WeeklyWatch – European and US markets see positive start for 2023

10 January 2023

Stock Take

A review of European inflation

Markets ushered in 2023 with a robust first week after a challenging 2022, thanks to encouraging data from the US and Europe.

Among the major equity markets, European indices had the best performance last week, with the French CAC 40 and German DAX 30 climbing 6.0% and 4.9%, respectively. These were backed up by headline CPI inflation numbers, which fell below the 10.0% threshold for the first time in two months, increasing optimism that the peak may have passed.

The prolonged conflict in Ukraine, Russian sanctions and the mild winter have benefited the European economy. Due to the fact that less natural gas was consumed than in previous seasons, the Continent’s gas prices were kept down, which benefited the week’s equity markets in general.

Inflation easing in 2023 would help the European Central Bank in adopting a more assertive stance when debating interest rates in the future, therefore aiding in the recovery of equities too.

US job market sees improvements

US equities meanwhile benefited from strong job growth. In December, the US added 223,000 jobs, which was above expectations, while average hourly wages increased less than in prior months.

These factors combined imply the economy is doing better than expected, at least by appearance, and while the low unemployment rate indicates that the job market will stay competitive, Andrew Hunter, Senior US Economist at Capital Economics, noted:

“The softer gain in average hourly earnings suggests wage growth is nevertheless slowing and we still think the labour market will weaken more markedly this year.”

Overall, the data supported the idea that the economy could still experience a soft landing – as long as the Federal Reserve keeps tightening policy.

The latest from the UK, US and China

Although the S&P 500 and NASDAQ both increased last week, the release of the US’s December inflation data this week might have a significant effect on how long this recovery lasts. In the month, it is expected to have decreased to 6.5%.

The UK’s FTSE 100 also climbed 3.3%, spurred on by general market optimism despite a string of strikes and continued economic concerns. On Friday, the Office for National Statistics will announce its monthly GDP report, with the economy expected to have contracted by 0.3% last November.

In Asia, the most recent COVID-19 outbreak in China was one of the major news items from the New Year break. The end of 2022 saw China abandon its zero-COVID policy and reopen a large portion of the economy. Despite the recent surge in cases, the country’s reopening has mainly been viewed as a positive development for both the Chinese and larger world economies.

Global equities appear positive

Global equities had a good start to the year following China’s reopening and favourable UK and US market data. Mark Dowding, Chief Investment Officer at BlueBay, questioned whether these positive equities are the beginning of a trend that can influence the landscape in the year to come or a shorter-lived respite among a policy tightening that will continue to have a negative impact on pricing. He noted:

“Listening to central bankers, it strikes us that we may be nearing the top of the hiking cycle within the next few months. Policy tightening is gaining traction and inflation should continue to moderate through the course of the year, on both sides of the Atlantic. However, with labour markets remaining tight, there is ongoing anxiety that pressure on wages could continue to be a factor that drives up prices in the quarters to come.”

This is why it will be important to pay attention to what central banks say when they announce future rate changes, since it may provide clues about upcoming actions. Although inflation in the West now seems to be declining, it is still significantly higher than the 2% objective set by many central banks.

A year is a long time in the financial markets, so even though 2023 is off to a solid start, it shouldn’t mask the fact that the economy still faces some serious challenges.

Wealth Check

There’s a high chance that in our lists of New Year’s resolutions, many of us will have at least one money-related goal. The new year brings a new beginning, which is the perfect time to review your relationship with money, break old habits and make a refreshing change in your new ones.

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

“Getting into good tax and financial habits helps make your life so much easier. The key is to form new habits that make your good intentions stick, so they become second nature, and you don’t even realise you’re doing them.”

Creating good money-management habits helps us to stay on track when working towards our long-term financial goals, while feeling more secure and in control of our finances. The habits we develop sit at the centre of personal financial well-being.

As we approach the end of the tax year, here are our top five tax-smart habits to get into now.

  1. Maximise your tax allowances

Make your money go further by making the most of your tax allowances. Though ISAs are a proven and popular option, some other possibilities can be overlooked and left unused at times.

  1. Break the ‘last-minute’ tax habit

Though the 2022/23 tax year doesn’t end until 5 April, sorting your taxes and year-end finances in good time alleviates unnecessary deadline stress.

Consider the practical reasons for getting things in order as soon as possible, and don’t leave everything until the last minute. For example, if there’s a bottleneck at the tax-year end, providers can take much longer to process transactions.

  1. Organise your paperwork

Since many of us are self-employed, a larger percentage of us are also filing self-assessment tax returns. And with the online self-assessment return deadline looming at the end of January, you might find you have a last-minute panic search for the information you need to make sure your return is accurate and complete, such as receipts, records and missing statements.

  1. Utilise the HMRC app to get everything in order

You can avoid wasting time around tax-year end by simply knowing where all of your paperwork is, the correct tax codes and other official information. A good place to start is by downloading the HMRC app.

  1. Speak to a financial adviser regularly

If you don’t already, taking financial advice can be the greatest habit to develop. In more difficult economic circumstances like the present, financial advice provides assurance and practical, clear guidance to help you stay on course for your long-term goals. Financial advice is the first step towards developing other smart financial habits.

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 and are generally dependent on individual circumstances.

The Last Word

“I condemn the assault on democracy and on the peaceful transfer of power in Brazil. Brazil’s democratic institutions have our full support and the will of the Brazilian people must not be undermined.”

– US President Joe Biden’s comments on Brazilian protesters storming the Brazilian Congress, presidential palace and Supreme Court.

BlueBay is a fund manager for SJP.

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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SJP Approved 10/01/2023