Markets on both sides of the pond face imponderables - but what goodies will fall out of the Chancellor's Pandora's Box?
30 August 2024, 11:38
Considering the months of July and August are supposed to be focused on annual family holidays, revelry, the juice of Bacchus and sunshine, investors, to their irritation and concern, have found this period incredibly challenging.
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Thank goodness for technology and the supreme levels of communication.
Their quality has made a measurable contribution to smoothing many a furrowed brow of concern across an array of dealing rooms and ‘loungers’ on sun-kissed beaches. That old adage of ‘Sell in May and come back on St Leger Day!’ became redundant years ago!
For a period of nearly five weeks “the Grand Old Duke of York” appeared in all his glory, as US and Japanese equities bounced around like a cork in a bath, as investors attempted to read the runes in the sand on inflation, Central banks thoughts on cutting interest rates and whether to believe some highly respected analysts and economists that some degree of recession could be felt in the US, despite the second quarter yielding GDP of 2.8%, upgraded yesterday to 3%.
One can say ‘never say never’ but it must surely be a 16/1 shot against a recession in the next six months.
Many suspect that the outcome to the Presidential election on 5th November will provide some clarification as to the direction of travel for the US economy. Wall Street would probably prefer a Trump victory, but Kamala Harris appears to have found favour with many voters, aided and abetted by Tim Walz, an excellent communicator.
A year ago, the Harris/Walz ticket probably would not have been given houseroom and would probably have been laughed out of court.
As punters headed back from Cape Cod and Martha’s Vineyard, many would have been ruminating over Nvidia’s earnings, which were posted yesterday. Nvidia is unequivocally the heartbeat of “AI” with its sophisticated chip operation. It has been the mainstay behind the ‘Magnificent Seven’, which has been the driving force behind US stock markets reaching record levels in the past few months.
Despite delivering record quarterly revenue of $30.0 billion, up 15% from the first quarter and up 122% from a year ago, the bar was set so high, analysts thought these earnings fell short of expectations. Since April 2019 Nvidia’s share price has risen 2365%. Post its earnings announcement, the share price has fallen just over 10% in value – circa $300 billion.
With the US Labour market starting to show signs of weakening, the FED needs to be proactive and start cutting rates, even if inflation remains stubborn. A cut of 25 basis points in September looks ‘nailed-on’ – 50 basis points would be well-received. US markets are in a state of pre/post prandial neurosis and needs some TLC from the FED, to prevent a ‘sell-off.” There are also economic weaknesses in China and Europe. So, investors wait with bated breath.
Across the pond the UK’s fresh Labour Government finds itself in a bit of pickle. Many voters feel that PM Starmer and Chancellor Reeves have been slightly disingenuous suggesting a £22 billion black hole has appeared out of nowhere.
The Government knew that that public finances were not in good shape, endorsed by last week’s borrowing requirement being £5 billion above expectations. Let’s be candid. The Government knew the situation was far from perfect, the outgoing Government knew about it and the establishment also knew.
Its an old political trick, which the Conservatives played back in 2010, post the banking crisis to support their austerity policies. However, the UK’S total borrowings are £2.7 trillion up from £1.2 trillion in 2020/11; Therefore, £22 billion, in the grand scheme of the problem, is but a mere bagatelle.
Most people were aware that the public sector was in rags. – NHS, Education, Welfare, Defence, Prisons, Home Office – all of them needing more than a facelift. With PM Starmer’s and Chancellor Reeves’s promise of no increase in direct taxation, funds had to come from somewhere to finance the shortfall.
Cuts in public expenditure is one way of dealing with part of the problem. Voters had to be blind to think that taxation would not have to go up. Most people accept it as inevitable. However, what taxes?
The Budget is not until 30th October. However, speculation is rife and rumours on taxation are expansive and it’s all conjecture. The decision to withdraw the fuel allowance for pensioners will prove, I believe, to be ill-thought out and politically dangerous. The private school 20% VAT increase is political and spiteful. It will raise very little revenue and certainly not enough to encourage and finance 6,500 new teachers in a heartbeat.
This Government is quite rightly hell-bent on growth to dig the country of the economic mire. That is laudable. To get anywhere close to achieving that goal, will require massive inward investment, especially for Great British Energy, which will require funding totalling £7.3 billion.
Talk of penal increases on capital gains tax, inheritance tax, cuts to pension contribution allowances and possibly even a property tax would not be a good idea. The top 10% of the population already contribute 60.3% of the total income tax take. In July, about 60,000 were considered rich. It is thought that 9000 have already packed their bags against a pre-emptive tax raid and more will follow.
Thousands are already talking about taking remedial action, with many in the process of doing so. Accountants and financial advisors have never been in such demand. Also, any idea of further proposed windfall taxes on oil companies and banks could have negative connotations.
News of draconian tax increases against the better off, even though at present it is purely speculative, send a very strong and adverse message to international investors. The money must come from somewhere, but the government needs to be very careful, if it wants to finance its ambitious plans, not to metaphorically “throw the baby out with the bathwater!”
