Rory McPherson, Chief Investment Officer, 28/11/22
Markets continued their rebound last week, with UK assets leading the way. The UK stock market was up by about 1.5%, with the Pound also strengthening against most of the major currencies. The Pound has now risen by about 13% vs the US Dollar since the depths of the September “mini-budget” and is now trading at about 1.21 vs the Dollar. This has meant that many of the gains in overseas’ assets have been dampened down and that was the case last week too. The Bond market also put in a decent showing last week as yields fell on some weaker than expected economic data. This week is pretty quiet in terms of scheduled data, with the key watchpoint being the monthly US jobs numbers which come out this Friday.
Last week
- UK assets did well, with the stock market and the currency rising strongly
- Bond markets posted decent gains as yields fell
- Economic data came in worse than expected which was taken as a positive by the markets (less rate hikes needed)
- The Oil price fell about 5% on the week
This week
It’s another pretty quiet week of data.
- The US jobs data for November (out on Friday lunchtime) is probably the key data point
- Tuesday and Wednesday sees the release of key survey data (PMIs) for China
- There isn’t much this week in the way of UK data, but we do have some numbers on the housing market on Thursday as well as manufacturing survey data
Equities & Oil: returns are all in base currency, save for Emerging Equities which are in GBP. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.
Last week in more detail.
Last week saw a continuation of the theme that we’ve seen throughout the quarter. Equities continued to rebound, but strength in the Pound meant that overseas’ gains were crimped. This backdrop saw the UK FTSE All Share post gains of 1.5% on the week, whilst the Global share market was pretty muted; down by 0.1% on the week.
Within the UK market, returns were pretty even across the various different indices. For instance, the FTSE 100 (larger shares) was up by 1.5%, whilst the FTSE 250 (smaller more domestic shares) was up by 1.4%. Within the FTSE 100, Frasers Group was the best performing share (up by 7.9% on the week), closely followed by Rolls Royce (+6.3%) and Glencore (+5.5%). At the other end of the scale in the index was Harbour Energy (-5.4%), Vodafone (-4.5%) and Ocado (-4.2%). The UK market, (like many share markets) has now seen a big bounce this quarter, with the FTSE 100 rising by 9% and the FTSE 250 rising by just over 14%. The FTSE 100 is comfortably the best performer of the major share markets so far this year, up by 4.9%.
It was a very quiet week in terms of news flow. The key things that drove markets over the week were the US Federal Reserve minutes and some lackluster survey data. The US Fed minutes essentially said that they felt they could take their foot off the gas with regards to rate hikes and the survey data came in worse than expected; indicating that business’ feel that the economy is in recession hence tighter policy is not needed. Specifically, the US Fed minutes said that a “substantial majority of participants” thought that a slower pace of rate hikes was appropriate. This drove bond yields lower as less rate hikes were priced into the next meeting. There are now just 2 hikes priced into the 14th of December Fed meeting (and 2 for the BoE meeting on 15th December), where there previously were 3. The business survey data (PMI) for the US was lower than expected (with the composite reading coming in at 46.3) which indicates that the economy is in recession. The UK data also came in below the magic 50 level (which indicates the economy is in contractionary territory) but actually was a touch higher than expected (coming in at 48.3 vs expectations of 47.5).
Emerging market stocks continued to march to a different beat and were lower last week by 1.9%. This was due largely to Covid restrictions tightening again across China as case numbers rose. This hit emerging market shares early in the week, but they did get a boost on Friday as the People’s Bank of China announced a 0.25% cut to the reserve requirement ratio (RRR) for banks. This came on the back of a recent property sector support package from some of the large state banks.
UK Government bonds returned 0.6% on the week, whilst UK Corporate bonds returned 1.1% on the week. This came on the back of falling bond yields (reflecting lower expected interest rates) and improving credit conditions (as UK political risk continues to be priced lower). These 2 assets have now bounced 14% off their lows in late September (gilts) / early October (corporates) but still remain heavily under water for the year. With yields of 3.1% (10-year UK gilts) and 5.5% (UK corporate bonds), there is still plenty of room for upside especially if rate hike expectations continue to come down.
The other interesting theme last week was the fall in the oil price. This has been a theme over recent weeks, with the price of WTI Oil dropping from $120/barrel in June to around $76/barrel today. Last week saw the price of WTI oil fall by circa 5%. The fall in oil reflects the slowdown in economic activity (economies are slowing and therefore consuming less oil) but also points to the covid shutdowns in China as well as the buildup in US inventories and the milder weather which has seen many of us consuming less energy (especially when combined with the increased prices!). This fall in the oil price is good news for the economy as it means that prices (and therefore inflation) will start to come down and there will be less pressure on the Central Banks to hike interest rates to quell inflation and send the economy into a deep recession.
The Oil price fell by nearly 5% last week and has now given up most of its gains for the year as recession risk starts to be reflected
