Market Commentary July 2023

Insight Financial Associates

Introduction
Sluggish growth and high inflation were recurring themes in many major and emerging economies last month, as central banks across the globe sought to manage the impact of global economic headwinds. But interestingly, many emerging markets bucked this trend.

As always, let’s take a closer look at the details.

UK
The UK economy saw surprise growth of 0.2% in April 2023, despite many analysts predicting a decline. However, other positive economic news has been hard to find in recent weeks, with the Bank of England raising interest rates by half a percentage point to 5% – the highest level in 15 years.

Chancellor of the Exchequer Jeremy Hunt argued that the UK has “no alternative” but to hike interest rates in order to tackle inflation, which remained stuck at 8.7% in May – the same as in April. This has caused huge concerns about the impact of rising mortgage rates, which led to the bank bosses meeting with Mr Hunt, and agreeing to offer more flexibility to mortgage holders who are struggling to keep up with their payments. Prime Minister Rishi Sunak, meanwhile, called on homeowners and borrowers to “hold their nerve” over rising interest rates.

The wider economic situation led to annual house prices falling for the first time in 11 years, according to UK’s largest mortgage lender Halifax. Figures showed typical house prices in May were £3,000 down on the previous year. However, retail sales did hold up, with the Office for National Statistics reporting that sales volumes rose by 0.3% in May, partly because of better weather in the second half of the month.

Energy prices have also been a huge contributor to the ongoing cost of living crisis, but the government has confirmed that if prices fall to normal levels for a sustained period, its windfall tax on oil and gas firms – which has helped to fund a support scheme for struggling households and businesses – will be scrapped.

On the international stage, Rishi Sunak and US President Joe Biden unveiled the Atlantic Declaration. While this is some way short of the full trade deal that the British government has hoped for following Brexit, it does still represent a strengthening of economic ties between the UK and the US.

The UK has also signed a new pact with the European Union, which will see the two parties meet twice a year to discuss financial regulation and standards. Mr Hunt believes this forum will be mutually beneficial, as the UK and EU financial markets are “deeply interconnected”.

It was a difficult month for the London Stock Exchange, with natural soda ash producer We Soda scrapping plans to sell shares on the index, and cinema chain Cineworld confirming it is to file for administration and suspend trading on the London Stock Exchange as part of a major bankruptcy restructuring plan. This comes shortly after microchip designer Arm Holdings opted to list its shares in the US rather than London.

There was brighter news in the mobile phone sector, with Vodafone and Three agreeing a deal to merge their operations and create the country’s biggest mobile phone operator.

The pound ended June up 0.82% against the dollar, and on the financial markets, the FTSE-100 Index ended the month at 7,544 points, up 1.32% on May.

Ukraine
Global leaders and bodies such as the World Bank attended the Ukraine Recovery Conference in June to discuss what can be done to rebuild the war-torn nation.

World Bank Managing Director of Operations Anna Bjerde pointed out that Ukraine will need the help of the international community for many years. However, she told the BBC that the country also has great potential to turn “a lot of its assets into economic opportunity and recovery”.

Among the topics under debate was the idea of fast-tracking Ukraine’s entry into Nato, which the British government said it supports.

Ukraine’s President Volodymyr Zelensky addressed the conference by video link, and told attendees that Ukraine could be “the largest source of economic, industrial and technological growth in Europe for decades and decades”.

The meeting came amid a military counter-offensive to recapture Russian-occupied areas of the country, which President Zelensky has admitted has led to slower progress than he hoped for.

Europe
The European Central Bank (ECB) increased its benchmark rate of interest by 0.25 percentage points to 3.5% – its highest level in more than 20 years. The cost of borrowing is being hiked as part of an effort to tackle inflation, which fell from 6.1% in May to 5.5% in the year to June – a welcome fall but still a stubbornly high figure.

Rising prices led to the eurozone falling into recession over the winter, official figures have revealed, with the 20-nation bloc’s economy shrinking by 0.1% between January and March. This followed a contraction in the final three months of 2022. Falling household spending contributed to the drop in economic output, as this fell by 0.3% in the first quarter of 2023, following a 1% slump in the previous three months.

There was some positive news, however, with the ECB reporting that the international role of the euro was resilient in 2022, with its share across multiple indicators of international currency use averaging close to 20%. This means the euro is still the second most widely used currency, despite high inflation and geopolitical problems such as the Russian invasion of Ukraine.

The invasion has led to another problem for the EU, as member states are set to be asked to make bigger budget contributions following recent crises. Johannes Hahn, Commissioner for Budget and Administration, argued that the EU budget has been “instrumental” to its recovery from the pandemic and continued support for Ukraine. However, he said “the multiple challenges over the past years have exhausted its flexibilities and capacity to react to future crises”.

