WeeklyWatch – Global uncertainties and rising interest rates cause markets to stumble

28th February 2023

Stock Take

From supermarkets to global markets

Good news was buried under several layers of uncertainty last week, similar in some ways to the deeply hidden tomato and cucumber supply in British supermarkets.

While UK shelves were left empty of fruit and veg due to the high costs of heating greenhouses in the UK and chilly climates in Spain and North Africa, shelves in continental Europe remained well stocked – resulting in the inevitable allegations of a Brexit effect.

Surprising to no one, salad was indeed not the most pressing issue where global markets were concerned. The anniversary of Russia’s invasion of Ukraine saw both sides escalate the stakes and the rhetoric, increasing the geopolitical risks. China’s diplomatic efforts have also intensified.

Mark Dowding of BlueBay observed:

“It appears that Beijing is growing concerned that a Russian defeat could open the door to a more western-friendly regime in Moscow, while a drawn-out war is pushing Europe closer to the US. These outcomes are potentially harmful to China from a geopolitical point of view.”

Rising rates and the potential recession

According to data from Bank of America, worldwide investors have moved $354 billion to cash since February of last year, underlining the severe economic uncertainty brought on by Russia’s invasion, which skyrocketed energy costs and global inflation.

In theory, it was good news that business activity increased in the UK, US and eurozone in February. For the first time since last July, the Purchasing Managers’ Index (PMI) figure for the UK sparked hopes that a prolonged recession may be avoided.

However, the surprisingly strong growth data, which some thought suggested that interest rates would stay higher for longer, was rejected by the markets. Financial markets currently indicate that there is a 95% possibility that the Bank of England will raise interest rates again next month.

One step forwards, two steps back

The US report was just one more piece of recent economic evidence that the economy is still doing well, despite the Federal Reserve raising interest rates repeatedly in an effort to contain inflation.

However, American markets had their worst single-day performance of the year on Tuesday. The Dow Jones Index saw all its 2023 gains erased as investors processed the news that US business activity has increased for the first time in eight months.

Investors determined that robust US consumer spending, the easing of the gas crisis in Europe and the reopening of China had more harmful than beneficial elements. It appears that at least for now, good news is bad news.

Some numbers peak as others bottom

The current consensus among financial markets is that US interest rates will peak at 5.3% in July, with a possible quarter-point cut by December. This is a significant shift from predictions at the beginning of the month, which called for a peak below 5% in July and a first cut to follow only a few weeks later.

The world share indices fell to their lowest points in more than a month on Wednesday as a result of President Putin’s bellicose remarks and concerns that interest rates will continue to rise. The VIX Index, the alleged “fear gauge” of international markets, also tested its highest reading of 2023.

No sign yet of a slowing US economy

Reports that unemployment claims had decreased later in the week confirmed the ongoing strength of the US labour market. The US Commerce Department also revealed that the rate of inflation in the fourth quarter had risen considerably more quickly than predicted. Data showing that consumer spending, which makes up two-thirds of US economic activity, came next, showing the highest increase in almost two years.

The data provided more proof that the US economy is not declining at a rate that would allow the Fed to feel confident that it has control over the inflation issue. It also suggests that markets may have anticipated the change in interest rate policy too soon. Wall Street saw its greatest weekly decline of 2023, while major indexes in Europe, the UK and Asia all creeped lower.

Wealth Check

To put it mildly, 2022 was turbulent. The headlines were dominated by the conflict in Ukraine, the cost-of-living crisis and the political unrest. And at the beginning of the year, who would have imagined that we would have three different Prime Ministers living at Number 10, plus four chancellors coming and going next door?

One result of the political and economic volatility that defined 2022 has been a tax structure that seems to be constantly evolving.

A brief history

The tax controversy in the UK began in September with Kwasi Kwarteng’s now infamous “mini-budget”. He was swiftly denounced as irresponsible, as stock markets, gilt prices and the value of the pound all fell.

Kwasi was promptly replaced by Chancellor Jeremy Hunt, who swiftly reversed the majority of the announcements made in the mini-budget. Then in November’s Autumn Statement, he unveiled a new set of tax changes.

The present moment

It’s understandable that these changes may have put many people in a tough situation where they are unsure of what the future could hold and are therefore unconfident when making financial plans.

Even in ideal circumstances, tax planning can be intimidating. The good news, according to Technical Connection’s Managing Director Tony Wickenden, is that no further change is anticipated – at least not right now.

“We know with certainty what tax is going to look like in 2023/24, and we can start planning around that.”

Looking ahead

The most important thing is to start discussing your options as soon as possible, especially if you stand to be impacted by forthcoming changes to the falling Capital Gains Tax and dividend allowances. Tony adds:

“Tax planning shouldn’t always dictate how you manage your investments. But in some cases, there may be opportunities to take advantage of current allowances before they are scaled back.”

Starting your preparations before the end of the tax year will ultimately impact you less than if you wait until after the reductions had been implemented. ‘Use it or lose it’ is indeed the case.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

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

The Last Word

“I thank all of our partners, allies and friends who have stood side by side with us throughout the year.”

– Ukrainian President Volodymyr Zelensky thanks Ukraine’s supporters as he marks the first anniversary of Russia’s invasion and looks back on ‘the year of invincibility’.

BlueBay is a fund manager for St. James’s Place

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SJP Approved 27/02/2023