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A year of stagnation for the uk

Watch our latest Market Moves, providing a round-up of the market movements and the global investment outlook for the week beginning 18th December 2023.

| 6 min watch

This week Head of Fixed Income Research Oliver Faizallah reflects on market movements from the past week, provides an outlook on the economy more generally, and considers the implications of what is unfolding.

Transcript

Erica Whyte:
Thank you so much for joining us for the final episode of Market Moves for 2023. My name is Erica Whyte, alongside our head of fixed income research. Oli Faizallah here to break down the market-moving events of the last week, namely the Financial Times has reported a year of stagnation for the uk, citing little

to no growth despite a recent boost that we have seen in the markets. And meanwhile, figures for corporate bankruptcies are on the rise. But the question on everybody's minds is, what is the impact on markets?

Well, that is where Oli comes in, Oli, thanks so much for being here. How's it going?

Oliver Faizallah:
Good. Thanks for having me. For the last market moves of the year.

Erica Whyte:
What are moving Markets this past week? What can you tell Us?

Oliver Faizallah:
Some mean, obviously there's been a huge amount of information out, um, some more negative than others and obviously there's been a lot of pessimism out in the news as well. But I think like the main thing that's been, um, moving markets this week we had some inflation data in the US that came in bang in line with expectations. Uh, and then we had, uh, GDP, uh, out in the uk, which was negative and it, it was a, it was a miss as well in terms of market expectations, but really what the markets were focused on was the Fed. So we had the, uh, uh, the Fed who kept rates unchanged on Wednesday market was expecting that, but what they didn't see coming was, uh, the sort of dubbish reaction from, uh, from Jay Powell and from other policymakers as well.

So basically the other policymakers, they come out with a dot plot, uh, forecasting the future view of, uh, rate hikes or cuts in 2024. And they are now talking about up to 75 basis points of cuts in 2024. And the market's reaction to that was huge. So we had bonds really rally and we had equities rally as well.

Erica Whyte:
Fascinating.

Oliver Faizallah:
And the same week we had the ECB and the Bank of England come out, uh, they, they spoke to, so they had um, you know, a lot more hawkish messaging than the, than the Fed did, but that didn't stop, uh, a rally in buns in Germany and in UK gilts as well. So it is been probably, uh, one of the better weeks for both bonds and equities on the back of, uh, more dovish, uh, central bank speak from, uh, from the Fed and from some general market pessimism as well, thinking that hey, there could be some, some rate cuts in 2024.

Erica Whyte:
So what Are the implications of these moves? Oli, can you tell us?

Oliver Faizallah:
So it's actually quite difficult to tell because on the one hand, we've got the market that is expecting really aggressive rate cuts next year. Mm-Hmm.

Erica Whyte:
And hoping for aggressive rate cuts, Right? Yeah.

Oliver Faizallah:
Hoping for aggressive more so than what central banks are telling them. So we have, uh, our first cut priced in in March for us in April for Europe and in May for the UK. We've got seven cuts priced in by the market for the US over 2024 and five for the UK and Europe over 2024. So that kind of tells me that maybe the market thinks that inflation's gonna come down so quickly that uh, data's gonna be so bad that we're gonna have all of these rate cuts and that is backed up by a huge rally in, in sort of risk-off assets. So 10 year government bonds in the UK in, in the US and in Europe.

So that kind of makes sense. But what's a little bit strange is equity markets have rallied massively over a month as well.

Erica Whyte:
Yeah.

Oliver Faizallah:
So high yield credit and you just talked about bankruptcies before picking up, but still the, the, you know, credit spreads in, in, in high yield are really running away. So I'm getting the impression that maybe somebody's wrong risk-on assets. So your equities in high yield, they’re really pricing for perfection. So essentially, uh, interest rates coming down, uh, inflation coming down, but defaults not picking up and earnings remaining pretty robust. I think that's quite optimistic, but at the same time, I think the rally that we've seen in risk-off assets has been far too optimistic as well. The market is pricing in a lot more rate cuts than central banks are alluding to. And I think overall, I think perhaps markets have partied a little bit too hard in December.

So what's wrong with that is I think January could come with a bit of a repricing hangover and that could be quite painful. So it's definitely something, to look out for.

Erica Whyte:
Absolutely. So looking ahead, what could all of this mean?

Oliver Faizallah:
Well, basically I think, you know, we might have had a, a little bit of an overreaction in terms of um, you know, forecasted interest rate cuts and a real sort of rally in equities and high yields going forward. We need to pay very close attention to data. We need to pay close attention to fed speak.

Uh, we've already seen some fed speakers come out and try and reign in market expectations a little bit.

Erica Whyte:
Quieting people down.

Oliver Faizallah:
Yes. And we said there were gonna be rate cuts, but not in March.

Erica Whyte:
Yeah. Chill out

Oliver Faizallah:
Maybe at the end of 2024. Um, that could result in a bit of repricing how much that could be, you know, that's, we have to remain data dependent. So yeah, absolutely. I’d recommend maybe taking some of the profits you've seen over the past month because it's been an excellent month.

Um, and then, you know, if we do see a repricing, that could be a good entry point.

Erica Whyte:
Thank you so much for all your information here today Oli, that was fabulous. And we will see you all in 2024.

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A year of stagnation for the uk

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