Oscillate: to move repeatedly from one position to another. Last week saw markets continue to fluctuate as investors grappled with the higher-for-longer interest rate outlook.
The week began with the start of China’s annual National People’s Congress, where outgoing premier Li Keqiang announced an economic expansion target of around 5% for 2023, its lowest goal in three decades. The Chinese economy grew just 3% last year in the face of extended lockdowns to combat the spread of COVID-19.
Given this low base, Goldman Sachs said that achieving the target was “not challenging”. China’s economic growth targets have been trending lower over the past decade as policymakers seek to rein in the country’s growing debt burden and boost domestic consumption.
Investors were encouraged that slowing growth in China was an anti-inflationary sign; hopes that were boosted by news of a drop in US factory orders. But earlier gains for European stocks were reversed on fears that the modest growth target suggested a dampening of demand for European goods.
In the middle of the week, Federal Reserve Chairman Jerome Powell gave his keenly awaited six-monthly testimony to the Senate Banking Committee. Powell warned lawmakers that stronger-than-expected US economic data meant that the speed and size of interest rate hikes may also need to increase, and that “the ultimate level of interest rates is likely to be higher than previously anticipated”.
Markets had previously been betting on a quarter-point rise at the Fed’s next meeting on 21-22 March but are now pricing in a half-point increase. Powell’s hawkish tone chimed with those from Christine Lagarde, president of the European Central Bank, who warned that further action was needed to tackle the inflation “monster”. Markets now expect European rates to rise from 2.5% to above 4%.
Unsurprisingly, stocks fell in response to Powell’s comments and the dollar hit multi-month highs, while US and German short-term bond yields broached their highest levels since at least 2008.
The relative calm in markets was shattered on Thursday as a dramatic sell-off in US banking stocks spilled over into Europe and Asia on Friday. The global rout in bank stocks was triggered by Silicon Valley Bank (SVB), a key lender to technology start-ups. The bank’s shares plunged more than 60% after it announced a $2.25 billion share sale to help shore up its finances. The action was prompted after SVB lost $1.8 billion when it offloaded a portfolio of assets, mainly US Treasuries. In the wider market, this led to concerns about the value of bonds held by banks as rising interest rates made those bonds less valuable.
Late on Friday came news that US regulators had shut down SVB and taken control of customer deposits, signalling the largest failure of a US bank since 2008.
Gary Kirk of TwentyFour Asset Management believes SVB’s plight is an idiosyncratic regional event, and that the negative impact on European lenders is overdone. He points out that European banks are less exposed to tech and crypto lending and tend to hold short-dated government bonds, limiting the potential loss from a forced sale. European banks are also typically better capitalised and better regulated than US counterparts. “We expect this to be short-lived as investors begin to appreciate that with higher rates the real benefit is stronger net interest margins actually strengthening the balance sheet. However, we would not be surprised to see more news stories like the SVB one coming from the US in the coming days.”
The slide underlined the nervousness on markets ahead of the key US employment report on Friday. Prior to that came news on Thursday that US jobless claims had seen their largest increase in five months and that planned layoffs had jumped. Any signs of a weakening labour market are good news for the Federal Reserve as it seeks to quell inflation.
However, confirmation that the US economy added a further 311,000 jobs in February – ahead of expectations – suggested that January’s surge in hiring was not a fluke and cemented the view that the Federal Reserve will raise rates for longer. The S&P 500 index slid 4.77% over the week but remains in marginal positive territory for the year to date.
Friday also saw news that the UK economy rebounded in January, growing by 0.3% thanks largely to a pick-up in school attendance after a spike in winter flu, and the return of Premier League football after the World Cup. This followed a decline of 0.5% in December and means that the recession headlines can be filed away for a few months at least.
However, the figures also showed a fall in output in both the manufacturing and construction sectors. “Looking beneath the surface, the figures suggest the economy is on weaker ground than it appears,” observed Ruth Gregory of Capital Economics. “We doubt January’s strength will last and our hunch is that there will still be a recession.”
Azad Zangana of Schroders agrees that underlying challenges remain. “Although we do not expect the Bank of England to raise rates any further, there is a delayed impact from rising rates. By the end of this year, many more households will have come off their fixed-rate mortgage deals and will face a sizable shock when they try to refinance.”
There’s a huge north-south gap in the financial health of the UK, which has widened over the past year. This is a key finding of the latest Financial Health Index, published by St. James’s Place.1
What’s more, the UK-wide survey reveals that only a third (34%) of adults have a financial plan, falling from 38% last year. This is particularly concerning, as having a financial plan for the future – such as aiming to increase savings or payments into a pension or buy a property – is key to helping establish and maintain good financial health.
Financial health is used as an assessment of a person’s overall wellbeing, including how comfortable and resilient they are to pressures on their finances.
And when considering such matters, it’s important to understand the distinction between actual wealth and financial health, says Alexandra Loydon, Director of Partner Engagement and Consultancy at SJP.
“You can have wealth, but you might not necessarily have financial health,” she explains. “The way people manage their lives, and whether they have a financial plan in place, will determine whether they feel they’re financially healthy.”
It’s clear that financial advice helps increase financial wellbeing by improving financial confidence and resilience, says Alexandra. She points to the fact that SJP’s previous Financial Health Index (for 2021) revealed that, of those people who had a financial plan in place, more than three-quarters (78%) said it made them feel more confident about their financial position.
But to increase the overall level of financial planning, it’s vital that financial education is improved, she argues: “People have to understand why they need a financial plan – and that comes down to education.
Our primary hope is that the results of the Financial Health Index will prompt people to look at their finances and take action, by creating a financial plan that suits their circumstances and seeking financial advice where appropriate.
“The Index is telling us that people are not sufficiently engaging with their finances, and that there’s a direct correlation between feeling confident about your finances and your health and wellbeing,” says Alexandra.
“Our message is that you need to be on top of your finances; you need to be planning for your future. It’s such an important element of your overall wellbeing to ensure that you have a financial plan in place.”
1 Financial Health Index Report 2022, St. James’s Place, November 2022. The 2022 Financial Health Index report includes research conducted for St. James’s Place by Cebr in November 2022. For the full methodology of how Index scores are calculated, see page 34 of the report. It also incorporates the results of an Opinium survey of 4,000 UK adults conducted between 17th and 21st October 2022.
In The Picture
Even as overall wealth increases across some regions, our Financial Health Index shows that more than half of UK adults do not feel financially resilient.
Our Financial Health Index Report 2022 includes research conducted for St. James’s Place by Cebr in November 2022. For the full methodology of how Index scores are calculated, see page 34 of the report. It also incorporates the results of an Opinium survey of 4,000 UK adults conducted between 17th and 21st October 2022.
The Last Word
“During the financial crisis, there were investors and owners of systemic large banks that were bailed out. The reforms that have been put in place means that we’re not going to do that again. But we are concerned about depositors and are focused on trying to meet their needs.”
US Treasury Secretary Janet Yellen rules out providing Silicon Valley Bank with a bailout.
Schroders and TwentyFour Asset Management are fund managers for St. James’s Place.
The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
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SJP Approved 13/03/2023