Market Commentary September 2023

Insight Financial Associates

Introduction
Sluggish economic growth in major economies was again a common theme throughout August, as policymakers across the globe continue to battle against high inflation.

As always, let’s take a closer look at key markets across the world to find out what’s been going on…

UK
The UK is continuing to narrowly avoid recession, despite widespread fears over the country’s longer-term economic outlook. Gross domestic product went up by 0.2% between April and June, fuelled partly by a bigger than expected upturn of 0.5% in June.

There was further good news as the rate of inflation fell from 7.9% in the year to June to 6.8% in the year to July. But while this is well down from the peak of 11.1% last October, it remains well above the Bank of England’s target of 2%.

As a result, many analysts are expecting to see a further increase in interest rates in September. The Bank of England raised interest rates to 5.25% in July – the 14th consecutive rate hike and one that leaves the cost of borrowing at a 15-year high. Andrew Bailey, the Governor of the Bank of England, has hinted that further hikes are around the corner, telling the BBC that interest rates will not come down until there is “solid evidence” that rapid price rises are slowing.

It was a mixed picture for the UK labour market, with the rate of unemployment in the UK rising from 3.9% to 4.2% in the three months to June, according to the Office for National Statistics. However, annual growth – excluding bonuses – rose to a record high of 7.8% throughout the same three-month period.

A separate study by the High Pay Centre, meanwhile, revealed that the median pay of a FTSE-100 chief executive rose from £3.38m in 2021 to £3.91m in 2022. This was found to be 118 times more than the amount earned by a typical UK worker.

Elsewhere in the UK economy, poor weather hit retail sales in July, with the ONS blaming a 1.2% slump partly on the “summer washout”, as well as continuing cost of living pressures. ONS data shows that the volume of goods people bought was 1.8% lower than they had been in February 2020, yet the value of retail sales was 16.4% higher – a measure of the extent to which prices have gone up in the last few years.

August saw the collapse of one of the UK’s best-known high street chains – Wilko – which means 12,500 jobs are now at risk. However, various rescue bids are currently being considered, including one from Canadian businessman Doug Putman.

The profits of energy firms has been a controversial issue for some time, with the sector performing strongly at a time when soaring prices have put massive pressure on households and businesses. However, wholesale oil and gas prices have started to ease in recent months, and this has contributed to BP seeing its profits fall from $8.4bn in Q2 2022 to £2.5bn in Q2 2023.

Another ongoing controversy – the closure of former UKIP leader Nigel Farage’s Coutts account – continued to rumble on throughout August, with Chancellor of the Exchequer Jeremy Hunt asking the Financial Conduct Authority to “urgently investigate” whether people are having their bank accounts closed because of their political views and to “put a stop” to this practice.

London’s stock market received a blow earlier this year when microchip designer Arm announced it would not be listing in the UK capital. The company has now publicly filed paperwork to sell its shares on New York’s Nasdaq in September, although the number of shares for sale or their value has not yet been confirmed.

The pound ended August down 0.47% against the dollar, and on the financial markets, the FTSE-100 Index ended the month at 7,476 points, down 2.90% on July.

Ukraine
The ongoing war in Ukraine took another surprise turn in August when Yevgeny Prigozhin, head of mercenary group Wagner, was killed in a plane crash. It was only in June that Prigozhin staged an apparent mutiny, a shocking move that raised questions about Russian President Vladimir Putin’s grip on power, and his death has prompted speculation about whether or not his death was an accident.

There were further shows of international solidarity for Ukraine, with the US approving the transfer of F-16 fighter jets from Denmark and the Netherlands when Ukrainian pilots have been trained to operate them. A US government spokesperson said this would enable Ukraine to “take full advantage of its new capabilities”.

Meanwhile, UK Energy Secretary Grant Shapps, who has since been moved to the Ministry of Defence, visited Kyiv to confirm that the British government will provide a £192m loan guarantee to keep Ukraine’s nuclear power plants running over the winter. It is hoped this will help end Ukraine’s reliance on Russian energy supplies, as nuclear power generates over half of the nation’s electricity.

August also saw a prominent Russian business figure speak out against the continuing war. Arkady Volozh, co-founder of technology giant Yandex, had previously been criticised for not commenting on the invasion, but in a recent statement, he described it as “barbaric”, adding that he was “horrified” to see so many homes in Ukraine being bombed.

Europe
Businesses in the eurozone saw a sharp fall in output and new orders in August, according to the latest HCOB flash eurozone composite purchasing managers’ index. The index fell from 48.6 to 47 in August – its lowest level in almost three years and a figure that may raise fears of an economic slowdown later this year.

