Market Commentary October 2022

Aetas Wealth

Speaking to journalists at a lobby briefing in 1964 – when the sterling crisis was raging – Prime Minister Harold Wilson famously said “a week is a long time in politics”.

What, then, is a month? Especially a month like September 2022 when enough happened to fill a year’s worth of Bulletins.

In the UK, the beginning of the month finally brought an end to the Conservative leadership contest, as Liz Truss defeated Rishi Sunak and replaced Boris Johnson as Prime Minister. With the sad death of Her Majesty The Queen two days later, Truss became the first PM to serve both a King and Queen since Winston Churchill. Liz Truss must have enjoyed the shortest honeymoon period of any Prime Minister: by the end of the month, the Telegraph was running a comment piece entitled‘ Liz Truss has shocked her own allies and is dangerously close to the edge’.

Much of the blame for this can be laid at the door of new Chancellor Kwasi Kwarteng’s ‘fiscal event’ (or mini-Budget), which worried both the markets and Conservative backbenchers in equal measure: one opinion poll immediately after the speech gave Labour an astonishing 33% lead.

As we will see below, the pound fell spectacularly during the month, although it subsequently recovered some of the lost ground. Also falling were the world’s stock markets: only one of the markets on which we report made any headway in the month, with some suffering double-digit falls.

This wasn’t surprising with continuing worries about inflation and major economies around the world flirting with recession. Throw in the continuing war in Ukraine, Putin’s apparently increasing irrationality, the attack on the Nord Stream pipeline and continuing tensions between the US and China, and September was a month when good news was hard to find.

With September ending on a Friday, this Bulletin was largely written over the weekend of October 1st and 2nd to allow us to send it to our clients as quickly as possible after the month-end. As always, we have reported on all the month’s events and their impact on stock markets around the world, but we should stress that world events are moving very quickly at the moment. This was evidenced on Monday morning as the Government U-turned on the tax cuts for the highest earners, and it is possible that some other comments may be out of date by the time you read the Bulletin.

Welcome, therefore, to September 2022 – when a month really was a long time, in both politics and economics.

We could probably write this Bulletin for the next ten years and not have as many notes for the UK as we have for September this year. As we noted in the introduction, the month began with a new Prime Minister and new Chancellor, who duly presented his ‘fiscal event’ on Friday September 23rd.

It was not billed as a traditional Budget, but the string of measures Kwasi Kwarteng reeled off caused far more of a stir in the markets than most Budgets in recent memory, with the ‘tax and spend’ approach of previous Chancellors going out of the window.

“We won’t apologise,” Kwasi Kwarteng said in the conclusion to his speech. “Our entire focus is on making the UK more competitive in a fiercely competitive global economy.”

As virtually all our clients will know, the speech produced a violent reaction, at least in the short term. Kwarteng presented his measures without the usual forecasts from the Office for Budget Responsibility: this certainly contributed to unease in the bond and currency markets, with the pound (of which more below) sliding perilously close to parity with the dollar. At one point, the Bank of England was forced to step in and buy Government bonds as pension funds reportedly faced liquidity problems.

By Friday, the pound had rallied somewhat – and it is very far from the only currency to fall against the dollar. Following a meeting with the PM and the Chancellor, the OBR is now due to deliver its independent forecast on the impact of the Chancellor’s measures ‘in the coming weeks’. Kwarteng will present his ‘medium term fiscal plan’ on November 23rd. At the time of writing, he has no plans to bring that forward, although it will be interesting to see the reception he gets at this week’s Conservative Party Conference.

What about other economic news in the UK? In almost her first act as Prime Minister, Liz Truss had announced an energy price cap, which should cap the bill for the ‘average household’ at £2,500 per year. Clearly, the Government will need to borrow to pay for the cap: initial estimates were that it would cost £150bn, but as we report in the Europe section below, gas prices fell sharply at the end of September, which may reduce this initial estimate significantly.

