Weekly Market Update (and Chart of the Week) #4

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For financial professionals only

This week’s market update highlights the latest inflation data, GDP numbers and retail spending figures as well as market performance across the UK, US and Asia. 

Here’s the key takeaways:

  • US inflation exceeds forecasts - US consumer prices rose by 0.3% in January, surpassing market expectations, with the annual inflation rate climbing to 3.1%. Even with lower energy costs, the strong inflation figures reduce the chances of a rate cut in March. Treasury yields surged and US stock markets fell on the news.
  • UK inflation remains stable - the BoE breathed a sigh of relief as the UK's January inflation rate remained stable at 4.0%, below an anticipated increase to 4.2%. Importantly, services inflation also came in lower than expected at 6.5%.
  • UK economy weaker than forecast - the UK fell into a technical recession during Q4 of 2023, as the economy contracted by 0.3%, deeper than market predictions of 0.1%. This was the second consecutive quarterly decline, driven by a drop in output, especially in the services sector.
  • Japan’s economy stumbles - GDP unexpectedly contracted by 0.1% in Q4 2023, defying market expectations of 0.3% growth. This downturn marks the country's first recession in five years, largely driven by reduced private spending in the face of rising costs and global uncertainties.
  • Is the US consumer running out of steam? - retail sales for January fell by 0.8% in the US, well below the expected 0.2% drop. This follows a strong holiday shopping season, coupled with indications that severe weather also took a toll on spending.

What does that mean for me and my clients?

The macro news continues to drive stock and bond markets with heightened sensitivity. Diversification between growth and defensive assets remains appropriate for clients when the range of outcomes remains so wide.

Chart of the week

Line graph titled 'US Bond-Equity Two Year Rolling Correlation Since 1802', displaying fluctuating correlation values between -0.8 to 0.8 along the Y-axis. The X-axis represents time, from 1802 to 2023. The line oscillates frequently, crossing the zero line multiple times, indicating varying periods of positive and negative correlation between US bond and equity markets over more than two centuries.

Source: Ruffer

The chart above shows the correlation of bonds and equities since 1802. Historically they’ve often been positively correlated (the line is above 0, more than it isn’t). But the more recent exception to this rule has been the QE/ low inflation period. 

Why’s this worth sharing?

This chart demonstrates that having additional asset classes like alternatives is important when building portfolios for clients. The distinct return profile of alternative investments, often showing little correlation with traditional asset classes offers additional sources of potential return or protection. This can be particularly helpful when bonds and equities move in tandem. By including alternatives, portfolios can achieve more balanced exposure which can help dampen volatility or buffer against sharp market downturns.

The Markets

Major developed markets whipsawed during the week following concerning and stronger than expected inflation data coming out of the US. The S&P 500 plunged towards 4,900 on the news. However, the following day saw a robust rally back above 5,000, erasing all losses that week.

Better than expected inflation data also helped boost sentiment in the UK with the FTSE 100 & 250 both producing small gains for the week. This was despite the news that the UK was in recession, which markets shrugged off.

Japan’s Nikkei 225 hit an all-time high during the week, despite sliding into a technical recession, with technology stocks driving returns.

The Hang Seng also produced strong weekly returns following tentative signs of a consumption pick up. Lyft Inc’s shares popped 67% this week following a ‘clerical error’ which stated its profit margins had expanded by 5% rather than the actual 0.5%, despite this the shares still rose by 20% on the day. 

Weekly ChangeYtD Change
FTSE 1000.36%-1.61%
FTSE 2500.19%-2.11%
S&P 5000.08%6.05%
Hang Seng2.13%-2.74%
Nikkei 2254.26%15.62%
Brent Crude0.58%7.26%
Gold Spot-0.79%-2.67%
UK 10yr GILT-3bps+51bps
US 10yr Treasury+9bps+35bps

Source: FE FundInfo, figures as at close Thursday.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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