True Potential Morning Markets

Following a volatile reaction in equity markets last week, attention will be focused on US survey data this week. Kevin Kidney, Head of Asset Allocation looks to the imminent US ISM services data and its importance as markets worry that the US economy is slowing. Will the Federal Reserve step in with an emergency rate cut following the figures this week? Towards the end of the week we get inflation data from China, which having not seen any real inflation pressures for 3 years, is now seeing a fall in consumer prices.

The Bank of England have cut interest rates from 5.25% to 5%, but how does this affect your money and how did markets respond? Faye Graham, Investment Analyst and Paul Durrans, Investment Director, go over the key takeaways from the decision and what the outlook is for further additional interest rate cuts. In contrast the Bank of Japan raised interest rates in an effort to lower inflation. In the US, the Federal Reserve decided leave interest rates unchanged. However, questions are being raised whether this was the right decision following the employment data released this Friday. We finish with corporate earnings where we’re seeing signs of consumers pulling back on spending and being more frugal with a notable decline in sales from McDonalds after raising prices on some products 27% since 2019.

Today, Matt Henderson, Portfolio Manager, reviews the Federal Reserve’s decision to hold interest rates at 5.25% to 5.5%.We review both inflation and employment in relation to the decision as they are both parts of the Fed's dual mandate. Although the rate remained unchanged, the markets are equally interested in the comments that follow policy decisions as Chair Jerome Powell highlighted that inflation has made progress towards target and if it remains low that a reduction in interest rates could come as soon as September.

Kevin Kidney, Head of Asset Allocation, looks to the monetary policy meetings taking place this week with the Federal Reserve and the Bank of England and the expectations on interest rate cuts. While no cuts are expected as of yet, there will be a keen eye on communications as to the direction of policy for both central banks with the European Central Bank and Bank of Canada having already begun their cutting cycles. The hesitancy to cut rates could be due to the scarring effect in which past failures to control the rise in inflation pressures through 2021 and 2022 lead to criticism. Contrast to this is the Bank of Japan which raised interest rates overnight to +0.25% with an intent to suppress future inflation pressures to around 1%.

Paul Durrans, Investment Director, looks at the latest corporate results and respective management comments to gauge the strength of consumer demand. Last week's US GDP report for Q2 2024 suggest consumer spending remains strong. However, investors are beginning to question whether higher interest rates are beginning to bite. Paul focuses on the latest results from McDonalds and the key trends within the wider retail sector.

As we look to the week ahead, 3 out of the 4 major central banks will make decisions on interest rates, Matt Henderson, Portfolio Manager, looks at the economic factors and market expectations on their decisions. We will also see company earnings reports from big tech with the likes of Microsoft and Amazon and a focus on consumer health from Mastercard, Paypal and McDonalds. 

Chris Leyland, Director of Investment Strategy, and Joe Forward, Investment Analyst, look back at a week of corporate earnings where Tesla saw a 12% drop in share price after CEO Elon Musk announced a delay to their self driving taxi service. Alphabet, the parent company of Google increased their revenue stream by 14% which was driven by advertising revenue and demand for their cloud computing services. We then get a reflection on the volatility of US equities this week and an understanding of the overall performance of mega cap equity stocks and how many of them have a strong link to artificial intelligence which will only continue to become a more significant. We then move over to PMI (Purchasing Manager Index) figures which help gauge the overall health of an economy, the release on Wednesday revealed the biggest expansionary reading in over two years for the US. We then finish with GDP data which actually exceeded market expectations for the US.

Chris Leyland, Director of Investment Strategy, looks East to China, where an unexpected interest rate cut has been announced in a bid to stimulate the economy on the backdrop of high youth unemployment, problems with the property sector and a lack of foreign investment post Covid. The fact that China cut rates ahead of the Federal Reserve in the US illustrates an acknowledgment of challenges in the economy and a willingness to tackle them. Will this be the start of a major cutting cycle in China? Elsewhere in US equity markets and we see the technology led sectors which have had great success so far this year begin to cool slightly with marginal price falls coming through.

With corporate earnings now in full swing, Paul Durrans, Investment Director, looks at some big names reporting within Technology, Consumer Discretionary and Industrial sectors. Tesla and Google were the first of the seven giant US tech companies to announce second quarter earnings results. Tesla disappointed investors as profits dropped 45% as it faced higher costs from employee lay-offs, slower sales and heavy investment into AI infrastructure. In contrast, Google exceeded analyst expectations with boosted advertising and cloud computing services demand. Turning to Luxury brand LVMH (Louis Vuitton Moet Hennessy) sales growth slowed as wealthy shoppers reined in spending. We then finish with United Parcel Service (UPS) that saw its shares fall the most in 15 years after they missed profit estimates.

Today our focus is China with Kevin Kidney, Head of Asset Allocation, looking at the People’s Bank of China and their decision to lower interest rates to encourage further borrowing from the private sector. China remains in a post property crash bust with an equivalent one trillion dollars worth of unsold properties, which will cause prolonged consequences for growth in an economy which is aging rapidly. Similar property bubbles in the west have historically taken 5-7 years to resolve so China is facing a big challenge and interest rate cuts will just not be enough to stimulate the economy.