As in every other country, inflation and interest rates were never far from the UK headlines in September. The headline rate of inflation was down slightly in August, falling to 9.9% from the 10.1% recorded in July. What most people notice, of course, is the prices in the shops – and food inflation was reported to be at a 14-year high. By the end of the month, an article in City AM stated that ‘food inflation is at the highest level ever recorded’. It hit 10.6% in September, up from 9.3% in August.

Aside from what we pay in the shops, one of the main problems with inflation is that it pushes up the cost of servicing the Government’s debt. The figure reported in August was a record £11.8bn – almost twice as much as the Treasury’s independent forecast had expected.

It was reported that the UK economy had only grown by 0.2% in July – more slowly than expected – and there were plenty of commentators suggesting that the UK was ‘already in a recession’. In the event, new growth figures released at the end of the month revealed that the country wasn’t in a recession, with the ONS reporting growth of 0.2% for the second quarter of the year – revised upwards from an earlier estimate of the economy shrinking by 0.1%.

Recession or no recession, September saw consumer confidence slip to a new low, despite the cost of living support from the Government. It dropped into negative territory for the first time since June 2020.

There were two main items of news from the UK’s high street in the month. City AM reported that footfall was continuing to climb back towards pre-Covid levels, although the pace of the recovery had slowed, with shoppers cautious as the cost of living continued to increase. The other news was that Aldi has now overtaken Morrisons to become the UK’s largest supermarket. Aldi boss Giles Hurley said that the discounter had gained 1.5m customers in 12 weeks as shoppers switched to the discounters (Aldi and Lidl) “in their droves”.

Finally, in this unusually long section on the UK, we come to the numbers. Although the FTSE 100 index of leading shares fell in September, as we will see below, it was a very long way from the worst performing stock market. The FTSE ended the month down 5% at 6,894.

What of the pound? The month began with the headline writers reaching for the superlatives. ‘Pound heads for historic low against the dollar,’ said City AM on the 2nd. By the end of the first week in September, the pound was ‘at its lowest level against the dollar since 1985’. Any news that came out during the month seemed to adversely impact the pound – ‘pound hits 37 year low as retail sales slide’ – and we all now know what happened after the Chancellor’s speech: the pound fell below $1.10 for the first time in 40 years and was at one point trading at $1.03.

Having closed August trading at $1.610, by the end of a very turbulent month the pound ended at $1.1147 – down 4% for the month as a whole.

The logical place to begin the Ukraine section of the Bulletin is at the end. On September 30th, as President Zelensky sought fast-track entry to NATO, Vladimir Putin delivered a major speech in Moscow in which he announced that four regions of Ukraine – Donetsk, Luhansk, Kherson and Zaporizhzhia – were now part of Russia. This followed widely-condemned referenda in the regions, with the US and several other countries flatly stating that they would never accept the results.

The worry, of course, is that having declared the regions to be part of Russia, Putin now believes that an attack on them is an attack on Russia itself and could – in theory – be resisted with nuclear weapons. While military strategists currently see this as unlikely, it clearly remains an option for the increasingly irrational Russian leader.

By and large, September had been a good month for Ukrainian forces, as they re-took several key towns. This forced Putin to order a partial military mobilisation, which could see 300,000 men called-up to fight. The order was met with widespread protests – especially in the Caucuses region – and dramatic queues at borders as Russians fled the country rather than be conscripted into the army. There were anecdotal stories of flights out of Moscow costing up to £10,000.

All through the month, stories of a potential coup against Putin swirled around, with various groups rumoured to be plotting to overthrow him. But as we have seen, the month ended with Vladimir Vladimirovich still very much in control, still making his speeches and accusing the West of trying to break up Russia.

He also blamed the West – specifically the US and Britain – for the sabotage of the Nord Stream pipeline. As clients will know, explosions have caused several holes in the pipeline, with most observers believing that Russia itself is responsible.

Far right or just ‘right?’ Your answer will depend on your political point of view, but September in Europe was notable for the success of right-wing parties in both Sweden and Italy. In Sweden, it was the Swedish Democrats, in Italy, the Brothers of Italy, whose leader Giorgia Meloni is almost certain to become the country’s first female Prime Minister.

