Friday Wrap-Up (3 February)

(Maksymilian Mucha - Investment Director of UCLIF & Lead Editor)

Welcome to the Friday Wrap-Up, our weekly summary of events from the financial world that have had the greatest impact across asset classes. This week has been tremendously intensive with Fed, BoE, and ECB holding their meetings and the NFP report release on Friday. So what's moving markets?

Markets

In the US equities, S&P 500 increased 2.15% while DJIA was flat with 0.05% increase. The Federal Reserve raised the funds rate by 25bp to 4.50-4.75% level, which was in line with the expectation of the slowdown in rate hikes. In spite of Powell’s remarks that the tightening cycle is yet to be continued, the Chairman acknowledged the beginning of the disinflationary process, which caused a rally in equity and fixed income markets. However, the rally was reversed on Friday since the NFP came at remarkable 517,000 vs. only 190,000 expected and unemployment falling to 3.4% in January vs. 3.5% in December and 3.6% expected, showing the persistence in labour market tightness. US 10y Treasury yield stayed flat adding 1bp to 3.52% this week, reversing all weekly gains on Friday.

In Europe, the FTSE 100 rallied 1.76% and EURO STOXX 600 rose by 1.50%. The Bank of England raised interest rates by 50bp to 4.00%, along with markets expectation. However, the MPC members expressed highly dovish views suggesting the end of the tightening cycle, contrary to the current market expected peak of 4.25%. The Committee also warned against low economic growth in the next few years. The European Central Bank also hiked rates by 50bp to 3.00%, but took a hawkish view committing to the same increase in March and maintaining a decisive stance on inflation. UK 10y Gilts yield fell -28bp to 3.05%, while German 10y Bunds yield was down 5bp this week to 2.19%.

In Asia, the Nikkei 225 increased 0.46% and the Hang Seng plunged -4.07%. The tension between the United States and China are likely to escalate next week after the alleged Chinese spy balloon flew over the US airspace to be eventually shot into the Atlantic Ocean on Saturday.

Equities

Consumer Staples and Consumer Discretionary (Jinesh Bothra)

The Consumer Discretionary sector and Consumer Staples both gained over the past week. The Consumer Discretionary Select Sector Fund (XLY) posted a gain of 5.35%. Similarly, a 1.16% gain was witnessed in the Consumer Staples Select Sector Fund (XLP) from last week. The Federal Reserve hikes interest rates by another 0.25 percentage points. In addition, US payrolls increased by 517,000 for January, almost triple the consensus forecast of 185,000. The country's unemployment rate, at 3.4%, is now the lowest for 53 years.

In company news, the American multinational chain of coffeehouses and roastery reserves Starbucks Corporation's (SBUX) shares fell 4.4% last week. The firm reported record first-quarter revenues, up 8% to $8.71 billion; this was below the $8.78 billion analysts were calling for, while headwinds in China meant adjusted earnings per share of 75 cents was shy of the 77 cents expected by Wall Street.

In addition, international same-store sales fell by 13%, dragged down by a 29% slump in China sales after the Chinese government relaxed its zero-Covid policy. This triggered fresh outbreaks of the virus which forced Starbucks to shutter many of its shops in the country.

On the other hand, Starbucks' China same-store sales are improving, with finance director Rachel Ruggeri pointing out that a 42% plunge in December moderated to a 15% decline in January. And in the US, Starbucks delivered robust first-quarter same-store revenue growth of 10% as customers spent more per visit at its outlets.

Financial Institutions (Gauri Varma)

This week in the mortgage market, the cost of fixed-rate mortgages look set to fall, as the UK inflation outlook brightens. Interest rates on five year fixed mortgages are set to drop below 4%, following suggestions from the Bank of England that inflation may be under control soon. On Thursday the Bank of England raised their policy rate by 0.5 pp to 4%, and have suggested that rates have now peaked. Market expectations of future rate increases have dropped further, and there are predictions of loosening monetary policy by the end of the year. Demand for fixed deals are also likely to grow as interest charges on variable rate mortgages rise in line with base rate increases.

European government bond markets have surged while stocks have rallied, with investors betting that interest rates have peaked. The yield on 10 year UK gilts dropped by 0.35 PP. The FTSE 100 has performed well, peaking to hit an all-time high on Friday.

For UK asset managers, they suffered the worst year on record in 2022, experiencing net outflows of £50.1bn, as retail investors took £25.7bn out of funds last year due to the soaring inflation and cost of living crisis. As the FTSE100 is now performing well, asset managers are asking clients to ignore the economic uncertainty. Valuations for UK equities are attractive relative to other stock markets and history, trading at lower valuation multiples than global peers. The UK also offers the highest dividend yield globally.

Utilities (Tancrede Guyader)

Both the US Federal Reserve (FED) and the Bank of England (BoE) have raised their interest rates this week in order to bring down inflation. As a result, the S&P 500 Utilities Index and S&P 500 Energy Index have fallen this week. 

