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The World In A Week - Markets shrug off cold winds from the East

Written by Chris Ayton

Last week was a positive one for global equities with the MSCI All Country World Index retracing most of its losses suffered earlier in the month, and ending the week up +3.3% in Sterling terms. Large cap US growth stocks bounced back sharply with the NASDAQ 100 index up +6.2% over the week, boosted by Nvidia’s CEO citing at a Goldman Sachs technology conference that there continues to be a frenzy of demand for its products from its large and “emotional” AI focused customers with “everyone wanting to be first and everyone wants to be most”.

In the UK, July’s GDP growth number unexpectedly came in flat for the second month in a row. The economy grew by +0.7% in the first three months of the year and +0.6% in the second quarter but the flat numbers for June and July raised fears that the economy is stalling. This data also slightly raised expectations that the Bank of England could cut interest rates again when they meet on 19^th September, although the odds are still in favour of the base rate being left unchanged at 5%.

The FTSE All Share Index ended the week up +1.3%. Takeover activity continued to be prominent in the UK market with the latest bid being by Rupert Murdoch owned REA’s £5.6bn bid for online property portal, Rightmove. The company swiftly rejected the bid, which was at a price 26% above where it started the month, saying it fundamentally undervalued the company’s future prospects.

In the US, away from the headlines from the Presidential debate, the latest inflation data showed inflation falling to 2.5% in August, although core inflation, which excludes food and energy, held steady at 3.2%. This tempered expectations of a 0.5% interest rate cut at the upcoming Federal Reserve meeting, although the markets are still pricing that as the most likely outcome.

Emerging Market equities were the laggards over the week, rising +1%, once again dragged down by Chinese equities which fell back -0.2% as China’s producer prices declined 1.8% year-on-year and raised more concerns that deflationary forces are entrenched in the economy. Data was also released showing that the value of new home sales by the top 100 developers fell 26.8% year-on-year. Although this lacklustre backdrop is far from ideal for equities, it continues to be positive for our funds’ exposure to China government bonds, with the Bloomberg China Aggregate Bond Index up +0.4% for the week and +8.2% for the year-to-date, both in GBP hedged terms.

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 16^th September 2024.

© 2024 YOU Asset Management. All rights reserved.

by ellen

The World In A Week - Sahm Rules are meant to be broken

Written by Cormac Nevin

Last week was a challenging one for global equity markets. The MSCI All Country World Index fell -4.0% in GBP terms, and while all equity markets found themselves in negative territory for the week the worst affected was the U.S market, illustrated by the -4.5% (GBP) fall in the S&P 500 Index.

The source of the volatility we have witnessed over the last two months has been centred around economic data releases in the U.S, primarily around the health of the labour market. As we covered in prior notes, the U.S Non-Farm Payrolls employment report released on the 2^nd of August undershot expectations by implying an increase in the unemployment rate and triggered a bout of market panic the following Monday. This was followed up with last week’s report whereby even though the unemployment rate fell back to 4.2% from 4.3%, the report again disappointed expectations.

Market participants are acutely focused on a concept known as the “Sahm Rule”. This metric was devised by the economist Claudia Sahm as an indicator for when the economy enters a recession. It is “triggered” once the 3-month moving average of the unemployment rate rises by half a percentage point or more relative to the minimum of the three-month averages from the previous 12 months. The dynamic which it seeks to capture is that when the labour market weakens, it does so at an accelerating rate as the growing body of jobseekers reduce demand in the economy spurring further job losses. This metric was initially triggered in the August payroll report and was further pushed into recessionary territory by last Friday’s report. Interestingly, Claudia Sahm herself has recently argued that her rule may not apply this time given large numbers of new entrants to the labour market from immigration, however markets appear to be becoming increasingly concerned about the U.S economy from a number of angles.

While the equity market’s reaction to these developments has been negative, the reaction from fixed income markets have been much more amenable, particularly in the highest-quality segments. The Bloomberg Global Aggregate Index of high-quality global bonds rallied +1.0% last week and is now up +3.9% for the quarter-to-date. The long duration U.S Treasury exposure we hold in the MAB Funds has rallied +3.4% last week and has now returned +9.5% for the quarter to date. All returns quoted were in GBP Hedged terms. Fixed income is once again playing its traditional role in providing meaningful diversification to equities, illustrating the value of a globally diverse multi-asset 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 9^th September 2024.

© 2024 YOU Asset Management. All rights reserved.

by ellen

The World In A Week - A cut above the rest?

