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Multi-Manager People’s Perspectives

13th May 2022
May 2022

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Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.
Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

We’ve seen more volatility in equities and bond markets over the week with the hoped-for insight into Russia’s longer-term strategy for Ukraine failing to materialise. Meanwhile the US inflation data showed signs of peaking but equally pointed to inflation broadening in the service sector, which suggests that it will be ‘higher for longer’, with consequences for interest rate policy.

 

The anticipated speech by President Putin during the Russian ‘Victory Day’ parade on Monday saw no major announcements with no declaration of war on Ukraine or mobilisation of troops. Putin made no mention of Russia’s intentions but spoke of Russian troops fighting ‘heroically’ in the Donbas region. Putin said the Russian operation in Ukraine was “pre-emptive” to “ward off aggression and a necessary response to Western policies”. One of Russia’s concerns was the expansion of NATO but their actions have accelerated this process, with the formerly neutral countries of Finland and Sweden now very close to joining the alliance after announcements this week. The Financial Times reported that the US believes that Russia has not changed its aims and Director of National Intelligence Avril Haines said the US is “not confident” that the fight in the Donbas region “will effectively end the war”. The US sees Russia preparing for a prolonged conflict with the chances of a negotiated solution in the short term described as “remote” and the conflict turning into a “war of attrition”. President Zelensky earlier in the week reiterated that any peace deal would be dependent on Russia returning to their positions held before the invasion began on 24 February. The US expects Russia to continue seeking to capture territory in the south of Ukraine, to effectively cut off Ukraine from access to the Black Sea, but this would require the commitment of a greater number of forces. The US Congress moved closer to approving a near $40bn aid package for Ukraine, including $6bn of ‘security assistance’ to include weapons.

 

The economic data has been headlined by employment and inflation data from the US. The non-farms payrolls report for April showed a further 482,000 jobs created, ahead of expectations though prior months saw downwards revisions. The unemployment rate was unchanged at 3.6%. The inflation data in the US eased slightly to 8.3% year on year in April, down from 8.5% in March. This was higher than expectations however and core CPI (which excludes volatile food and energy inputs) was up 0.6% month on month, highlighting a broadening out of inflation across the service sector and the inflationary pressures within housing and rents. The easing in inflation from the 40 year high in March was helped by gasoline prices falling back, though these falls have now reversed, with US gasoline prices making new highs just this week. Equities sold off further on the inflation data, with stocks more vulnerable to higher rates suffering the most. The market expectation for a more definitive peaking in inflation was not delivered by this set of data, meaning that fears over inflation staying elevated and indeed broadening across the US economy will continue to weigh on sentiment. China also published inflation data with CPI slightly ahead of expectations, but way below what we are seeing in Western economies, at 2.1%. In the UK, the British Retail Consortium recorded the first decline in retail sales in 15 months, with sales down 0.3% in April versus March. Chief Executive Helen Dickinson said that “the rising cost of living has crushed consumer confidence and put the brakes on consumer spending”. The data is not adjusted for inflation so in reality the fall in retail sales is larger than the headline figure suggests. Yesterday the UK published economic growth data for the first quarter, with the economy growing by 0.8%, lower than expected. The monthly data showed all of the growth came in January, with the economy flat in February and shrinking in April. For what is expected to the strongest quarter of growth for this year, and indeed for the next couple of years, this was not particularly encouraging.

 

The ‘Queen’s speech’ earlier in the week set out the legislative agenda for the UK but we may well need to see more measures announced to support the UK economy over the coming months, not least as the ‘cost of living’ headlines impact on politics. In the short term, the government appears to be focused on undoing the Northern Ireland Protocol section of the Trade & Co-operation agreement signed with the EU as part of the Brexit process. The proposed legislation could over-ride parts of the protocol, which was agreed to avoid a hard border between Northern Ireland and Ireland but results in an economic border between Northern Ireland and Great Britain. The UK government said “the protocol needs to change”, while the EU pointed out that this raises the prospect of breaking international law. Given the weakness of the UK economy right now, maybe a trade war with our largest trading partner may not be the most sensible move…

 

Expectations for the European Central bank to hike rates as soon as July gained more weight after ECB President Christine Lagarde said that the first rate hike may come “weeks” after bond buying ends in early July. Lagarde had previously said the first hike would be “some time” after QE concluded, but markets took her comments to imply that a hike in July was on the table. The European Central Bank has not yet started on the path of tightening policy, unlike the Federal Reserve and Bank of England, despite eurozone inflation almost four times higher than their target. Deposit rates in the eurozone remain negative, as they have been since 2014, with the last rate hike back in 2011. Markets are pricing 75bps of hikes by year end and while the ECB is clearly concerned over inflation, it is equally concerned over slowing growth given Europe’s vulnerability to events to the east, and the impact of energy price shocks on consumers. 

 

Across at the Federal Reserve, we heard from several of Jay Powell’s colleagues echoing his comments that 50bp rate hikes were likely, but some chose not to completely rule out 75bps hikes should inflation remain stubbornly high. John Williams of the New York Federal Reserve referred to the path to a “soft-ish landing”. Powell himself said that 50bps hikes at the next two Fed meetings were “probably appropriate” and he noted that bringing inflation down to target “will cause some pain”. Powell said that “the question of whether we can execute a soft landing or not may actually depend on factors we don’t control. But we should control the controllable; there’s a job to do on demand”. Markets will continue to ponder how this rate hiking cycle comes to an end – as I’ve mentioned in the past few weeks, the usual outcome tends to be a recession. Certainly, the fall in bond yields this week points to bond markets looking through the interest rate hikes themselves and focussing on the economic consequences of monetary tightening. The Fed published their semi-annual financial stability report, warning of a “higher than normal” risk of trading conditions in US financial markets suddenly deteriorating. They noted that sharp increases in interest rates (arguably something we are in the midst of) to tame inflation shocks posed risks to the US recovery. They also noted liquidity concerns, with the ability to buy or sell at prices quoted having “deteriorated”, with market moves compounded by high frequency trading and brokers being cautious. We have seen a tightening in financial conditions, and have heard from our own trading desk of poor liquidity in some credit markets, but things are likely to have to deteriorate much further with actual funding stresses emerging for the Federal Reserve and others to change direction on policy. Higher US rates and a strong Dollar usually causes trouble somewhere, so we are certainly watching for any signs of problems across financial markets.

Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.
Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.
Use our handy glossary to look up any technical terms you are unfamiliar with.
Use our handy glossary to look up any technical terms you are unfamiliar with.

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