Market Watch: Markets struggle for direction

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Team Asset Management offer their weekly round-up of the global markets

MARKETS struggled to move meaningfully in either direction last week. On one hand, further stresses in US regional banks and a lack of progress by rival political parties to reach a deal to increase the US government’s debt ceiling were grounds for concern but, on the other hand, the latest US inflation report offered some encouragement. The blue-chip S&P 500 fell 0.04% and the technology-focused Nasdaq gained 0.88%.

If rival politicians in Congress cannot agree a deal to raise the $31.4 trillion debt ceiling by early June, the US government will be left in a position where it is unable to meet all its spending obligations, potentially triggering its first-ever default on its debt obligations.

This scenario would be catastrophic for the economy and global financial system and it is expected that brinkmanship will give way to the national interest at some point. However, the closer we get to the deadline, the bigger the risk of a mistake.

Both sides are blaming the other for the impasse. The Democrats are pushing to increase the ceiling without any preconditions and the Republicans are demanding spending cuts. Donald Trump, frontrunner for the party’s 2024 presidential election candidate, used a televised town hall speech to put more pressure on Republican lawmakers to stand firm.

Away from politics, the back end of the quarterly corporate earnings reporting season saw mixed results. One of the biggest losers was Walt Disney and its shares fell nearly 9% on Thursday after it reported a loss of four million Disney+ subscribers during the quarter. Most of the losses were attributable to its Hotstar service in India, which lost the IPL cricket rights to Jio Cinema.

There was some better news on the monetary front and the losses incurred in its streaming services fell to $659 million, a 26% improvement on the same period a year ago. This was achieved by increasing subscription fees and cutting costs, particularly marketing expenses.

Disney’s theme parks performed much better and post-pandemic recoveries at its Shanghai, Paris and Hong Kong resorts helped to lift operating income to $2.2 billion, 23% of the same period a year earlier.

Shares in Richemont, the owner of Cartier and Van Cleef & Arpels, gained 3.5% on Friday after it reported record operating profits of €5 billion, a third higher than a year ago. The Swiss luxury group benefited from a strong performance in Asia, particularly China. Net cash rose to €6.5 billion, enabling the company to increase its dividend by 11% to 2.5 francs and announce a new share buyback programme.

Richemont’s chairman and controlling shareholder, Johann Rupert, admitted he was in constant friendly dialogue with LVMH’s chairman Bernard Arnault but was quick to deny that he had any interest in selling his business to the world’s largest luxury group. Richemont also turned down a deal with Kering a couple of years ago.

The Bank of England raised interest rates by another 0.25% on Thursday, taking its benchmark base rate to 4.5%, the highest it has been since 2008. The move was fully expected, with inflation still running above 10% in the UK, although there was some dissent on the nine-member Monetary Policy Committee. Swati Dhingra and Silvana Tenreyro voted for no change, arguing that previous rate hikes would be sufficient to bring inflation back down towards the 2% target rate over the medium-term.

The BoE forecasts that inflation will slow from 10.1% to 5.1% during the fourth quarter, higher than its previous forecast of 3.9%, and expects the UK economy will avoid falling into a recession.

In the US, the inflation outlook is more encouraging. On Wednesday, it was reported that annual consumer price inflation had fallen below 5% for the first time in two years, re-enforcing the view that the Federal Reserve will not raise interest rates any further. Prices for airfares, hotel rooms and new cars all fell during April.

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