Germany’s economy in particular has struggled in recent months, and saw zero growth in the second quarter of the year. This followed two consecutive quarters of economic contraction. Germany also saw a fall in wholesale prices of 2.8% during July, when compared to the same period of last year.

In Italy, government plans to impose a 40% one-off tax on bank profits were watered down significantly. The initial announcement had led to shares in Italian institutions such as Banco BPM, UniCredit and Intesa Sanpaolo plummeting, but the later decision to cap the tax at 0.1% of assets led to a slight rebound.

The European Union, meanwhile, implemented its new EU Digital Services Act, which outlines rules for tech organisations to help protect users. The new rules mean that any digital operation in the EU will be liable for harmful online content, Russian propaganda and fake news.

In Europe’s business sector, the big news was that L’Occitane International chairman Reinold Geiger is planning on taking the skincare chain private. The billionaire currently controls nearly three-quarters of the company’s shares and is looking at acquiring those he does not currently own. The announcement led to a surge in the value of its shares on the Hong Kong stock exchange.

On the financial markets, Germany’s DAX index fell by 2.58% in August to end the month at 16,023 points. Meanwhile, the French CAC 40 index fell by 1.71% to end at 7,369 points.

US
August saw the US government’s credit rating downgraded by Fitch from AAA to AA+. This followed the protracted battle over lifting the US’s debt ceiling to $31.4tn, after the country found itself on the brink of defaulting on its debts.

Commenting on the move, Fitch said it was in response to a “steady deterioration” in governance over the last 20 years, but US Treasury Secretary Janet Yellen described it as “arbitrary”, adding that the decision was based on “outdated data” covering 2018-20.

The downgrade took place against the backdrop of increasing inflation, as it went up from 3% in the year to June to 3.2% in the year to July. According to the US Labour department, this was fuelled by rising food, car insurance and housing bills. However, many analysts observed that the rate of inflation last July had been relatively low, which means the year-on-year figure was starting from a low base.

The US Federal Reserve has been raising interest rates in recent months in an effort to tackle inflation, but economists are increasingly of the view that policymakers will pause rate hikes for the next few months.

According to a survey by Reuters, 90% of economists believe the Fed will freeze rates in the 5.25 to 5.50% range at its September meeting, while 80% don’t expect to see any further rate rises for the rest of the year.

Hopes that the US economy would avoid slipping into recession were further bolstered by news that employers added 187,000 jobs in July, a comparable figure to the previous month. Meanwhile, the unemployment rate fell from 3.6% to 3.5% month-on-month.

Relations between the US and China have been strained in recent years, and they were put under further pressure by the US government’s newly announced ban on American investment in parts of the Chinese high-tech sector. Under the new rules, US-based businesses will also be required to reveal what investments they are currently making in the industry.

Elsewhere in the business sector, US-based vegan food manufacturer Beyond Meat saw a 30.5% fall in sales during the three months to the end of June, when compared to the same period of 2022. The announcement led to its shares falling by nearly 12% and came shortly after it confirmed that it aims to cut costs by more than £30m by reducing the size of its workforce by one-fifth.

On the financial markets, the Dow Jones fell by 2.55% to end the month at 34,721, while the more broadly-based S&P 500 index fell by 1.51% to end at 4,507.

Far East
In China, inflation fell by 0.3% in July compared with the previous year, taking the economy into deflation and putting further pressure on the government to stimulate demand. The country saw a 14.5% drop in exports in July year-on-year, while imports slumped by 12.4%.

However, the automotive industry was one bright spot in the economy, as according to Nikkei Asia, China beat Japan to become the leading exporter of cars in the first six months of 2023, partly due to growing demand for Chinese electric cars worldwide.

The country’s ongoing economic problems led to the central bank cutting its one-year loan prime rate from 3.55% to 3.45% – the second interest rate cut in three months. This marks a sharp contrast to other countries that are battling high inflation, where interest rates are being increased.

China’s low growth has also led to the government stopping the release of its youth unemployment figures for July, after the jobless rate for 16 to 24-year-olds in urban areas exceeded 20% in June – a record high. The overall unemployment rate rose to 5.3% in July.

In China’s business sector, one of its biggest property developers – Country Garden – has reported a £5.2bn loss for the first half of 2023, which it described as an “unsatisfactory performance”. Meanwhile, property company Evergrande has filed for bankruptcy protection in the US, after it defaulted on its debts two years ago.

Recent years have been characterised by strained diplomatic relations with the US, but there has also been ongoing tension between China and Australia in recent years. However, there are signs that the situation could be improving, as China’s Ministry of Commerce has confirmed the scrapping of tariffs on Australian barley imports, and the Chinese foreign minister has been invited to visit Australia by the government.

