The aftermath of the horrendous attack at a dance school in Southport last week has reverberated around the UK as violent protests and misinformation have rapidly spread throughout the country. Our thoughts are with anyone affected by these awful events. For now though, I will concentrate simply on market movements over the last week.
I am sure you are aware that, starting last Friday and continuing into Monday, financial markets experienced enhanced volatility as fears of a U.S. recession triggered a global equity sell-off. Officials from the US Federal Reserve (Fed) quickly moved to reassure markets that they would “fix” any deterioration in the economy and saw no signs that a recession was gathering momentum.
Exactly what has caused this sudden market volatility? Market jitters began at the end of last week when soft macroeconomic data led the Bank of England to cut interest rates for the first time in over four years. This decision prompted questions about why the Federal Reserve (Fed) in the U.S. had left rates unchanged just a day earlier. Inevitably this decision by the Fed was followed by a perfect storm of weak economic data, underwhelming corporate earnings, stretched positioning, and poor seasonal trends.
The market volatility peaked on Monday as we saw the worst day ever for Japanese equity markets as the Yen currency extended its rebound against the dollar. Over the past few months, many investors had been betting on a weaker Yen. However, a shift in the expected trajectory of Japanese interest rates compared to U.S. rates disrupted this trend. This shift forced many to unwind their "short Yen" positions (bets against the Yen) by instead buying the Yen, which in turn increased demand and further strengthened the currency.
Unfortunately for markets, the turbulence did not stop there. A significant contributing factor was the "crowded trade" in Big Tech. The Artificial Intelligence (AI) boom has driven tech stocks higher over the past two years, but weaker-than-expected earnings and doubts about AI's long-term profitability have unnerved investors. This was exacerbated when well-known investor Warren Buffett sold half of his Apple shares and then Intel announced plans to cut a large portion of its global workforce. By the end of Monday, the tech-heavy Nasdaq 100 had experienced its worst start to a month since 2008.
Finally, last Friday's weaker-than-expected U.S. nonfarm payroll report (jobs data) added to the market's fears that the Fed might have waited too long to avoid a sharp economic slowdown, increasing concerns about a looming recession. Traders who have been clamouring for a rate cut since spring are hoping the market’s nervousness will bully the Fed into easing policy aggressively, rather than sticking to an expected quarter-point cut next month.
Markets actually recovered well towards the end of early trading on Tuesday with Japan’s Nikkei up more than 9% - its biggest ever intraday surge.
This volatility is something our investment team continue to monitor closely, searching for new buying opportunities after the recent sell off and ensuring the portfolio is best positioned for the changing environment. I am pleased to report that despite this market drawdown, our main investment models have offered strong defence against a sea of negative performing benchmarks as the team’s conviction holdings were perfectly positioned in anticipation of such a market wobble.
In a time like this it is essential to remember that for an investor, periods of market turbulence are inevitable and not the time to sell stocks. Instead, focus on your long-term investment goals and try to avoid emotive reactions to short-term fluctuations. That is where we can help.
As always if you have any further questions, please do not hesitate to contact us. Things appear brighter now in the markets, and as we head towards the mid-point of the summer holidays we will be taking a short break from our weekly update and will be back with you on 30th August. Do have a good weekend.
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