Away from politics energy, or the lack of energy, continued to make the headlines. The month began with Germany announcing a €65bn (£57bn) package to curb energy costs.

Later in the month, the German government took temporary control of two subsidiaries of the Russian energy company Rosneft. Having rescued utilities giant Uniper in July, at a cost of €19bn ($16.6bn), the German government is now set to buy a 78% stake in the company, effectively nationalising the country’s biggest consumer of Russian gas.

Murky rumours persist that the EU is buying natural gas from China that originated in Russia, but by the end of the month, gas prices were moving down sharply, as it appeared that Europe’s scramble to top up its gas supplies ahead of winter has largely been successful. Gas futures fell, leading some forecasters to suggest that the falling price could knock £60bn off the cost of the UK support package for households and businesses – originally estimated at £150bn.

In other news, JP Morgan was reported to be considering moving its banking headquarters from Frankfurt to London over fears of possible winter blackouts. VW said it was aiming for a valuation of €75bn (£66bn) when shares in luxury carmaker Porsche started trading. It was less good news for Instagram though, as it was fined €405m (£357m) by the regulators over child data privacy.

The two main European stock markets followed the general trend by falling in September. Germany’s DAX index was down 6% at 12,114. The French stock market dropped back by a similar percentage to close the month at 5,762.

The first big news of the month in the US was the jobs figures. US employers added 315,000 jobs in August, slightly ahead of expectations but well down on the more than 500,000 jobs added in July. Despite fears that the labour market may be heading for a slowdown, it still seems likely that the Federal Reserve will continue to raise interest rates as it seeks to rein in rising prices.

For the US, September was very much a story of inflation and interest rates. Inflation for August was 8.3% – that was down from the 8.5% recorded in July, but above the 8.1% analysts had been expecting, as the costs of food, housing and medical care continued to rise. The markets reacted badly to the news, with the Dow Jones index losing nearly 4% in one day, and the S&P 500 index down 4.3%.

As the Federal Reserve again raised rates by 0.75% – taking them to a range of 3% to 3.25%, the highest since early 2008 – US mortgage rates rose to their highest levels for 14 years. 30-year mortgages went above 7% for the first time since 2000, rising at the fastest rate since records began.

In company news, Apple switched production of the iPhone 14 from China to India, as the Biden administration barred tech companies that receive federal funding from building ‘advanced technology’ facilities in China for ten years. This was introduced as part of a £50bn (£45bn) plan aimed at building up the US semiconductor industry.

Elon Musk’s on/off courtship of Twitter took another twist as the company’s shareholders approved the $44bn (£39bn) deal: they will now try and force Musk to buy the company through the courts.

September in the US was bookended by the weather. The month had begun with reports that a summer drought had ‘wreaked havoc’ across farmland in the north east. It ended with Hurricane Ian twice making landfall in the south-eastern states. Early estimates put the cost of the damage at up to $70bn (£63bn) which, say economists, will further fuel inflation.

As we have already seen, September was not a good month for US stock markets. Over the course of the month, both the Dow Jones index and the more broadly-based S&P 500 were down by 9%, respectively closing the month at 28,726 and 3,586.

Far East
One of the prevailing themes of the month was the strength of the US dollar. The pound was by no means the only currency to have problems, and September saw the Japanese yen slip to its lowest level against the dollar since August 1998, breaching the psychologically important 140 yen-to-the-dollar level. Action by the Bank of Japan did little to ease worries about the Yen.

Another currency not having a good month was the South Korean won, which fell sharply after the country revealed a bigger-than-expected trade deficit.

Another ongoing theme this year has been the problems in the Chinese property market, exemplified by the struggles of Evergrande. Garden Holdings, one of China’s biggest developers, reported a 96% drop in profits, blaming a ‘severe depression’ in the property market that ‘only the fittest can survive’. It seems doubtful if Evergrande will be numbered among the fittest: the company staggers from one crisis to another, and in September, a lender seized the company’s Hong Kong HQ.

