TEAM Asset Management’s global weekly market review for week commencing 20th March 2023. TEAM Asset Management is a Jersey-based independent asset management company of AIM-listed parent, TEAM plc (LON:TEAM).
Markets remained volatile last week and sensitive to news flow as investors continued to digest the ramifications of the fall of Credit Suisse and some regional banks in the US.
However, there were more ups than downs, underpinned by hopes that the turbulence in the banking sector will persuade central banks to halt, and then reverse, interest rate increases earlier than expected. The blue-chip S&P 500 and technology focussed Nasdaq indices gained 0.7% and 0.8% respectively.
Government bonds have performed well this year, benefitting from safe-haven inflows at times of market stress and signs that inflation is trending lower in most developed economies, but the UK’s inflation report for February sent a different message.
Annual CPI inflation re-accelerated back up to 10.4%, against consensus forecasts of a fall to 9.9%. Food and non-alcoholic drink prices soared 18.2%, the fastest pace since 1977, and other price rises were broad-based, including in the services sector where wages are a significant factor. Core inflation, which excludes more volatile items such as food and energy, also accelerated to 6.2%.
Prior to the release of the report, the odds of a Bank of England rate hike this month were priced at 50-50, or a coin-flip. However, by the time the Monetary Policy Committee started its 2-day meeting on Wednesday, it was clear there was little choice other than to raise the benchmark interest rate by another quarter of a percentage point to 4.25%. Markets are pricing in a similar move higher in either May or June.
The scourge of inflation has been felt acutely in the hospitality industry where energy, food and wages represent a large share of costs. On Friday, JD Wetherspoon, which runs more than 800 pubs across the UK, reported like-for-like sales fell 0.6% in the 26 weeks to the end of January versus the same period prior to the pandemic. It reported a profit of £4.6 million, compared to £50.3 million in 2019 and a £26.1 million loss last year.
The low-cost pub chain raised its food and drink prices by 7.5% in February and Tim Martin, Wetherspoon’s found and chairman, warned it would be “catastrophic” not to pass higher costs onto customers.
The Federal Reserve also raised the federal funds rate to a target range of 4.75% – 5% the day before the BoE announced its decision. Following the recent collapse of Silicon Valley Bank and other regional lenders, policymakers were evidently keen to demonstrate that the broader US banking system was “sound and resilient”.
The “dot plot” chart of projections for interest rates revealed most Fed officials expect there will be one more hike to 5.25% but the markets don’t believe them and are already pricing in a handbrake turn with rates to be cut from July.
Technology stocks have been some of the biggest beneficiaries of the re-pricing of interest rate expectations and the Nasdaq is up more than 13% so far this year.
There was some more good news for Microsoft, the second largest constituent of the index, after the UK’s competition regulator had a change of heart and gave its blessing to its proposed $75 billion takeover of digital games maker Activision Blizzard.
The Competition and Markets Authority had previously raised concern that the deal would result in higher prices, fewer choices for consumers and less innovation. Activision shares jumped more than 5% to $84 on the news but continue to trade at a discount to Microsoft’s $95 offer price, reflecting that there are more regulatory hurdles to clear before the transaction can go ahead.
Energy markets continued to recover and Brent Crude climbed to $78 a barrel after hitting a 15-month low of $70 early last week. The International Chamber of Commerce ruled in favour of Iraq against Turkey in a long running dispute over oil exports from the semi-autonomous Kurdish region, halting the flow of around 4000,000 barrels a day by pipeline to the Turkish port of Ceyhan.
Author: Andrew Gillham, TEAM Asset Management, Senior Investment Manager, ([email protected])