Canada is another nation that has had somewhat frosty relations with China in recent times. This was made apparent once again when Canada was excluded from a list of countries approved by the Chinese government as international travel destinations for tour groups. Officials in China have said the decision was taken as a result of recent claims by Canada that Beijing has been interfering in its politics.

Elsewhere in China’s business sector, shares in major technology companies such as Alibaba and video-sharing site Bilibili fell after the country’s cyberspace regulator proposed limiting smartphone usage of children under 18, which would see children only being allowed to use their devices for up to two hours a day.

In Japan, the economic picture was much better, as gross domestic product grew by 6% in the three months to the end of June year-on-year. This was much more than had been anticipated by economists, and the biggest quarterly increase in nearly three years.

These figures were reinforced by data from the Japan Center for Economic Research, which revealed economic output went up by 0.2% in June year-on-year, partly thanks to an increase in exports. Tourism also performed strongly, as the easing of Covid-19 restrictions has led to a surge in the number of visitors to Japan.

This improving picture is having a positive effect on Japanese businesses. According to a survey by Kyodo News, more than 82% of major companies, including Toyota Motor and Fast Retailing, expect to see further economic growth in the next year. This compares with 55% last summer.

A reflection of this increased confidence was found in a survey by Japan Business Federation, which found that average summer bonuses across Japan’s major firms rose by 0.47% year-on-year to 903,397 yen. This is the sixth highest average summer bonus in Japan since 1981 and the first time the figure has exceeded 900,000 yen in three years.

On the financial markets, Hong Kong’s Hang Seng index fell by 8.14% to end August at 18,382. Meanwhile, Japan’s Nikkei index slumped by 2.56% to 32,619. China’s Shanghai Composite index fell by 5.39% to 2,510 and the Korea Composite Stock Price Index went down by 4.15% to 2,556.

Emerging Markets
The BRICS group of nations – Brazil, Russia, India, China and South Africa – met for their annual summit in August, and agreed to expand the organisation. Argentina, Ethiopia, Iran, Saudi Arabia, Egypt and the United Arab Emirates are set to become full members from the beginning of 2024.

India’s status as an emerging market was bolstered last month when it became only the fourth country to achieve a soft landing on the moon. The Vikram lander from Chandrayaan-3 touched down in the southern polar region of the moon, an accomplishment that Prime Minister Narendra Modi described as a “joyous occasion”.

It was particularly welcome news for Mr Modi following his domestic political woes. He successfully defeated a no-confidence vote in the Indian parliament brought by opposition parties after ethnic violence broke out in Manipur state.

August also saw India continue its trade negotiations with the UK government, ahead of a visit by UK Prime Minister Rishi Sunak to the country later this month. Meanwhile, Air India’s rebranding took a step forward, with a new logo, branding and livery being unveiled by Tata Group, which purchased the airline nearly two years ago.

Soaring food costs in India continued to impact on the hospitality sector during August, with both Subway and Burger King removing tomatoes from its menus after prices of the ingredient rose sharply.

Over in sanction-hit Russia, the rouble fell to its lowest value in 16 months, falling past 100 per US dollar. While oil and gas exports had helped to bolster the currency following Russia’s invasion of Ukraine, imports are now rising faster than exports, while military spending is increasing as the war drags on. The falling value of the rouble led to Russia’s central bank hiking interest rates from 8.5% to 12%.

This contrasted sharply with the situation in Brazil, where the central bank announced a half-point reduction in interest rates, taking the Selic lending benchmark to 13.25%. Commenting on the news, Ernesto Revilla, Chief Latin America Economist at Citi in New York, said: “Even if the fight against inflation is not finished, Latin American central banks can take a victory lap.” He added that Brazil’s “discipline, autonomy, commitment and clear communication” is “giving a lesson to the world”.

This came shortly after ratings agency Fitch upgraded Brazil’s long-term foreign-currency debt for the first time in five years.

On the financial markets, India’s BSE Sensex index fell by 2.45% to end at 64,831 points. Russia’s MOEX index rose by 4.72% to close at 3,218 points, while Brazil’s Bovespa index ended the month at 116,263 points.

And Finally…
Teachers in Inverclyde might be in for a confusing autumn term with 17 sets of twins starting school. This is the second largest number of twins starting primary school at the same time on record.

This month also marks the return of another reliable mainstay of this section of the Market Commentary – a person seeing a famous face in their food.

Sten Flygare, from Lidköping in Sweden, was sizzling a steak on a barbecue and saw what he believed to be the image of former US president Donald Trump staring back at him.

“The orange paprika and olive oil dressing made it look like Trump’s skin too,” he observed.

Of course, Trump’s recent arrest and mugshot has meant his image is on many people’s minds right now, but we’ve looked closely at Sten’s photo and, so far, we’re struggling to see a big likeness…