Market Update – 9th August 2023.

10th August 2023

Rainy days in July kept UK shoppers indoors. The British Retail Consortium (BRC) reported that sales rose by 1.5% compared with July last year, which is less than half the 12-month average growth rate. Clothing and footwear retailers in particular, who normally enjoy a surge in summer purchases, saw sales instead decline and this added to an overall 0.5% fall in non-food sales leading up to July.

This latest data supports our decision to reduce exposure to consumer-facing sectors; while UK consumers have so far remained resilient in the face of sticky inflation and rate hikes, we are now starting to see these taking their toll, reducing shoppers’ abilities to keep passing their card across the register. And yet, to keep profit margins high, we are beginning to see a rise in discounts from retailers trying to entice people to spend. It will be a little while yet before we see whether this can be achieved, however, owing to the recent raises to interest rates have not yet been fully realised in the wider economy.

Turning to Europe, Italy has passed a one-off 40% tax on bank profits derived from higher interest rates. European banks’ stocks experienced a decline after this unexpected decision, as concerns arose about the possibility of other nations taking similar actions. The revenue generated, approximately €2 billion (£1.7 billion), will assist mortgage holders and enable tax reductions, as stated by the government. The levy’s proceeds are earmarked to aid families impacted by the heightened interest rates. Italy’s parliament must now ratify the tax decree as law within 60 days.

In the US, Moody’s Credit Rating Agency has adjusted the credit ratings of 10 midsize banks by one notch, although we fear this is yet again another transient storm in a teacup. US banks have had a commendable rebound since March; they have exhibited excellent credit quality, and there have been no systemic risks found in the area. Moreover, many regional banks even reduced exposure to uninsured deposits after this year’s banking turmoil, which will act as a safeguard against sizable deposit withdrawals of the kind we witnessed with SVB and First Republic Bank.

Also this week we are expecting UK GDP data for Q2, US PPI & initial jobless claims and US CPI data, which investors will be hoping for further signs of cooling.

Nicola Tune, Portfolio Specialist