After its collapse two weeks ago, Britain’s battery start-up Britishvolt should be bought out of administration by the Australian battery group Recharge Industries over the weekend. If the deal closes, the Australian group will have seen off three rival bids. In spite of the collapse of Britishvolt, the excitement around EVs and EV batteries hasn’t vanished. The German carmaker BMW (BMW.DE) announced on Friday a €800mn investment to step up electric vehicle production in Mexico as the country benefits from its inclusion in US green subsidies. Similarly, Ford (F) and General Motors (GM) have decided to open new plants and/or increase EV production in the North American country. Whilst the US remains leader when it comes to EV battery assembly capacity, Mexico could close the gap if it adjusted its energy policies to make them more investor-friendly. 

The scandal around the Adani Group’s alleged accounting fraud and stock manipulation persists. Since Hindenburg Research’s accusations on January 24th 2023, the flagship entity of the Adani Group, Adani Enterprises Ltd (ADANIENT.NS), has seen its share price fall by 53.9% and the Adani Group’s listed companies have lost $107bn in value according to Bloomberg. As explained by the chief executive of the asset management company TIW Capital, this scandal threatens to undermine investor confidence in India and in the nation’s regulatory framework. 

Fixed Income

Rates (Eugene Chan)

Conflicting Data and a Seemingly Dovish Fed

This was an exciting week for the rates, with three major central banks delivering decisive interest rate hike decisions. The first of these was dispatched by the Fed on February 1, matching the market consensus of 25 basis points and lifting the target to a range of 4.5%-4.75%. This caused the S&P to rally more than 1% and the two-year yields to fall sharply right after. Powell mentioned a couple of more rate hikes, indicating that the hiking cycle is not over yet. However, the market seemed to interpret this as dovish and the rally that followed seems to indicate hopeful market sentiment.

The Bank of England and ECB both hiked 50 basis points, but had opposing comments on the future trajectory of the rates. During the announcement, the BoE hinted that the hiking cycle may be slowing to a stop, causing the pound to fall on the news. On the contrary, the ECB intends to continue hiking 50 basis points at the March meeting. 

Experts are wary of the Fed’s decision to hike 25 basis points and the market’s positive reaction, as the market doesn’t seem to be pricing in inflation/recession risk that is still very possible. Apart from high services sector inflation, nonfarm payrolls increased 517,000 in January, above all expectations. Additionally, the unemployment rate fell to 3.4%, showing a very tight labor market. The tight job market has created a debate as to whether the Fed will go back to hiking 50 bps in the next meeting. 

Credit (Albert Moreno Gonzalez)

The credit market has been showing signs of improvement, as seen in the narrowing of credit spreads. The Option Adjusted Spread (OAS), a gauge of the yield spread above the benchmark yield that considers a security's extra risk, has been declining. On January 1st, the OAS for CCC US corporate bonds was 11.57, and by February 1st, it had decreased to 10.32, a 10.8% drop. 

Investment grade corporate bond yields have increased by approximately 5 basis points, while high yield spreads have narrowed, indicating that investors are becoming more willing to take on risk. Additionally, Mexico's state-owned oil company, Pemex, successfully completed a $2bn bond sale, despite investor demand for a double-digit yield.

Investors rushed to bonds on Thursday as interest rates neared their peak in both the US and Europe. The Federal Reserve's modest interest rate increase and hints of a slowdown led to a rally in US Treasury bonds, causing 10-year Treasury note yields to fall to 3.40%, the lowest since September. Meanwhile, the Bank of England and European Central Bank both expressed a similar sentiment, with the latter pledging to "stay the course." European bonds, including the 10-year German bond, saw a drop in yields, reflecting rising prices.

Overall, the credit market is displaying positive signs with a narrowing of credit spreads. Investment grade corporate bond yields have increased, and high yield spreads have narrowed, indicating a growing comfort among investors in taking on risk. These market trends suggest a positive outlook for the credit market and potential for increased investment opportunities as shown by the Pemex example.

Alternatives

Digital (Marco Fontanesi)

After a catastrophic 2022, the crypto sector seems ready to resume where it left off with a wave of bankruptcies, layoffs, and arrests in the first few weeks of this year. 

The total market value of crypto assets has increased by almost $300 billion in just the month of January, bringing it back up to $1 trillion. In particular, after falling to about $16,000 per token in the aftermath of FTX's bankruptcy last year, Bitcoin, the flagship cryptocurrency, has recovered and increased by more than 40% to over $23,000. Similarly, Bitcoin’s main competitor token ether (ETH) is also solidly in the green, registering an unexpected 140% growth in value so far in 2023. 

According to CryptoCompare data, the total assets under management for digital asset investment products surged by about 37% in January to more than $26 billion, the highest level since May 2022, the month that saw the start of the unprecedented crisis of trust in the cryptocurrency market. According to the cryptocurrency data source, Grayscale's GBTC, an investment trust created to follow the price of bitcoin, saw $38.9mn in average daily volume last month, up 23% from December.

Finally, it is important to remember that the current rise in digital assets did not occur in a vacuum, but rather is coinciding with a broader rally for other speculative assets, with which digital assets are historically correlated. Therefore, the bull market we have witnessed in this first month of 2023 may not be synonymous with a positive trend also in the rest of the year: it is always important to bear this in mind when looking at speculative kind of assets.