Written by Millan Chauhan

Last week, Jay Powell delivered his speech at the Federal Reserve’s (the Fed) annual economic symposium in Jackson Hole, Wyoming. Chairman Powell acknowledged that the “upside risks to inflation have diminished and the downside risks to employment have increased” and stated that the “time has come for policy to adjust”, indicating that policymakers would look to cut interest rates at their next meeting in September.

According to the CME FedWatch Tool, the probability of an interest rate cut is now 100% but the magnitude of the rate cut still remains in contention. The probability of a 25 basis points cut currently stands at 70% and the probability of a 50 basis points cut is at 30%. One of the major risks that remain is the speed at which future interest rate cuts are implemented. Whilst a 25 basis points is almost certain, the probability of a 50 basis points rate cut has risen substantially following Chairman Powell’s statement. The Fed’s preferred inflation metric which is the personal consumption expenditures index is expected to be released this Friday, with expectations of the core measure at 2.7%, on a year-over-year basis.

We also saw the release of the Fed’s meeting minutes which stated that the vast majority of participants expecting a September rate cut and that some officials preferred a July rate cut following weaker jobs data releases.

Following Chairman Powell’s comments at Jackson Hole on Friday, the likelihood of an interest rate cut increased which was a tailwind for smaller-capitalised stocks with the Russell 2000 index ending the week +1.3%, outperforming the S&P 500 index (larger-capitalised stocks), which returned -0.8% last week, both of which are in GBP terms.

In Europe, we saw business activity rise in August with the first estimate of the HCOB Eurozone Composite PMI Output Index coming in at 51.2, up from 50.2. The Paris Olympics was a major driver for the services sector however manufacturing production fell for the 17^th month running. The governors of the Bank of Finland and the Bank of Italy commented that the case for the European Central Bank (ECB) to cut interest rates further in September has strengthened. Expectations now point towards two further rate cuts this calendar year. In July, the ECB voted to keep interest rates unchanged, but they were concerned about restricting future economic growth prospects.

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 27th August 2024.

© 2024 YOU Asset Management. All rights reserved.

by ellen

The World In A Week - Have we gone full circle?

Written by Shane Balkham

Last week seemed to be very much the calm after a short-lived storm. Not wanting to tempt fate, the dust seems to have settled again with financial markets back to almost where they started at the beginning of the month. The S&P 500 index is only a few percentage points below its all-time high, while Japanese equities, arguably at the epicentre with the Bank of Japan’s surprise rate hike, have also recovered significantly since the sharp drop.

A timely reminder that trying to time the markets is a fool’s errand and keeping a cool head and maintaining your investment strategy has been a robust process to follow. If your investment time horizon is measured in years and decades, then short-term movements over days and weeks should not be a cause of worry.

What helped quell the recent volatility was that a series of data publications were slightly better than general expectations. In the UK we had a jobs report for the second quarter, which showed a drop in the level of unemployment and slowing wage growth. Inflation was slightly lower than expected at 2.2% year-over-year to the end of July. Although slightly up from June’s and May’s reading, UK CPI is more or less still at the Bank of England’s target rate. For the US, CPI data continued to trend downwards, reaffirming market expectations that the Federal Open Market Committee (FOMC) will cut rates in its September meeting.

The FOMC minutes from the end of July meeting are published this week. Of particular interest will be any commentary around the level of confidence in the decline in inflation and weakening of the US economy. It must be remembered that any details gleaned from these minutes are three weeks old and there has been and will continue to be, a lot of data issued before the next FOMC meeting in four weeks’ time, highlighting the problem of relying on data that is inherently lagged.

The process of bringing down US inflation without causing a recession is a difficult balancing act. The resilience of the US consumer continues to defy gravity, as retail sales data showed a continued willingness to spend. However, with savings that grew during the pandemic largely gone and wage growth cooling, the US consumer is increasingly resorting to credit, raising questions about the longevity of consumer spending, especially as data is showing delinquency on payments are increasing.

While the recent market scares have abated and the US Federal Reserve’s goal of a soft landing looks feasible once again, we have the uncomfortable period of four weeks until the central bank meets to decide whether or not to cut rates. Whatever happens over the remainder of the summer, this demonstrates the importance of holding a diversified investment when the stock market is looking significantly narrow, particularly when we have the annual economic symposium at Jackson Hole this week, which has been the stage for drama in previous years.

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 19^th August 2024. 

