Wellesley WeeklyWatch – Mild manners made markets stable

29 June 2021

Stock Take

Gently does it

US stocks took an upturn last week, after a pacifist performance from Federal Reserve officials and the Biden administration obtained bipartisan support for a $1 trillion infrastructure agreement on Thursday.

In the lead-up to this, there had been some fluctuation in US markets, following last week’s announcement that an interest rate rise was predicted in 2023 – a year earlier than in previous projections.

US Federal Reserve officials managed to buoy up investors, in that any steps to fortify fiscal policies would only occur if economic data made it necessary. The fact it was even being proposed was the result of stronger-than-anticipated data on the recovery, leading to improved prices.

Prices continued to recover in light of the infrastructure deal, which will fund areas such as transport, broadband and energy improvements. The Nasdaq and S&P 500 both surged directly after the announcement – closing Thursday at record highs – while the Dow Jones also rose over the course of the week.

It comes as no surprise that events in the US have been impacted, given the prominence of the country. Ruth Gregory, Senior UK Economist at Capital Economics, pointed out the following:

“The evolving outlook for monetary policy on the other side of the Atlantic has once again been partly to blame for recent movements in UK markets. Like in the US, the yield curve flattened after the Fed became more hawkish at its May meeting, although these moves have since unwound.”

A measured approach

The UK’s Bank of England (BoE) voted to maintain interest rates at their all-time low in the past week too – continuing its current programme of UK bond purchases.

The BoE noted inflation had risen above its 2% target to 2.1%, and GDP growth had been bolstered – yet it said it anticipated these to be temporary changes, and expected both to fall back in the future.

Adopting a milder tone, the BoE said that it does not plan on tightening monetary policy, at least until clear and considerable progress is being made in eradicating spare employment capacity, and meeting the 2% inflation target sustainably.

The news that the BoE would be taking a somewhat relaxed approach to shifting its policy led to a drop in sterling against the dollar, plus a boost to the FTSE 100, which closed the week up compared to the beginning of the week.

David Page, Head of Macro Research at AXA Investment Managers, commented:

“Our longer-term assessment is that UK GDP growth will be a little softer than the BoE expects. We forecast 6.8% now versus BoE forecasts of 7.25% in May and that inflation will fall back a little more than the BoE expected: we forecast above 1.5% by end of next year, rather than around 2%.

“Accordingly, we suspect that the BoE will take slightly longer to tighten monetary policy than current expectations, which rose after last week’s Fed meeting. We forecast a rise to 0.25% in August 2023.”

The STOXX Europe 600 finished the week more or less where it started. Investors will scrutinise further economic data due out in the next few weeks, including the Economic Sentiment Indicator and a flash estimate for eurozone inflation, to weigh up the prospects for Europe.

Wealth Check

The spotlight was on the pensions ‘triple lock’ again last week, as commentators started to look ahead towards the Autumn Statement.

The triple-lock is one of the government’s manifesto pledges, guaranteeing pensioners a state pension uplift every year of either inflation, average earnings growth, or 2.5% – whichever is highest.

The earnings part of the commitment is measured by the annual increase in the quarter to July. Current data from the Office for National Statistics reveal that average earnings growth for February to April was 5.6% – a rise from 4.3% in the three months to March.1

Economists have predicted that a sustained revival in the health of the UK’s economy may see average earnings reaching 8% by July.

By all accounts, this would cost the Treasury £4 billion – a sizeable sum, just when the Chancellor is contemplating how to balance the books post-pandemic via tax rises or spending cuts.

Whereas Downing Street last week asserted its commitment to the triple lock, the Treasury will be keeping a furtive eye on the earnings data for July, ahead of the Autumn Statement.

The lock is already politically delicate and is expected to become a point of fiscal focus and contention.

Tony Clark, Senior Propositions Manager at St. James’s Place, said:

“The cost of COVID will need to be recouped at some point. If we combine this uncomfortable truth with the fact that future tax allowances are not necessarily set in stone, then staying on top of any potential regulatory or taxation change is paramount.

“This is where the value of ongoing financial advice and tax planning is fundamental. Meeting regularly with your adviser ensures that you are able to adapt your retirement plans in a timely way, avoid financial shocks and remain on track.”

For further information on the State Pension, the pensions triple lock system and how this affects your retirement strategy, contact your Wellesley financial adviser today.

Sources:

1 Office for National Statistics, AWE annual growth rates, 15 June 2021

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

The Last Word

“I look forward to contributing to our fight against the pandemic, and serving my country from the Cabinet once again.”

– Sajid Javid, who replaced Matt Hancock as Secretary of State for Health and Social Care over the weekend.

The information contained is correct as at the date of the article.

AXA Investment Managers is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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