The Bank of England Leaves Rates Unchanged on Upbeat Forecasts
After a busy week in markets, the major indices ended the week with mixed performances on expectations for monetary and fiscal policy movements, evidence of a recovery in manufacturing and services data and labour market concerns following the pandemic-induced lockdowns across the globe, with particular concern over the US labour market.
The Bank of England voted unanimously to leave policy unchanged in its latest meeting, while reiterating its commitment to supporting the UK economy through its long road to recovery. No policy shifts were expected following the £100bn of quantitative easing announced in the June meeting, which was seen as sufficient to last to the end of the year.
The central bank issued new projections which show a slower recovery than predicted three months ago, however expects GDP to return to pre-Covid levels sooner than many other forecasters, with a smaller spike in unemployment and lower decline in annual GDP than it expected in May. Investors will be watching closely over the coming months for any changing signals on the bank’s attitudes to negative rates alongside any changes in forecasts moving through the second half of the year. UK stocks declined on the forecasts that Britain’s economy may take longer to get back to its pre-pandemic levels and on BoE Governor Andrew Bailey’s comments that cutting rates below zero could hurt banks’ balance sheets.
For more information on the Bank of England decision and what this means for market expectations, please see the attached Market Update document.
Republicans and Democrats Argue Over Stimulus Plans, Dollar Declines
Talks to break an impasse over a new virus relief package became increasingly urgent this week, with millions of jobless Americans left without additional aid. The parties remain far apart on some of the biggest sticking points, despite claims of some progress on other issues. The senate is scheduled to leave for an extended break on Friday, leaving little time to strike a deal to provide much-needed stimulus. At this stage, although negotiations are ongoing it remains unlikely that we will see a deal reached this month.
After cutting rates aggressively, officials from the Federal Reserve have repeatedly pointed out the need for more support from the fiscal side to help the US economy endure the pandemic. The Trump administration is considering a series of executive orders to get around the impasse which would delay the collection of federal payroll taxes, reinstitute an expired eviction moratorium, and extend enhanced federal unemployment benefits using unspent money already appropriated by Congress.
After spiking to a more than three year high earlier this year amid the Covid-19 pandemic, we have started to observe dollar weakness as investors become more confident in the outlook for global economic growth, while risks remain in the US economy. Dollar weakness can become a drag on US exposure within the portfolios, which is likely to continue to hamper the benchmark performance should the weakness continue. In comparison, our portfolios are underweight US exposure, with more opportunities to be had in other geographies in our view.
Recovery in Services and Manufacturing Across Europe
In Europe, strengthening services data bode well for the economic recovery, after the final July services PMI data showed that activity continued to improve across the four largest Eurozone economies. But the pace of the recovery is likely to soften due to the continuation of some containment measures and consumer caution. Eurozone retail sales grew by a strong 5.7% in June, bringing them back to pre-pandemic levels. While this is encouraging, overall consumer spending is expected to recover more gradually given the large services component. Data over July also confirmed a recovery in industrial activity is underway, with marked improvements bringing the reading for all the major eurozone countries above the critical 50 mark indicating growth of the sector.
Our Positioning
In line with our expectations, volatility remained high over the week as key earnings results came in and investors reassessed the economic outlook against a backdrop of continued uncertainty. Despite challenges over the week, momentum remains positive as the global economy continues to recover from the pandemic while central banks remain supportive, maintaining a positive backdrop for our portfolios moving forward. Overall, we remain optimistic looking ahead, however expect to continue to see high volatility levels in the near-term as is always the case during this stage of the cycle.
Key Events We Are Watching This Week:
- Earnings releases over the week
- Friday: China Trade data for July, US Non-Farm Payrolls for July
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets continued to show high levels of volatility over the week as countries across the world battle with increasing virus cases and mixed economic data. Over the week, the major indices remained mixed on virus fears and underwhelming company forward guidance as earnings season gets underway, despite improving PMI data on a global scale. The portfolios remained relatively robust in the face of market volatility over the week, benefitting from a high level of diversification in asset classes and geographies. Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather these market conditions. Year to date, we have now recovered from the March coronavirus decline, and we are in a strong position moving forward.
Important Information
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 1945, a B-29 bomber famously known as Enola Gay dropped an atomic bomb on Hiroshima, marking the first of two times the bomb has ever been used in warfare. Days later, the US dropped another bomb on Nagasaki, which effectively ended the second world war. 75 years later, tensions over nuclear weapons and how to ensure they are not used again are still very much with us.
Have a great week,
Jason & Gina
