Global equities had a positive week, rising 1.0% in local currency terms and 1.4% in sterling terms. The US and Japan fared best, with gains of 1.8% and 2.0% in sterling terms, while the UK and China lagged with falls of 0.3% and 3.8%.
Meanwhile, bond yields were quite volatile but ended lower, leading to returns of 0.5% and 0.7% for UK gilts and corporate bonds.
The meetings of the Federal Reserve and Bank of England produced no major surprises. Both banks kept rates on hold as expected and removed from their forward guidance any reference to the potential need for further tightening (even if two members of the BOE did still vote for a rate rise).
However, both central banks held back from endorsing the market’s belief that rate cuts are in the offing sooner rather than later. Instead, they said they needed to see further confirmation that inflation is heading back down to 2% on a sustainable basis before starting to cut rates. The Fed went as far as to say that it did not expect to lower rates in March.
The European Central Bank also took a similar line the previous week and all three central banks are once again basically singing from the same hymn sheet. Rates do look set to be cut significantly over the coming year but not before April or May.
The market is pricing in rates falling by year-end by around 1.25% in the US and Eurozone and 1.0% in the UK. This continues to look a bit on the optimistic side, particularly in the US following Friday’s unexpectedly strong labour market report. Payrolls rose in January by close to double the amount forecast, gains in previous months were revised up significantly and wages surprised on the upside.
Last week’s numbers were also a tad stronger than expected in the Eurozone. GDP was flat in the fourth quarter whereas the economy had been expected to slip into recession. Core inflation also fell a bit less than forecast, edging down to 2.8% from 2.9%.
In the UK, house prices posted an unexpected gain in January with the Halifax index rising 0.7% over the month. This left prices down only a modest 0.2% on a year earlier. The other news came from the Chancellor who played down the scope for tax cuts in the Budget on 6 March, saying any cuts would likely be smaller than the £20bn announced in November.
Politics also reared its head in the US. Most of the time, the actions of the Fed are much more important for markets than those of the President, suggesting the November elections are not as critical as generally thought. But this week Trump said he would sack Fed Chair Powell if he wins, upping their relevance to investors.
The other big focus was the results of five of the Magnificent Seven tech stocks which were somewhat mixed. However, some disappointment over the results of Microsoft, Alphabet (Google) and Apple was more than compensated by positive surprises from Meta (Facebook) and Amazon. Indeed, Meta saw the largest ever daily gain in market capitalisation with a rise of $196bn, to end the week up 20%.
Overall, the Magnificent Seven ended the week 4% higher and year-to-date have been very much the main driver of the gains in the US market. The elevated valuations of these companies, along with the narrowness of the recent market increases, mean we retain our cautious view on US equities.
At the other end of the spectrum, Chinese stocks resumed their decline last week. The liquidation of Evergrande, the property developer, has been a long time coming and was no real surprise but still refocused attention on the problems still facing the property sector. Sentiment was also not helped by the failure of the authorities as yet to follow through with concrete measures following their recent acknowledgement of the need for further policy support.
Chinese equities look very cheap but just as the expensiveness of the US market is being ignored by investors, so too is the cheapness of the Chinese market. Valuations have in the past proven to be a good indicator of long-term return potential, even while providing little guide to short term market direction.
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