Quilter Cheviot|Weekly Comment

UK stocks back at record high

Our Weekly Market Overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Global stock markets extended their strong start to the new year with all major bourses advancing last week and the UK hovering near its all-time high. Bond markets have also been in jubilant mood, beginning 2023 with one of the best starts in decades as most market participants expect central banks to end aggressive hiking cycles in the coming months.

European benchmarks (+3.3%) outperformed US (+2.7%) and UK (+1.9%) equivalents on the week, boosted by better than expected economic data which raised hopes that the forthcoming recession will be relatively short and shallow. Although UK large caps have lagged global peers a little in recent trade, they have already taken out last year’s peak and are within striking distance of all-time highs, set back in May 2018. This is largely thanks to the significant relative outperformance in 2022 when the UK index managed to eke out a small return, while US and European benchmarks posted heavy losses.

China re-opening more swiftly than previously thought has also proved something of a boon for several UK stocks and the UK economy is also performing not as badly as some had feared, with the latest GDP figures showing a small rise in November, compared to a consensus forecast for a contraction. This beat, driven by increases in telecommunications, computer programming and higher sales for food and beverage services due to the football World Cup has raised hopes that the economy will avoid falling into recession at the back end of last year. The economy would have to shrink by around 0.5% in December, according to the Office for National Statistics (ONS), to record a second consecutive quarter of economic contraction and satisfy a widely used definition of recession. The pound continues to tread water against the US dollar, ending last week slightly higher at 1.22 but still near the middle of the relatively narrow 1.18-1.25 range that has contained price since early November.

More upbeat inflation news
The release of the latest US inflation data was seen as the key event risk last week, but the market reaction was actually fairly muted with most of the data coming in line with consensus forecasts, providing further reason for optimism that price pressures are on the wane. The 6.5% year-on-year rise in consumer price index was as expected and the lowest level since October 2021. Weekly jobless claims have fallen to their lowest level in three months at 205k and consumer sentiment has reached its highest level since April, according to the University of Michigan’s index.

With inflation seemingly falling back to less troublesome levels and the labour market remaining very strong, hopes that the Federal Reserve (Fed) can engineer a soft landing have been bolstered – and also reflected in equity and stock markets. US tech shares have been one of the clear beneficiaries of the market’s current rosy outlook, with benchmarks rising by almost 5% last week, compared to a 2.7% gain for the broader US large cap space. The US 10-year Treasury yield has fallen to its lowest level since the last Fed meeting, decreasing five basis points last week to 3.51%. Interest rate markets now widely expect the Fed to deliver one more 25 basis point hike before pausing, but apparent splits among Bank of England rate setters means a greater degree of uncertainty surrounds UK rates, with a fair chance of either a 25 or 50 basis point increase priced for the next policy meeting. 10-year gilt yields fell 11 basis points last week, closing at 3.36%.

Click on the button below for the original article, along with the Weekly Podcast – which includes discussion around the strong start for markets in 2023, inflation pressures coming down, the impacts of China reopening, and a spotlight chat on Japan.

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