises beyond the current interest rates of 1.25%. The Bank of England also announced that it expects inflation to increase further beyond its current level towards 11%.

Global equity markets sold off last week, following the news of the Federal Reserve’s more aggressive stance on interest rate hikes, with MSCI ACWI returning -4.5% in GBP terms. Some sections of the global investment universe remain more sensitive to interest rates and it is most critical to hold a diversified portfolio as the macroeconomic landscape continues to change.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 20th June 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Walking the tight rope – Part II

Written by Shane Balkham

Economic data was mainly centred around the UK last week, with the latest inflation, confidence, and employment data being published for April.  The inflation rate for April came in at 9%, which was slightly below the market expectation of 9.1%, but still at a 40-year high, and it was the first month since the end of 2021 that inflation data has been lower than expected.  The monthly increase from March of 2.5% was primarily driven by the surge in energy prices as the domestic price cap was lifted by 54%.  Focus naturally moves to October, when the domestic price cap for energy is scheduled for a further rise.

To muddy the waters further, UK consumer confidence dropped to its lowest level in almost 50 years, driven down by the continuing rise in the cost of living.  The survey measures how people view the state of their personal finances and wider economic prospects, and certainly points to weaker consumer spending going forward.

It is ironic that official data showed UK unemployment falling to the lowest rates in almost 50 years to 3.7%.  In these circumstances, a strong labour market adds to the risk of higher inflation, as workers seek higher wages to combat the squeeze from the cost of living.

In the past, the Bank of England would have preferred to look through the supply shock in energy and commodity markets, however the strength of the labour market is at odds with this plan of action.  These data releases point to one conclusion and that is added pressure on the Bank of England to continue its plan of interest rate hikes in 2022.

The European Central Bank (ECB) is playing catch-up, due to not yet raising its interest rates.  Comments from François Villeroy, the Governor of the Bank of France, has created expectations of 100 basis points (1%) of interest rate hikes from the ECB for 2022.  His remarks about expecting “a decisive June meeting and an active summer” have led to the market’s conclusion.  The taming of inflation is the most significant risk to policymakers and next month’s meetings of the central banks will be closely monitored.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 23rd May 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Walking the tight rope

Written by Shane Balkham

Inflation concerns are still the hot topic for investors, politicians, and policymakers.  The US published its inflation data last week for April and it was a mixture of good and bad news.  The relatively good news was that the headline Consumer Price Index (CPI) fell from an annual rate of 8.5% to 8.3% and that core inflation, a measure that excludes certain volatile and seasonal prices such as energy and food, fell from 6.5% to 6.2%.

The bad news was that these data points were still higher than markets had expected.  The decline in used vehicle prices helped the reduction in core inflation, however services inflation picked up, showing demand shifting from goods to services.  It is the uptick in the stickier parts of the inflation basket that will be of greatest concern to the policymakers within central banks.  With the next policy meetings for the Federal Reserve and the Bank of England just four weeks away, one month’s worth of data showing a slight downturn will not be sufficient for policymakers to change their current course of interest rate hikes.

In the UK, the Bank of England Governor Andrew Bailey will be meeting the Commons treasury committee today, ahead of the UK’s inflation data which is due to be published on Wednesday.  Expectations are for April’s inflation data to show another sharp increase in prices and add pressure on the Government to help ease the spiralling rise in the cost of living.

Inflation has become a political hot potato and Governor Bailey can expect a hostile reception from MPs, who will want some reassurance that the independent central bank has control over the path of prices.  The Bank of England considers inflation to be less entrenched than in the US and that price rises will slow as the economy contracts later in the year.  That is a difficult narrative to promote when they also think that this temporary level of inflation has yet to reach its height of 10% in the coming months.

One country that does not have a rampant inflation problem is China, with headline CPI @2.1%, year-on-year for April 2022.  China’s core inflation dropped to 0.9%, evidence of weaker demand as China continues its zero-tolerance policy for COVID-19.  Retail sales have dropped over 11%, year-on-year in April, highlighting the toll that lockdowns are having on Chinese growth.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 16th May 2022.
© 2022 YOU Asset Management. All rights reserved.