Europe’s largest economy, Germany, has been in particular difficulty over the last few months, but the German Bundesbank believes its recession will end in the April to June quarter, thanks to factors such as improving supply chains and falling energy prices. The Bundesbank has predicted that GDP will fall by 0.3% across the whole of 2023, but grow by 1.2% in 2024 and 1.3% in 2025.

Ireland also provided some positive economic news for the EU, as its economic output went up by 2.7% in the first quarter of 2023, compared with the final quarter of 2022.

On the financial markets, Germany’s DAX index rose by 3.14% in June to end the month at 16,156 points. Meanwhile, the French CAC 40 index went up by 4.39% to end at 7,410 points.

US
All eyes were on the US Congress after a deal to lift the country’s borrowing limit was agreed. The US had risked defaulting on its £25trn debt had the measure not been approved by the Senate and the House of Representatives.

Interest rates remained another key focus of attention, as the US Federal Reserve opted against increasing the cost of borrowing for the first time in over a year. The benchmark rate remained at 5%-5.25%, as the Fed wants time to assess the effects that previous rate hikes have had in recent months.

However, interest rates do not look set to remain at this level for much longer, as many analysts are forecasting further increases in the coming months. Inflation, meanwhile, fell from 4.9% in the year to April to 4% in the year to May, according to official figures, which means the rate of inflation has now fallen for 11 months in a row.

Curiously, high inflation and interest rates failed to dent job creation in the UK, with employers adding 330,000 jobs in May. This has led to some analysts becoming increasingly confident that the economy could avoid slipping into recession this year, although figures also showed that the unemployment rate rose from 3.4% to 3.7% month-on-month.

According to a poll by The Associated Press and NORC Center for Public Affairs Research, just 34% of US adults currently approve of President Biden’s handling of the economy. Against this backdrop, the President has been talking up his economic approach, which has been termed “Bidenomics”, which involves growing the economy “from the middle out and bottom up, not the top down”.

Business activity in the UK expanded in early June, according to the latest S&P Global Composite Purchasing Managers Index. However, the index fell 1.3 points to 53, which indicates growth is at its slowest level in three months, partly because of a decline in manufacturing activity. Chief Business Economist Chris Williamson said: “Growth remains dependent on service sector spending. The question remains as to how resilient service sector growth can be in the face of the manufacturing decline and the lagged effect of prior rate hikes.”

Nevertheless, small businesses in particular appear to be quite confident about the future. According to the latest MetLife and US Chamber Small Business Index, a record 71% of small business owners expect to see an increase in revenue over the next year, while the share of respondents expecting to hire more staff in the coming 12 months has gone up from 37% in Q1 to 47% in Q2.

On the financial markets, the Dow Jones rose by 4.52% to end the month at 34,376, while the more broadly-based S&P 500 index went up by 6.22% to end at 4,439.

Far East
China’s National Bureau of Statistics has revealed that the country’s industrial output went up by 3.5% in May year-on-year. This was slightly down on the 5.6% increase seen in April, indicating that demand for Chinese manufactured goods is easing both domestically and worldwide. Retail sales, meanwhile, also dropped off slightly, falling from 18.4% growth in April to just 12.7% in May.

Commenting on the figures, analysts at Nomura said the post-Covid recovery “appears to have run its course” and that “an economic double dip is nearly confirmed”. Nevertheless, Chinese premier Li Qiang remains bullish, insisting that the country remains on course to achieve its economic growth targets of 5% this year.

Ongoing diplomatic tensions with the US continued to cast a shadow throughout June, although a visit by US Secretary of State Antony Blinken to Beijing saw both sides seek to improve their relationship.

President Xi Jinping said progress had been made and Mr Blinken stated that while there are major differences between the two nations, both sides are open to additional talks.

Shortly after Mr Blinken’s visit, President Biden criticised President Xi, referring to him as a “dictator”, who was embarrassed after the US shot down an alleged Chinese spy balloon.

Thankfully, there appears to be little appetite for any escalation, as China’s Defence Minister General Li Shangfu said war with the US would be an “unbearable disaster” for the world. He added that the Earth is big enough for both nations and that they should try to find common ground.

Against this backdrop, Microsoft co-founder Bill Gates met President Xi in Beijing. However, iPhone maker Foxconn has said it is planning for the worst-case scenario in case relations between Washington and Beijing deteriorate further by moving some of its supply chains away from China.

Speaking to the BBC, Foxconn Chairman Young Liu said: “We hope peace and stability will be something the leaders of these two countries will keep in mind, but as a business, as a CEO, I have to think about what if the worst case happens?”

In Japan, gross domestic product went up by 2.7% in the first three months of the year, exceeding forecasts from economists polled by Reuters of 1.9%. This was fuelled partly by a 1.4% increase in capital spending, although exports and imports both fell by 4.2% and 2.3% respectively.

