Dollar tide turning, but too early to bank on a soft landing

November got off to a rather subdued start after an exceptionally strong October, the basis for which was the exceptional pessimism surrounding markets at the end of the third quarter. It was a quieter month in terms of earnings releases, UK prime minister reshuffles and political uncertainty, which was a nice adjustment. We saw some higher than expected inflation in the UK, some lower than expected inflation in the US and some strong performance in regional specific indices, particularly Europe, and moving to China as the opposition to lockdowns leads to a withdrawal of the Covid Zero policy.?

With earnings season for the third quarter coming to a close in November, attention was primarily on inflation data releases and interest rate decisions. US CPI figures were released on the 10th of November, with headline CPI coming in at 7.70%, below the 7.90% consensus figure. Many are suggesting that US inflation has now peaked, coming down from 9.10% just 3 months prior. The ‘trimmed mean’ measure favored by the Fed suggests this is the case, and that inflation is no longer accelerating. Following the release the S&P 500 increased 2.50% and the US 10 year bond yield fell sharply, towards a month end level of c. 3.60%

It was a far less volatile month for UK politics. Jeremy Hunt announced the UKs sweeping fiscal plan with the aim of vastly reducing the UK public spending deficit. It was received relatively well by markets with additional pressures on the average UK consumer expected on the back of the changes. The UK also released CPI data during November coming in at 11.10% YoY, above consensus estimates of 10.70%. During the month the Bank of England announced another 75bps increase in rates to try and stem the consistently high inflation. The FTSE 100 increased 5.50% in sterling terms throughout the month driven mainly by materials and utilities.?

It was in fact in currency markets that the sharpest moves were seen. The structural long dollar positions of the past two years saw significant unwinding during November, with the dollar index now close to testing it’s 200 day moving average. Changes in interest rate differentials do not explain the reason for the move, and it would appear that momentum has swung in favor of banking gains made during its previous ascent. Sterling has benefitted from the dollar’s decline, and also been boosted by the new government’s fiscal discipline, and could retrace further during 2023.

Towards the start of the month, we increased our exposure to European stocks whilst also increasing our overweight position to the region. Throughout the month, the Euro Stoxx 50 index was up 15.40% in dollar terms. European shares trade on a significant discount to their US peers, where there remains the potential for further earnings downgrades as the effects of monetary policy start to bite in 2023. A rotation away from the US towards Europe and China looks probable during the next 12 months.?

The Martello Global Equity fund was up 7.54% over the month with the Morningstar Developed Market Index up 7.07%. The biggest contributors within the portfolio were iShares Metals and Mining ETF (+22.77%), HSBC (+17.86%) and Glencore (+16.69%) and the detractors included SAP (-3.25%), Schlumberger (-0.92%) and ASML (-0.62%). The latest factsheet for the fund can be found on our website here

It was a relatively active month in terms of trading on the fund with inflows apportioned across the portfolio. We sold Catalent and BT, both of which were struggling over all meaningful time periods and producing too much downside volatility to justify maintaining their positions. We reduced our Tech ETF exposure and ?purchased SAP, ASML, Texas Instruments and CGI during November, focusing on specific sectors within the technology space whilst also increasing our European regional exposure.

The last two months has seen a clear win for ‘team soft landing’ but it’s important to note that whilst the inflation data has supported this, economic data in the US remains strong, particularly with regards to payrolls and services. Complacency has crept back into markets and whilst the terminal rate for the US may now be more certain, the duration of restrictive policy is still unknown, and may well upset the current scenario at some point in 2023.