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US equities in bull market, despite inflation concerns

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 9 June 2023.

| 13 min read

The S&P 500 entered a new bull market on Thursday after rising 20% from its October low ahead of an expected pause in interest rate rises by the Federal Reserve next week. This follows ten consecutive meetings in which the US central bank has upped its key rate to fight inflation. Markets are keenly awaiting the announcement next Wednesday and particular attention will be given to the accompanying statement to determine what the central bank intends to do next.

However, there were some jitters in the bond markets, as traders appeared to recognise that global central banks are far from finished fighting inflation. This followed surprise interest rate rises by central banks in Canada and Australia, with both issuing more hawkish statements.

Inflation in the UK remains problematic, with further interest rate rises expected over summer. The Organisation for Economic Co-operation and Development said that it expected the only two countries in the G20 club of rich nations that will have inflation ahead of Britain this year will be Argentina and Turkey.

Over the week, the blue-chip FTSE 100 index was lower 0.4% by mid-session on Friday, with the more UK-focused FTSE 250 trading down 0.6%.

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Energy

The Brent crude oil price fell by almost 1% over the week, despite Saudi Arabia committed to cut its crude output by one million barrels per day (bpd) – roughly 1% of global supply. After a weekend of Opec+ talks, Riyadh announced its oil output will drop to 9 million bpd in July from around 10 million bpd in May, the biggest reduction in years. The reduction is part of an Opec+ agreement which will also see the United Arab Emirates increase its output target by 200,000 barrels a day from January. The Saudis are taking the short-term volume hit to try to boost the price to fund its “gigaprojects” that lie at the heart of its Vision 2030 program to diversify its economy away from oil.

The UK government softened the oil windfall tax following concerns that North Sea oil and gas producers are pulling out of new projects and pivoting away from domestic waters. The industry supports 215,000 UK jobs. The Energy Profits Levy (EPL) – a 35% tax on the profits of fossil fuel producers – will no longer apply to companies until prices fall below 20-year historic averages. The government unveiled the Energy Security Investment Mechanism (ESIM), which establishes a price floor at $71.40 per barrel and 54p per therm. At this point, the windfall tax would fall away entirely – with taxes dropping from 75% to 40%.

Economics

The only two G20 nations that will have a higher rate of inflation than Britain this year are Argentina and Turkey, according to forecasts from the Organisation for Economic Co-operation and Development (OECD). However, the organisation expects the UK to narrowly avoid a recession after it upgraded its forecast for UK economic growth this year and next. However, the OECD said that the global economic recovery will be dogged by persistent inflation and tighter monetary policy, estimating world growth will be 2.7% this year with only a modest pickup to 2.9% in 2024. In the seven years before the Covid-19 pandemic, the average growth in world output was 3.4%.

HSBC temporarily withdrew mortgage deals for new borrowers on Thursday as the market prepares for higher interest rates from the Bank of England. The bank said it would remove all its "new business" residential and buy-to-let products, with deals available again on Monday. This followed similar moves by other lenders such as Nationwide.

UK house prices recorded their first annual fall for 11 years, according to Halifax. In May, house prices fell 1% year-on-year as higher borrowing costs hit "confidence" the lender said. The average UK home now costs £286,532. It said that prices had edged down slightly compared with a month ago.

The Bank of Canada resumed interest rate increases after a five-month hiatus in a move that surprised the market and had global implications. Demand is proving to be more resilient, with inflation being more persistent. The Reserve Bank of Australia also raised interest rates in a surprise move to an 11-year high. It warned that further tightening may be required to ensure that inflation returns to target. The read-across to the US, where some have been optimistic about rate cuts in the second half, sent the S&P 500 lower as traders boosted bets on further US rate rises.

China’s six biggest state banks cut interest rates for savers at the request of the Communist Party, as Beijing attempts to stimulate consumption. Economic growth has proved disappointing since the withdrawal of its tough ‘zero-Covid’ policy in December. The move increased speculation that the People’s Bank of China will cut interest rates in the second half of this year, as well as reduce the amount of capital banks are required to keep as reserves to free up funds for lending.

The Eurozone slipped into recession in the first three months of 2023.

Underscoring its sluggish recovery, China’s exports fell in May for the first time in three months, providing another indication that the rebound in the world’s second-largest economy was losing steam. Exports fell by 7.5% year-on-year last month to $283.5bn on an annual basis, a sharp reversal from the increase of 8.5% in April. The May figure was below the expectations of a fall of 0.1%. Imports fell by 4.5% to $217.7bn, up from a fall of 7.9% in April, and above expectations of a 6.8% fall. Additionally, China's factory gate prices fell at the fastest pace in seven years during May, as faltering demand from overseas means they are receiving less for their products.

The Eurozone slipped into recession in the first three months of 2023, after official figures were revised to show its economy shrank as the rising cost of living weighed on consumer spending. Figures from Eurostat, the European Union’s statistical agency, showed GDP fell 0.1% in the first quarter of 2023, as well as in the final three months of 2022, after revisions to earlier estimates. A technical recession is generally defined as two consecutive quarters of negative growth.

German industrial production rose less than expected in April. Orders rose 0.3% on the month following a 2.1% decline in March, versus expectations for a 0.6% increase. March’s fall was revised down from 3.4%. On an annual basis, industrial orders were up 1.6% in April following a 2.3% increase the month before.

