June 2023 Investment & Economic Update

Our latest monthly investment update for June 2023 examines how the global investment markets, economy, and commodities are performing.

The FTSE 100 index of leading UK company shares closed at the end of May at 7,446.14 points, down 385.44 points or 4.92% during the month.

European shares reached a two-month low at the end of May due to weak Chinese economic data, raising concerns about a global slowdown. This overshadowed optimism from easing inflation in major eurozone economies.

The pan-European STOXX 600 index fell 0.4% to its lowest level since 31st March. London's FTSE 100 and Paris' CAC 40 were among the worst-hit markets, also trading at a two-month low.

Luxury firms, automakers, and industrial goods and services sectors in Europe were particularly affected as factory activity in China contracted more than expected in May, impacting Germany, its key trading partner.

Eurozone inflation

Eurozone inflation decreased to 6.1% in May from 7.0% in April, bringing it closer to the European Central Bank's target of 2%. However, prices are still rising three times faster than the ECB's goal.

Core inflation, which excludes volatile food and fuel prices and is a significant factor in the ECB's policy decisions, dropped to 5.3% from 5.6%.

In response to the surge in prices, the ECB has increased base rates by a total of 375 basis points to 3.25% over the past year to address the issue of escalating prices.

Recession forecast

Britain is expected to experience a recession this year as high mortgage rates, particularly affecting homeowners at the end of fixed-rate deals, lead to soaring costs, according to a prominent ratings agency, Moody's.

Moody's predicts that the UK, along with the US and Germany, will face technical recessions, but the UK will be the only advanced economy to see negative growth throughout 2023.

Meanwhile, a Bank of England policymaker, Catherine Mann, acknowledged the persistence of underlying inflation in the UK compared to other countries, making it more challenging to control price increases.

Mann also warned that the transition to sustainably higher interest rates will inevitably result in some disruptions. She defended her voting record on the Monetary Policy Committee, which has faced criticism for its inability to manage inflation effectively.

Debt ceiling

Global shares experienced an increase at the start of June as expectations of a US interest rate hike this month were scaled back, and traders were relieved by the passage of a bill to suspend the federal debt ceiling in the US House of Representatives.

The bill, which received support from both Democrats and Republicans, aims to avert a potential default and suspend the $31.4 trillion debt ceiling. This development has raised optimism that the bill will also pass through the Senate before the weekend.

Following the previous session's two-month low, the pan-European STOXX 600 index rose by 0.8%, while US S&P 500 e-Mini futures saw a 0.3% increase.

Essentially, the US legislation temporarily removes the borrowing limit for the federal government until 1st January, 2025. This time frame allows President Joe Biden and Congress to defer this politically sensitive issue until after the November 2024 presidential election.

Global demand

The latest business surveys for May indicate that sluggish global demand has exacerbated the decline in manufacturing activity across Europe and posed significant challenges for major exporters in Asia.

In the eurozone, the Purchasing Managers' Indexes (PMIs) continued to fall below the breakeven point, despite factories reducing prices for the first time since September 2020. Meanwhile, in the UK, output has declined for three consecutive months, with new orders experiencing the sharpest decline in four months.

While China and Japan witnessed swings in factory activity that resulted in growth last month, other Asian economies such as South Korea, Vietnam, and Taiwan faced ongoing weakness, as indicated by PMIs.

According to the HCOB final manufacturing PMI compiled by S&P Global, the euro zone's manufacturing PMI dropped to 44.8 in May from April's 45.8, slightly above the preliminary reading of 44.6 but still below the 50 mark that separates growth from contraction for the 11th consecutive month.

The index measuring output, which contributes to a composite PMI providing insights into economic health, reached a six-month low of 46.4, down from 48.5.

House prices

According to Nationwide, UK house prices experienced the fastest annual decline in nearly 14 years in May. Prices dropped by 3.4% compared to the previous year, marking the largest decrease since July 2009.

The building society also expressed concerns that further increases in mortgage interest rates could have a negative impact on the housing market.

Recent expectations of the Bank of England raising interest rates due to persistent high inflation have contributed to the rise in mortgage rates. Consequently, Nationwide stated that the housing market is likely to face stronger headwinds in the near future.

In May alone, house prices slightly decreased by 0.1%, with the average property price now standing at £260,736. Average prices still remain 4% below their peak in August 2022.

Renewable energy

A new report from the International Energy Agency (IEA) highlights that global renewable power capacity is expected to experience a significant increase this year. The report attributes this growth to factors such as policy momentum, rising fossil fuel prices, and concerns about energy security.

The deployment of solar photovoltaic (PV) and wind power is driving this expansion, with renewable capacity additions projected to rise by 107 gigawatts (GW), marking the largest absolute increase ever recorded.

By 2023, global renewable electricity capacity is estimated to reach 4,500 GW, equivalent to the combined power output of China and the United States. This surge in capacity is occurring in major markets worldwide.

Europe is accelerating its renewable energy growth as part of its response to the energy crisis, while new policy measures are driving significant increases in the United States and India. China remains a dominant player in renewable power, expected to account for nearly 55% of global capacity additions in 2023 and 2024.

Petrol prices

Following warnings from the UK's competition watchdog regarding high forecourt prices, supermarkets have reduced diesel prices by more than 7p per litre, according to the RAC.

The motoring group's analysis shows that the average price of diesel has decreased by 7.44p per litre, dropping from 151.02p two weeks ago to 143.58p this week. This action comes in response to the Competition and Markets Authority's concerns about retailers generating "sustained higher margins" from diesel sales.

The RAC also noted that supermarkets have accelerated their price cuts for diesel, which had previously been slower to reflect the decline in energy markets in recent months. The CMA has pledged to investigate the reasons behind the higher-than-expected prices at diesel pumps.

Market data

On 30th April, £1 buys $1.2568 or €1.1290. Gold is $1,964.40 an ounce, and UK natural gas futures are 56.67p/therm, down from 87.75p/therm at the end of April. The UK 10-year gilt yield is 4.111%, up from 3.178% at the end of April.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

 

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