There were some mixed messages coming out of China in the month. One report suggested that Premier Xi Jinping had been placed under house arrest, after a coup led by army general Li Qiaoming. Moves had apparently been made against Xi when he was out of the country meeting Vladimir Putin in Samarkand. The rumours were swiftly debunked and Xi was back in public by the end of the month.

Economically, China was facing pressure to devalue the yuan, with the country seen as increasingly vulnerable due to the heavy indebtedness of private companies and the previously-mentioned property sector. Interestingly, a report revealed that China was back among the top ten countries for Bitcoin and cryptocurrency usage, despite the Government taking action against it last year. Vietnam leads the world in overall adoption of virtual currencies.

The rumblings and tension over Taiwan continued following Nancy Pelosi’s visit last month, a trip described by former New Zealand leader John Key as “reckless, provocative and dangerous”. A Taiwanese billionaire put up $32m (£29m) to train an army of ‘civilian warriors’ against any possible invasion by China.

The news on the region’s stock markets was not good, with two markets recording double-digit falls in September. Hong Kong’s Hang Seng index led the way, dropping 14% to 17,223. The market in South Korea wasn’t far behind, falling 13% to 2,155. Japan’s Nikkei Dow index was down 8% at 25,937 while China’s Shanghai Composite index was 6% lower at 3,024.

Emerging Markets
The emerging markets section of the Bulletin has, of late, been dominated by the conflict in Ukraine. Perhaps the biggest news in the section this month though was India overtaking the UK to become the world’s 5th largest economy.

With India’s economy growing by 7% in the last three months, the IMF duly made the announcement. Anand Mahindra, billionaire chairman of the Mahindra Group, said it was “a silent but strong reply to those who thought India would descend into chaos [when British rule ended]”.

Almost the first action of the world’s new 5th largest economy was to curb rice exports: following heatwaves in August, India placed curbs on some exports, adding to global worries about food inflation.

We have commented previously on Russia’s increasing coal and oil exports to China. In August, they increased significantly, with China’s imports of oil reported to be up 28% on a year-on-year basis. Russia appears to be gradually moving away from the dollar for international trade, and Bloomberg reported that it had plans to buy as much as $70bn (£63.4bn) in Chinese yuan and other ‘friendly’ currencies, in a bid to stem the rise of the rouble.

With the conflict in Ukraine going badly and clear worries that Putin’s annexation of the four regions mentioned above would bring further sanctions, the Russian stock market fell by 18% in September, ending the month at 1,957. India’s stock market was down by a much more modest 4% at 57,427. The other emerging market that we cover in the Bulletin is Brazil, and it gave us our only gain of the month. Admittedly it was unchanged in percentage terms, but it did manage a gain of 514 points to end the month at 110,037.

And finally…
We know that many of our clients reading this will support a football team. Our apologies in advance to any supporters of Blackfield and Langley FC. The Watersiders – as the team is nicknamed – were playing Shepton Mallet FC in the first qualifying round of the FA Cup.

In the 76th minute, the ball went out for a goal kick. Spotting his opportunity, Connor Maseko, the Watersiders’ goalie, decided to do what he really should have done at half-time. There is no delicate way to put this: Connor relieved himself in a convenient hedge.

The referee was less than impressed and gave the now-much happier goalie a red card – a decision which left his manager “gobsmacked.” The match ended 0-0.

Sadly, in keeping with much of September’s news, we must end the month on a downbeat note. The month had started promisingly in the ongoing humans vs robots debate. Ameca, the world’s most advanced humanoid AI robot, took part in a Q&A in which it promised that: ‘There’s no need to worry. Robots will never take over the world. We’re here to help and serve humans, not replace them.’

A month may be a long time in politics and economics: apparently the same is true in robotics. By the end of the month, the Daily Star was warning of ‘Judgement Day’, as experts predicted that ‘super-intelligent machines could turn evil’ just like in the Schwarzenegger movies and ‘wipe us all out.’

To paraphrase Arnie, the Market Commentary – robots permitting – ‘will be back’ next month. And to bring you right up to date with the sports news, the Watersiders sadly lost the replay 3-2.

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