How have low-inflation countries avoided the cost-of-living squeeze?

East or West: India is emerging as the lead driver of global growth.

Geopolitics

As the relationship between Washington and Beijing deteriorates there are hopes that the US may be about to hold out a diplomatic olive branch. Reports suggested that Secretary of State Anthony Blinken was about to visit Beijing to meet with senior Chinese officials – and could potentially meet President Xi Jinping himself. Mr Blinken was scheduled to visit Beijing in February but the visit was cancelled after the US accused China of aerially spying using balloons that entered the country’s airspace. Beijing claimed they were weather balloons. Mr Blinken is currently in Saudi Arabia attempting to bolster the relationship with Riyadh, which has faltered under the Biden Administration.

Tensions between Beijing and Washington partly lie behind the break-up of venture capital’s biggest global brand – Sequoia. Its China and India and Southeast Asia funds are relaunching as new entities – HongShan and Peak XV Partners. The group’s investment heads said conflict between the funds’ respective startup portfolios, brand confusion and the increasing complexity of maintaining centralised regulatory were behind the decision. They acknowledged while attempting to downplay, the deteriorating geopolitical environment.

TikTok's owner ByteDance was accused of allowing Chinese Communist Party (CCP) members to access the data of Hong Kong civil rights activists and protesters. Users who uploaded "protest-related content" were also identified and monitored, former ByteDance executive Yintao Yu alleged in a US court filing. The CCP members were also able to access US TikTok user data, Mr Yu said. A ByteDance spokesperson denied the claims, describing them as "baseless".

Artificial intelligence (AI)

Prime Minister Rishi Sunak used his trip to Washington to push the UK as a global centre for AI regulation, insisting its record in the sector will make others listen to “this mid-sized country”. Ahead of the visit, the UK announced a plan to host a global summit on AI safety in the autumn. The intention is for companies and governments to start talking about what sort of safeguards might be needed in the fledgeling technology. US president Joe Biden and Mr Sunak confirmed that the UK and US would partner on advanced technologies, clean energy and critical minerals. The two leaders signed the "Atlantic Declaration", which Mr Sunak described as a first-of-its-kind economic partnership on AI and other economic and commercial relations, as the British leader made an official visit to the White House.

Artificial intelligence excites the bulls and alarms the bears: As expected, artificial intelligence (AI) has come to the investment party. It is the stardust on some share prices of companies that can claim to be the pioneers, exploiters and frontrunners of the AI industry.

Cryptocurrency

Research by the Financial Conduct Authority (FCA) concluded that estimated crypto ownership in the UK more than doubled between 2021 to 2022, with 10% of 2,000 people surveyed stating they own crypto assets. The estimate was released alongside new marketing rules for the sector, with the FCA’s crypto marketing regime requiring companies to use risk warnings and offer a “24-hour cooling-off period” for customers. Incentives for customers to “refer a friend” will also be banned.

US authorities accelerated their clampdown on the cryptocurrency industry. It charged Coinbase, the biggest crypto trading platform in the country, with operating illegally. The Securities and Exchange Commission said Coinbase had acted as a broker, exchange and clearing agency for investments that are subject to SEC rules, without properly registering. The regulator said that it had allowed it to escape oversight, including guards against conflicts of interest. The SEC also sued Binance, the world's largest crypto trading platform, accusing the group of mishandling customer funds, artificially inflating trading volumes on the site and taking steps to evade US regulation. Authorities have pledged to police the industry more aggressively using existing rules, arguing that many crypto assets function like other investments which are subject to oversight.

Company news

Vodafone and the owner of the Three network, CK Hutchison, will announce a long-mooted merger that will see them become the UK’s biggest mobile operator, press reports suggested. Talks are now in the final stage and an announcement is expected soon, the reports noted. The new company will be owned 51% by Vodafone and 49% by Hutchison and the combined group could be valued at around £15bn.

CRH shareholders approved a plan to move the building materials company's primary stock market listing to New York from London. CRH is the largest building materials supplier in the US and generated about 75% of its earnings there last year.

Shares in William Hill owner 888 Holdings surged after it emerged that investor group FS Gaming Investments has built up a 6.6% stake in the company. According to a Bloomberg report, the investor group could propose a change of leadership and strategy.

Housebuilder Crest Nicholson’s interim profits plunged 60% as the housing market reeled from rising mortgage costs. The company reported shrinking sales amid “rapidly” falling consumer confidence and rising borrowing costs, following the September mini-budget from Liz Truss’s government. Management flagged the risk of a further downturn if interest rates keep rising.

Zara-owner Inditex had a strong start to the summer, with sales of its spring-summer collection jumping 16% in May. The world's biggest fast-fashion company reported a better-than-expected 54% rise in net profit in its first quarter to April, exceeding analysts' expectations.

Boeing is being sued for alleged fraud and theft of tool designs by contractors Wilson Aerospace. The US aerospace giant has been accused of "brazenly stealing and misusing" intellectual property, causing leaks on the International Space Station and putting the lives of astronauts at risk. Boeing claimed the lawsuit was "rife with inaccuracies".

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US equities in bull market, despite inflation concerns

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