WeeklyWatch – Markets await Rishi Sunak’s next move

25 October 2022

Stock Take

Markets welcome Truss’ resignation

“A week is a long time in politics”, as Harold Wilson once quipped, a sentiment that has arguably never been more accurate. News of the shortest-serving Prime Minister, second-shortest-serving Chancellor and an economic-plan U-turn would normally dominate the headlines on their own, but this has been no ordinary week.

Following Liz Truss’ resignation after just 44 days as Prime Minister, hot on the heels of Chancellor Kwasi Kwarteng, markets reacted positively – with sterling rallying against the dollar and UK shares moving upwards, while government borrowing costs fell.

Paul Dales of Capital Economics commented:

“Although the resignation of Liz Truss as Prime Minister [left] the UK without a leader when it faces huge economic, fiscal and financial market challenges, the markets appeared to be relieved. It was a step that needed to happen for the UK government to move further along the path towards restoring credibility in the eyes of the financial markets.”

Mark Dowding of BlueBay Asset Management continued:

“Policymakers globally now feel little shame in mocking the state of affairs in the UK and it is a reminder that credibility and trust take a long time to earn, but can be quickly lost.”

Before Truss’ premiership came to an abrupt end, Chancellor Jeremy Hunt’s move to rip up her stimulus plan was thought to ease future pressure on the Bank of England (BoE) to hike interest rates, because it raised the prospect of a deeper recession, which would do some of the central bank’s inflation-fighting for it. At the time of writing, markets are pricing in a 66% chance that the BoE will raise the base rate by a full percentage point on 3rd November, down from a near certainty before the government’s U-turns.

Dowding added:

“With the economic outlook now looking materially worse than it did before its last meeting, it is hard to believe the BoE will want to raise rates too aggressively and crush the housing market, unless they are scared that a dovish response could prompt renewed weakness in the pound.”

Although markets were initially nervous around yet another Conservative leadership race, yesterday Rishi Sunak was confirmed as the next UK Prime Minister. Despite securing the top spot, Sunak faces the difficult task of uniting the country and navigating the current economic downturn. Markets are waiting with baited breath…

Retail feels the squeeze

With the list of economic headwinds growing as winter nears, a survey by market research firm GfK showed that confidence among British consumers remains close to its lowest level since the data began in 1974.

These recessionary fears were backed up by figures from the Office for National Statistics (ONS) which showed a continuing slide in retail sales. Sales volumes fell by 1.4% from August. The ONS said that people are shopping less than before the pandemic, with falling sales across all areas – most notably, food.

Better-than-expected data bolsters the US

Although this week saw calmer waters across the pond, there was still notable activity, with US markets surging at the start of the week, boosted by strong quarterly results from banks; no great surprise, as their margins increase on rising interest rates. Better-than-expected factory data also contributed to the mood. Expectations that a recession is coming and that the Federal Reserve will continue to raise interest rates appear baked into the market, giving scope for stocks to bounce on good news.

More data that’s fortifying expectations that the Fed will maintain its aggressive stance came in the form of unemployment data, which on Thursday showed that the labour market is still very robust. But Wall Street closed the week sharply higher after US Treasury Secretary Janet Yellen said that inflation is not becoming embedded in the economy. San Francisco Federal Reserve President Mary Daly also commented that it’s time for the Fed to consider slowing the pace of its interest rate hikes. But the job isn’t done yet, as Johanna Kyrklund of Schroders observed:

“It’s clear that central banks are willing to sacrifice growth at the altar of quelling inflation. Investors are now moving from denial to acceptance of this.”

And, what of the forecasts for equities? Kyrklund suggests:

“Corporate earnings expectations need to adjust down further. Signs of slowing in either commodity price inflation or wage growth would be encouraging, as they would allow central banks to back off from raising rates. For now, patience is still a virtue.”

Keith Wade, Chief Economist at Schroders, forecasts that US interest rates will reach 4.25% by year-end, but that the slowdown in the labour market may happen quite soon. He said:

“The good news is that markets do expect the Fed to succeed in controlling inflation. Long-term inflation expectations are steady at under 3%. This should mean that wage demands begin to moderate as people aren’t expecting a prolonged period of high inflation.”

Wealth Check

Even the best-laid financial plans can hit bumps in the road, and the past few years have been filled with more challenges than most. Even if you’ve always been comfortable, you may be finding yourself needing to tighten your belt, with soaring inflation and the cost-of-living-crisis. It can be a stressful time as financial concerns can have a huge impact on your overall emotional well-being.

From redundancy to an unexpected tax bill, when life throws you a curveball, it can force you to review your finances and limit your ability to save for the future.

Not everyone has assets they can draw on in tough times, and all too often, people take more drastic steps, cancelling insurance or reducing the amount they’re paying into savings or pensions. There are often easier and more practical ways to trim your spending without affecting your lifestyle too much in the short term or raiding savings you’ve accumulated for other goals.

The current economic climate is likely to be an even greater concern if you’ve retired or are on the cusp of doing so. You might be wondering whether you can afford to give up work or, if you’ve already retired, you may be worried about how much you can safely draw from your pension.

Short-termism is something that’s hard-wired into our DNA, but cutting back in areas could have serious ramifications further down the line. Taking money out of your pension while markets are falling or increasing your withdrawals could put significant pressure on your pot.

Avoiding knee-jerk reactions to short-term volatility and keeping your goals in mind requires discipline, and this is why it’s always good to chat to an experienced adviser when these challenges arise, so we can put a plan in place and set your mind at rest.

The same goes for other, less-universal challenges you may face. For example, you’ll sometimes find yourself in need of a big lump sum. You might be doing building work on your home that’s rumbling on longer than you’d anticipated, or perhaps costs are going through the roof. You might be a business owner and need to find some short-term finance to cover a VAT bill.

If you have a pension and are over 55, you might be tempted to dip into that pot of cash. But taking money out of your pension before you retire could land you with a significant tax bill.

It’s impossible to plan for every eventuality, but we can help you cope with all these short-term challenges.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

The Last Word

“I recognise though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party.”

Liz Truss resigns as Prime Minister.

BlueBay Asset Management, J.P. Morgan, and Schroders are fund managers for St. James’s Place.

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

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