The World In A Week - Not all doom and gloom

Written by Richard Warne.

It has been a gruelling start to the year for both equities and bonds, and it would be very easy to get despondent with all the negativity that persists. Topics that have and will continue to generate headlines have become familiar to us all; continued supply chain issues, inflation, rates, and the human cost of the Ukraine war. Amongst all this, there are some bright spots, though you would probably not have known it from recent share price actions. Globally, the Q1 earnings season has been remarkably strong, with 80% of US companies reporting and beating expectations. Unfortunately, even companies beating expectations and raising forward guidance have not been able to escape negative share price moves.

We did see good signs from companies like Airbnb and Booking Holdings, beating expectations into what is expected to be a busy summer for the travel sector. Though it is clearly not all plain sailing. From a macro perspective, it was concerning that the Zillow (US real estate company) forward guidance was weaker than expected on broader concerns for the housing market. Inventory levels have significantly fallen year on year, interest rates are surging, and housing affordability remains under considerable pressure with no signs of letting up.

Though we are clearly on the rate tightening path from central banks on both sides of the pond, it was encouraging to see Jerome Powell, Chairman of the US Federal Reserve, potentially ruling out a 75bps rate hike in the future and remain committed to a flexible yet well-telegraphed plan for tightening.

Investing is certainly never easy; time and patience tend to be your only friends in times of shifting sands for markets. Through all the noise and volatility we are currently witnessing, this often creates good opportunities. To quote the wizard of Omaha, Warren Buffett “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 9th May 2022.
© 2022 YOU Asset Management. All rights reserved.


market commentary

The World In A Week - Inflation Narratives & Deflated Expectations

Last week was broadly positive for markets, as the MSCI All Country World Index (ACWI) of global stocks rallied +1.8% in GBP terms.  It was a mixed bag beneath the surface, with European Equities and US tech stocks driving the rally while UK and Emerging Markets were more muted and Chinese markets were down.  Both the riskiest and least risky forms of debt posted positive returns as high yield bonds and treasuries were up roughly +0.5%.

These patterns of returns are not typical for markets and may reflect the principal ongoing debate taking place among market participants, that being the topic of inflation. Last week saw another release of Consumer Price Index (CPI) data in the US which showed inflation was running ahead of expectations, albeit by a modest amount.  Headline inflation came out at +5% on an annualised basis, while “core” inflation (which excludes volatile food and energy) printed at +3.8%.

The relevant markets were decidedly unperturbed by this news. The yield on the 10 year US Treasury Bond fell (not what we would traditionally expect when inflation is rising), while the 5 Year Breakeven inflation rate also continued on its downward path. We follow inflation “breakeven” rates as they imply what the market thinks inflation will average out at over the next five years. Right now the markets share the Federal Reserve’s view that the current inflationary spell will be temporary.

We think there are very good arguments on both sides for whether inflation will prove as “transitory” as the Fed expects it to be.  On the one hand, while the data shows an inflationary trend that is faster than many expected, it has been spurred by increases in prices that are likely to be temporary such as used cars and flights. There are also major deflationary global forces arising from technology and an aging population.

On the other hand, the bond markets (and indeed many multi-asset managers) may well have been conditioned by decades of low/falling inflation to believe it never poses a threat again.  Vast amounts of money have been injected into the system to keep economies alive during the pandemic, and the velocity of this money is expected to increase as economies reopen. In addition, we have seen commodity prices rise rapidly and employers struggle to fill jobs which could lead to non-transitory wage inflation.

We have been moderately adding inflation-sensitive assets to the portfolio but appreciate that, unlike the current weather, the picture remains quite unclear.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete.  Unless otherwise specified all information is produced as of 14th June 2021.
© 2021 Beaufort Investment. All rights reserved.