The Bank of Japan remains cautiously optimistic about the economic outlook, saying it expects to see a moderate recovery this year. However, it noted that the global economy and markets pose a risk to Japan’s future growth.

South Korea, meanwhile, saw minimal growth of just 0.3% in the first quarter of the year. However, this was enough to prevent the country slipping into recession, following a 0.4% contraction in the final three months of 2022.

The Bank of Korea has revised down its 2023 growth forecast of 1.4% slightly, partly due to sluggish conditions in its semiconductor industry, which Bank Governor Rhee Chang Yong said is “pivotal to our exports”. He also noted that exports to China are not “picking up as fast as we wish”, although he was hopeful the overall economic growth rate would pick up in the second half of the year.

On the financial markets, Hong Kong’s Hang Seng index rose by 3.74% to end June at 18,916. Meanwhile, Japan’s Nikkei index rose by 7.45% to 33,189. China’s Shanghai Composite index fell by 0.08% to 3,202 and the Korea Composite Stock Price Index fell 0.50% to 2,564.

Emerging Markets
Foreign ministers from Brazil, Russia, India, China and South Africa met in Cape Town to call for the global order to be rebalanced away from western countries. Speaking at the meeting, Brazil’s Foreign Minister Mauro Vieira described the Brics nations as an “indispensable mechanism for building a multipolar world order that reflects the devices and needs of developing countries”.

Brazil has seen impressive economic growth in recent months, with the Central Bank’s economic activity index showing growth reached 0.56% in April. This was the biggest monthly increase since December 2013 and well above many analysts’ expectations.

Brazil’s President Luiz Inacio Lula da Silva is confident about the country’s economic outlook, saying he expects to see growth of at least 2% this year. Speaking after S&P revised its outlook for Brazil from “stable” to “positive”, he said the nation is regaining its international credibility under his leadership.

Meanwhile, S&P is expecting India to be the fastest-growing economy in the Asia Pacific region during 2024, with growth likely to be about 6%. Louis Kuijs, Asia-Pacific Chief Economist at S&P Global Ratings, said: “The medium-term growth outlook remains relatively solid. The Asian emerging market economies remain among the fastest growing ones in our global growth outlook through 2026.”

Fitch Ratings is also confident about India’s outlook, raising its growth forecast for the current fiscal year from 6% to 6.3%. In a statement, it described India as one of the fastest-growing economies in the world, as it is benefiting from “high bank credit growth and infrastructure spending, with more to come from the latter”.

The Indian government has sought to build on this strong performance by consolidating its global relationships. June saw Prime Minister Narendra Modi go on a state visit to the US, where he met with President Biden and enjoyed a lavish reception at the White House.

India’s tech sector, meanwhile, received a boost when Foxconn announced it would start manufacturing iPhones in the state of Karnataka by April 2024, in a move that will create around 50,000 jobs.

In Russia, President Vladimir Putin’s grip on power was questioned after Yevgeny Prigozhin, head of mercenary group Wagner, staged an apparent mutiny. Following a day in which Wagner fighters moved towards Moscow, the insurrection was eventually called off. Commenting on the rebellion, Antony Blinken said it represented a “direct challenge” to Mr Putin that shows “real cracks” in his authority.

As Russia continues with its assault on Ukraine and continues to suffer global sanctions, the economy looks set to suffer, with Bloomberg Economics predicting growth of just 0.8% this year. By contrast, Russia’s central bank is forecasting growth of 2% in 2023.

This comes as Russia aims to raise about 300bn rubles by imposing a one-off windfall tax on big companies. It is hoped the move will boost its coffers after posting a first-quarter deficit of nearly 2.4trn rubles.

On the financial markets, India’s BSE Sensex index rose by 3.47% to end at 64,718 points. Russia’s MOEX index rose by 2.63% to close at 2,789 points, while Brazil’s Bovespa index ended the month at 119,110 points.

And Finally…
Many of us might have wondered how people would react if we died suddenly, but one Belgian TikToker took it a step further by faking his own death. His wife and children, who were in on the prank, announced news of his “death” on social media, and even went as far as holding a fake funeral to see who would turn up and hear what they really thought of him.

Staying on the funeral theme, funeral firm Go As You Please is offering people the chance to pick their own custom-made coffins before they die. Among the suggested themes for the caskets are a Greggs sausage roll, a pint of Tennent’s Lager and Doctor Who’s Tardis. Each to their own…

To end on a lighter note, spare a thought for Iain Grant, 49, who ordered a curry online after arriving in Falmouth, Cornwall for a holiday. So far, so good, but upon arriving at the restaurant, it was clearly closed. Although he admitted to seeing the funny side, he was clearly incensed enough to contact the newspapers to share the details of his ordeal.