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Equity markets did post a positive return last week for UK investors, but this was wholly due to the weakness in the Pound rather than strong market returns! The UK Pound was hit last week on concerns around UK long-dated yields and the ability of the government to finance its spending plans. Bond yields were also dragged higher in sympathy with US bond yields which rose on the release of strong economic data (notably jobs data) which led the bond market to price in less interest rate cuts this year. It’s a busy week ahead, with US earnings season kicking off, Christmas trading updates from UK companies as well as some key economic data in the UK, the US and China.
Last week
- Global equity markets gained (due to weakness in the Pound!)
- UK equity markets fell modestly, with the big international earners holding up well.
- Bond markets grabbed the headlines with long-dated yields rising (notably in the UK)
- US economic data continued to surprise to the upside (jobs data was much stronger than expected)
This week
- The 4th quarter US corporate earnings season kicks off this week, with some of the big banks reporting: JP Morgan, Citigroup and Wells Fargo on Thursday and then Bank of America and Goldman Sachs on Friday. 11.7% is the estimated growth rate for US corporate earnings in the 4th quarter (as per Factset data).
- UK inflation is due out on Wednesday and growth data is due out on Thursday.
- US inflation is also due out on Wednesday, with Retail Sales data on Thursday.
- Chinese growth data is released on Thursday.
Equity returns are in GBP, Oil is in USD. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.
More detail:
- Weakness in UK bond markets and weakness in the British Pound grabbed the headlines last week. Whilst a 1.7% weekly decline for the Pound vs the US Dollar is nothing to shout about, it did mean that overseas’ equity returns were boosted by virtue of them being held in other currencies. Global equities finished the week up by 0.6%, with the US equity market being up 1% in GBP terms (i.e. all of the gain and more was down to the Dollar strengthening vs the Pound).
- Although the FTSE All Share was down modestly on the week (-0.37%), there was clear divergence between the big international UK stocks and the domestic market. The FTSE 100 (more international earners) was up by 0.3% on the week, with the more domestically focused FTSE 250 market down by 4.1%. Within the 100 index, it was the heavyweight sectors such as healthcare, energy and materials (all making for a combined weight of c28% within the 100 index) that added to returns whilst most other sectors dragged.
- The key driver for markets last week was the rise in bond yields. Bond yields are rising globally, but they are rising for different reasons in different markets. In the US they are rising due to growth being better than expected. This is dragging up UK bond yields as well, but UK bond yields are also rising because investors want more compensation (a higher yield) for lending money to the UK.
- Long-dated UK bonds were very much in focus last week, with the yield on the UK 30-year government bond (“gilt”) rising to a level of 5.4%, which is the highest we’ve seen since 1998. Part of the reason for the rise here is that the UK Government has chosen to raise borrowing (via the Debt Management Office issuing bonds) to boost investment: hence more bonds being issued. Last week there was a £2.25bn auction of 30-year UK government debt. Whilst there was good demand for this auction, it was the lowest demand in over a year, which in turn puts pressure on future upcoming auctions. As investors, our preference remains for shorter-dated bonds where returns are much more stable.
- The chart below (from JP Morgan using ONS data) is a good one in that it shows the pull-back in captive buyers of UK gilts over the last 20 years. There is now much less buying from Pension funds (due to many of them being fully funded, bought out or in run-off) and also there is less buying from the Bank of England. With open market forces more at play, there is (in our view) more volatility associated with long-dated UK gilt yields.
- US growth data continued to surprise to the upside last week and continued to push US bond yields higher. The much-watched US monthly jobs data came out on Friday and showed that the US economy had added 256,000 jobs in December: much more than had been expected. Furthermore, the unemployment rate came down to 4.1% (from 4.2%) and wages also came down a touch (but are still running at a higher clip than inflation hence the consumer has spending power). There was also some key survey data (ISM services Prices Paid) which came in higher than expected and this led bond markets to price in a less aggressive pace of interest rate cuts (due to the economy growing so strongly). This view was also confirmed by the Federal Reserve meeting minutes (from their December meeting) which got released last week. These said that “almost all participants judged that upside risks to the inflation outlook had increased”. The bond futures markets are now pricing in just one interest rate cut for 2025 in the US, but we’d emphasise that this is because the US economy (the biggest economy in the world) is growing so strongly!
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The content of this article is not intended to be or does not constitute investment research as defined by the Financial Conduct Authority. The content should also not be relied upon when making investment decisions, and at no point should the information be treated as specific advice. The article has no regard for the specific investment objectives, financial situation or needs of any specific client, person, or entity.