© 2024 YOU Asset Management. All rights reserved.

by ellen

The World In A Week - Diversification is your friend

Written by Chris Ayton

Last week was an extremely volatile one for many global equity markets. The MSCI All Country World Index fell -1.6% over the week in Sterling terms. Global fixed income markets delivered some much-needed diversification with the Bloomberg Global Aggregate Index up +1.7% in Sterling hedged terms. Longer-dated bonds, which are more sensitive to interest rate reductions, were up substantially more.

News was dominated by various interest rate decisions. In the US, the Federal Reserve (“the Fed”) decided to keep their headline rate unchanged despite a slew of negative economic data including weaker employment and manufacturing data. This sent jitters through global equity markets as fears grew that the Fed has missed the boat and the US economy is heading towards a hard landing. Weaker-than-expected earnings result announcements from leading tech names like Intel and Amazon did nothing to quell these fears. The S&P 500 Index fell -1.7% over the week with the technology-dominated Nasdaq 100 Index down -2.7%, both in Sterling terms.

In the UK, the Bank of England’s Monetary Policy Committee did announce their first move, voting 5 against 4 to cut the UK base rate by 0.25% to 5%. Although they cautioned that further cuts were far from certain, they also cheered the market by raising their UK economic growth projections for 2024 from 0.5% to 1.25%. Despite this positive news, the FTSE All-Share Index fell -1.4% over the week.

However, in Japan, we saw the Bank of Japan surprise markets with a rise in their headline interest rate to 0.25%, with the implication that there are more rises to come. While this boosted the Yen, it resulted in concerns over the impact of a strong Yen on the profits of large Japanese exporters, a view that was accentuated by growing fears over the weakness of the US economy. The MSCI Japan Index dropped -6.0% in local terms over the week, although the strength of the Yen reduced that loss to just -1.3% in Sterling terms.

As Sir John Templeton said, "The only investors who shouldn't diversify are those who are right 100% of the time." The uncertainty around policy decisions, and the macro backdrop, have resulted in the return of market volatility as well as rapid changes in the dominant investment styles. Heavily momentum-driven markets have been followed by sharp style reversals and periods where smaller companies and value styles have led the way.  This volatility in markets and styles is likely to continue and is impossible to time. This is where YOU Asset Management’s approach of always maintaining asset class and regional diversification and, within asset classes, blending managers adopting a range of different investment styles can enhance risk-adjusted returns and reduce the volatility in client outcomes. After some years of a narrowly driven stock market, consistent with empirical evidence over longer time periods, prudent diversification is once again your friend.

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 August 2024. 

© 2024 YOU Asset Management. All rights reserved. 

by ellen

The World In A Week - Disappointments and Worldwide Shifts

Written by Ilaria Massei 

Equity markets were mostly down last week, with some bright spots in Continental Europe where the MSCI Europe Ex-UK equity index rose by +0.5% and in the UK where the FTSE All Share increased by +1.6% in GBP terms. Fixed Income markets were overall positive, with the Bloomberg Global Aggregate up +0.3% in GBP terms.

Over the past few weeks, the market narrative in the US has partially shifted from strong growth and a healthy economy to disinflation and expectations of lower interest rates in the near future. With inflation and the job market coming under control, markets now anticipate that the central bank in the US, the Federal Reserve, will likely cut interest rates in September. On the corporate front, two of the larger companies in the S&P 500, part of the so-called "magnificent seven," reported some disappointing earnings results last week. Tesla's revenues fell short of expectations, and Alphabet's heavy investment in AI raised concerns about future profitability. This news further fuelled a shift among investors from mega-cap US technology giants to small-cap stocks. As a result, the Russell 2000, an index tracking around 2,000 small-cap companies in the US, rose by +4.0% in GBP last week. The prospect of lower interest rates suggested by weaker economic data should benefit smaller companies, which typically carry more debt and are therefore more sensitive to changes in interest rates.

While the largest shift has been into the Russell 2000 and small caps in the US, the UK has also benefitted from this rotation, leading to a resurgence of UK Equities last week and more broadly this month to date. The FTSE 100 posted a positive +1.6% return last week, making it the best-performing equity market. Meanwhile, the FTSE 250, which tracks mid-sized UK companies, has performed even better on a month to date basis, rising by +5.5%.  UK stocks, which have been out of favour for a long time, are now benefiting from renewed political stability, earnings growth, valuation adjustments, and dividends.

