William John Market Report 12-05-21
William John Market Report 12-05-21Category: Reports
With local elections occurring across the U.K, there was no surprise to see significant market reaction throughout the week. Cable appreciated to its highest level since February, with a closing quote of $1.41 dollars per £ as of 10/05, up 13.88% YTD. In addition, U.K government gilts saw their yields, which rise as exchange-traded bond prices fall, creep up from 0.762 on 07/05 to 0.796 on Monday’s close:
Falling yields during the lead up to local elections suggests there was investor uncertainty surrounding indyref2 and its implications on the United Kingdom and its economy, given First Minister Nicola Sturgeon has reportedly told Prime Minister Boris Johnson the referendum for independence is a matter of when, not if. However, falling short of a majority in Scottish Parliament may have convinced some investors to move capital out of the low-risk bonds. Regarding the significant currency appreciation, this is likely due to capital inflows to the U.K partly due to the results of the local elections, noting the increased conservative gains in England which will be a big win for the Government and the Treasury moving forward.
It may also be due to the Bank of England’s updated forecast for the economy, forecasting 7.25% growth this year and the highest growth rate in more than 70 years. Although, this growth rate ought to be put into a mathematical context whereby the economy is operating with historic levels of spare capacity, thus such growth should not be a surprise with the easing of lockdown measures and further easing anticipated. An economy getting back on its feet and the BoE’s decision to hold interest rates at 0.1% presents a fantastic opportunity for investors to borrow cheap money as businesses begin to rebuild their balance sheets and generate revenue.
Looking ahead, it remains to be seen how holding interest rates low and continuing asset purchases through Quantitative Easing programmes will affect inflation, with many pundits suggesting inflation could be about to pick up quickly and significantly above major player targets set at the Federal Reserve, ECB and the BoE (circa 2%). This is likely to have implications on investor returns and monetary policy this summer.
Finally, Warren Buffett’s Berkshire Hathaway held its AGM for 2021 last week. In the meeting, he made many observations ranging from increased retail access to speculative trading, the airline industry and inflation. He remarked “We are raising prices and clients are accepting them”. For a business of Berkshire’s size and the influence of Mr Buffett himself, this seems to confirm pundit expectations that inflation risk is very much on the conscience of the financial markets and managers ought to watch closely over the coming months.
Any opinions expressed in these Reports are those of William John and are provided for information only. E&OE.