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WeekWatch – ‘Global equity markets have certainly made a strong start to the year’ January 23

WeekWatch – ‘Global equity markets have certainly made a strong start to the year’ January 23

In Chinese legend, the Jade Emperor challenged all the animals in his kingdom to a “Great Race”. The rabbit got a head start and took an early lead, but after tiring and stopping for a nap, was overtaken and beaten.

After last year’s disappointing returns, investors will be hoping that the legend does not portend the outlook for markets. The Year of the Rabbit is, after all, supposed to bring stability and a steady path to success.

Global equity markets have certainly made a strong start to the year, and registered their third weekly gain in four. Trading conditions were quiet though, with many Asian markets closed for the Lunar New Year celebrations and investors elsewhere awaiting the outcome of central bank meetings on both sides on the Atlantic in the week to come.

In the US, following its recent announcement of 10,000 job losses – nearly 5% of its workforce – bellwether Microsoft kicked off the start of the tech earnings season with better-than-expected fourth quarter results. However, a downbeat outlook for the current quarter disappointed investors. Demand for its cloud services fell noticeably in December as customers grew more cautious in the face of the economic slowdown.

Meta, Alphabet, Amazon and Apple are scheduled to release results this week. Tech stocks drove the bull market in growth stocks during the pandemic, but the turnaround in fortunes saw the tech-heavy Nasdaq index suffer its worst year since 2008, and its first four-quarter slump since the dot-com crash.

Across the wider S&P 500, two-thirds of companies reporting fourth-quarter earnings have so far posted better-than-expected results, while warning of a tough year ahead. Data showed that US business activity contracted for a seventh straight month. However, figures showed that contraction in the manufacturing and services sector was shallower than expected in the first few weeks of the year.

Results both in the US and Europe will help guide investors about whether the renewed optimism about the economy that has buoyed equities in recent weeks is grounded in reality.

On Thursday came news that US economic growth held up better than expected in the fourth quarter. Despite being dragged down by higher borrowing costs and the rising cost of living, the economy grew at an annual rate of 2.9% in the final quarter of 2022.

Although the jobs market has held up, tech firms SAP and IBM were among others announcing major redundancies, following on the heels of the tech giants in the previous week. But global stock markets rallied on hopes that a resilient US economy and slowing inflation would enable the Federal Reserve to engineer the desired soft landing. The MSCI World Index hit a five-month high.

A widely watched survey by Consensus Economics forecast that the eurozone will avoid recession this year, boosted by lower energy prices, bumper government support, and the earlier than anticipated re-opening of China’s economy. Just last month, the same survey predicted the bloc would plunge into recession, illustrating the sharp turnaround in global economic sentiment.

In a blow to Chancellor Jeremy Hunt ahead of his March Budget, the Office for Budget Responsibility warned that it had overestimated prospects for medium-term growth in the economy and intends to revise down its forecasts. The downgrade would wipe out the government’s £9.2 billion headroom from the Autumn Statement and may require the chancellor to make more savings in March to keep within his fiscal rules to reduce debt.

Official figures showed that government borrowing shot up to record levels last month, driven by support for energy bills and the impact of higher inflation on the government’s debt repayments. In a speech outlining plans to grow the UK economy, the chancellor warned that tax cuts in the Budget were unlikely. The economic challenges were underlined by news that UK car production had collapsed to its lowest level for 66 years.

Ahead of this Thursday’s Bank of England rate-setting meeting, markets are anticipating a hike of 50 basis points, taking the base rate to 4%. However, Mark Dowding of BlueBay is cautious. “Although this would certainly be justified by inflation and wage data, we are concerned at spreading signs of economic weakness. Meanwhile, house prices are looking very vulnerable and we think that it will be very difficult for UK rates to exceed a 4% ceiling without the risk of crashing the UK housing market and the UK economy along with it.”

Bluebay is a fund manager for St. James’s Place.


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