Another notable development last week was observed in Japan, with a significant shift in the Yen’s trajectory. For many years, the Bank of Japan's low interest rate policy, aimed at stimulating the economy, led to a depreciation of the currency against most major currencies. However, the Yen has recently started to strengthen, likely helped by suspected but not yet confirmed government actions to support it. While such measures may have a short-term impact, a clearer indication from the Bank of Japan that the interest rate gap between Japan and other countries is closing could provide the catalyst needed for a more sustained recovery of the Yen.

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 29^th July 2024. 

© 2024 YOU Asset Management. All rights reserved. 

by ellen

The World In A Week - Record-Breaking Rotations

Written by Cormac Nevin

Equity markets were broadly down across the globe last week, with the MSCI All Country World Index of global shares retreating -1.6% in GBP. While each of the major markets we track were negative, there was a wide degree of dispersion in returns, with the Chinese market down -4.3%, as measured by the MSCI China, the US market down -1.4%, as measured by the S&P 500, and the Japanese market down -0.6%, as measured by the MSCI Japan, all in GBP terms.

Under the surface of the headline market return, we have witnessed an extraordinary change in the type of stocks which have been driving returns versus those which have been retreating. Market leadership has shifted very abruptly from mega-cap US technology giants (often referred to as the “magnificent seven”) which have dominated returns in recent years, to previously neglected small-cap names which tend to be more sensitive to interest rates and economic growth. Over the 10 days to 19^th July 2024, the Russell 2000 Index of smaller U.S. companies outperformed the NASDAQ 100 Index of large-cap tech titans by over +12%. This was the largest such movement between the two types of stocks we have seen since the bursting of the tech bubble in the early 2000s.

A number of plausible catalysts were given by market commentators for this rotation of market winners. Inflation data in the US and globally has continued to come in weaker than anticipated, while economic strength has also undershot expectations. This is viewed as giving central banks a green light to begin cutting interest rates, which is more beneficial for relatively highly indebted small-cap companies vs their cash-rich larger peers. The sharp increase in market probabilities of Donald Trump becoming the new US President is also another potential driver. He has floated the idea of taking US corporate tax rates down to 15%, which again would benefit more domestically-oriented small-caps vs larger companies who can use aggressive international tax planning to shift the burden overseas.

Whatever the future holds, the events of recent weeks have nicely illustrated the benefit of maintaining a highly diverse set of exposures to benefit from changes in leadership, rather than solely relying on index exposures which will naturally be concentrated on past winners.

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 22nd July 2024. 

© 2024 YOU Asset Management. All rights reserved. 

by ellen

The World In A Week - Downside Surprise

Written by Ashwin Gurung

Downside Surprise in US inflation sees US small-cap stocks outshine US large-cap stocks.

In June, US headline inflation, as measured by the Consumer Price Index (CPI), fell by -0.1% month-over-month, lower than the expected increase of +0.1%. While the rate of inflation has been gradually declining since the end of 2022, this marks the first instance of deflation, where prices fell, with the last decline occurring in May 2020. Similarly, core inflation, which excludes the most volatile components of the index such as food and energy costs, came in below expectations of +0.2%, rising by +0.1%.

In contrast, Friday’s Producer Price Index (PPI) data, which measures changes in prices received by producers, rose by +0.2% month-over-month in June, exceeding expectations of +0.1%. Despite this upside surprise, the market showed little reaction, likely due to its minimal impact alongside surprising deflation numbers. While a rising PPI alongside a falling CPI could mean businesses are absorbing costs, prolonged differences might signal potential future inflation if producer costs are eventually passed on to consumers. Having said that, it is important to look at other economic indicators to understand the broader picture.

Nonetheless, the US small-cap stocks cheered the downside surprise in US inflation, as the cooling increased expectations that the Fed might begin cutting interest rates in September. The Russell 2000 Index, which measures the performance of approximately 2000 of the smallest publicly traded companies in the Russell Index, gained +4.4% in GBP terms last week, significantly outperforming the tech-biased Nasdaq 100 which fell -1.8% in GBP terms over the week.

This is a significant shift from the past few years, during which small-cap stocks have struggled due to high interest rates and borrowing costs, while strong US equity index returns have mainly been driven by large AI-focused tech stocks. This rally suggests that returns may be broadening across different market caps, and a possible shift towards small-cap stocks could be on the horizon. Regardless of the market trends, we maintain diversification across various asset classes and market caps, enabling us to capture opportunities while managing risk effectively.

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 15^th July 2024.

© 2024 YOU Asset Management. All rights reserved. 

by ellen