Monthly Market Update - June 2013

Welcome to the first of our Monthly Market Updates, where we provide a brief synopsis of financial markets over the last month.

• June 2013 finished on a subdued note for many investors. Although most leading equity indices still ended the first half of the year in positive territory, as we expected volatility continued to hit markets and share prices experienced widespread falls over the month, with investor sentiment undermined by concerns from both west and east.

• The US Federal Reserve sent shockwaves through equity markets with suggestions policymakers would consider scaling back their programme of asset purchases (quantitative easing) if the economy continues to demonstrate a sustained recovery (For an explanation of quantitative easing click here: http://en.wikipedia.org/wiki/Quantitative_easing )

• Here in the UK, investors were cheered by the news the UK economy had not in fact suffered a ‘double-dip’ recession during the first quarter of 2012 , although the recession of 2008/9 had proved more severe than originally calculated.  Nevertheless, UK investors remain preoccupied over the relatively fragile outlook for the domestic economy and were further perturbed by developments in the US and China.

The UK is set to avoid falling back into recession, according to the British Chamber of Commerce (BCC). They believes a strong performance by Britain's service industries during the first three months of the year has kept the economy growing. The weakness of the pound has also given exports a boost, it said.

The BCC's survey of more than 7,000 firms also showed improvements in the manufacturing sector, although employment had weakened.

David Kern, BCC chief economist, said the results suggested the economy had continued to grow in the first three months of 2013. He said this was contrary to the picture of the economy being painted by official figures.ading the main story "These results provide a glimpse of the as-yet-distant sunlit uplands of recovery. The survey reinforces our assessment that recent [official] gross domestic product figures have exaggerated the weakness of the UK economy and the volatility in output," he said.

"If an announcement of negative growth in the first quarter is misleadingly described as a triple-dip recession, confidence will again be damaged unnecessarily."

The number of loans being offered by banks has continued to fall in spite of the Funding for Lending Scheme (FLS). The scheme, which began in August last year, was designed to encourage banks to lend more money, both to individuals and businesses.

However, the Bank of England has announced that net lending fell by more than £2.4bn in the final quarter of last year. Lloyds was amongst the banks that lent less, while Barclays lent more.

In total, £80bn is being made available to banks at reduced interest rates, but only if they guarantee to lend that money on to Britain's small and medium-sized businesses, as well as individuals.

The UK has lost its triple-A credit rating for the first time since the 1970s. Moody's, one of the three biggest credit rating agencies in the world, has downgraded its assessment of the outlook for the UK economy.

Moody's now expects that economic growth will be "sluggish" into the second half of the decade. This means it will take longer for the government to reduce its budget deficit - the amount it has to borrow every year because it is spending more than it receives in tax revenue.

The lack of growth makes cutting the deficit more difficult because when an economy is not growing, less tax is coming in from companies and individuals, while the government has to spend more on welfare payments, such as unemployment benefit. And as the UK's debt problem will take longer to get under control, there will be a deterioration of the country's "shock-absorption capacity".

In other words, it will make it harder for us to cope with any external problems, such as a worsening of the crisis in the eurozone, our main trading partner.

The UK's big banks will be separated if they fail to follow new rules to ring-fence risky investment operations from High Street outlets, Chancellor George Osborne has announced.

He has said taxpayers are angry at banks' behaviour and will never again be expected to bail them out.

His speech comes on the same day the government introduces its Banking Reform Bill in Parliament.

Customers will also be able to switch bank accounts to a rival within a week.

Mr Osborne also said the banking system was not working for its customers, particularly small businesses and individuals.

Families are being left financially vulnerable as interest on existing debts is eroding money set aside for emergencies, a charity has warned. The StepChange debt charity suggests that UK households face debt interest payments of £189 a month on average. It suggests this is eating into their financial buffer for unexpected expenses, such as a broken boiler.

A separate report suggested that one in five people were set to retire in 2013 still having outstanding debts. The survey, for insurer Prudential, found that the proportion of potential retirees with debts was the same as 2012, but the amount that they owed had fallen by about £7,000 to £31,200.

If you are being affected by this or would like to discuss setting up an emergency fund please get in touch.

A summary of the key points

• The Office for Budget Responsibility cut growth forecasts for 2012 down from 0.8% to -0.1%. Next year’s estimate was revised down to 1.2% from 2%.

• Borrowing in the current financial year has been revised lower to around £80bn, thanks mainly to the coupon transfer from the Bank of England’s gilt holdings. It is expected to rise to £99bn in 2013-2014.

• The DMO has announced a cut in the number of Treasury bill auctions of £15bn in the current financial year following the downward revision to borrowing. This has benefitted the short-end of the yield curve, but 30 year yields have risen. This afternoon, 10 year yields are at 1.76%.

• The Chancellor announced a number of fairly significant tax changes: the 3p rise in fuel duty planned for January has been scrapped while corporation tax will be cut in April 2014 from 22% to 21%.

• Mixed news on pensions - the annual tax free allowance will be cut to £40,000 from £50,000 in 2014 while the lifetime allowance will be reduced to £1.25m from £1.5m. However, the capped drawdown limit for pensioners is being increased from 100% to 120%.

• For higher earners, the threshold for paying 40% income tax is being increased by 1% in both 2014 and 2015 but still at a slower pace than inflation. Capital Gains Tax and Inheritance tax exemptions will also be increased by 1%. The basic income tax threshold is to be raised by more than previously announced, to £9,440.

• The Chancellor hopes to raise £5bn over the next six years in tax from undisclosed Swiss bank accounts through a treaty with Switzerland. There were also a number of measures announced designed to combat tax evasion including 2,500 more inspectors.

• The ISA limit will be increased in April to £11,520 while the government plans to consult on allowing investments in small and medium scale enterprises equity markets like AIM to be held directly in ISAs.

• A number of infrastructure investments were announced for road, rail and broadband services.

If you would like to discuss any of these changes please get in touch

The British Chambers of Commerce (BCC) has increased its forecast for UK growth for 2012, but still expects the economy to shrink. The UK will shrink by 0.1% this year, less than the 0.4% contraction it had predicted previously, the BCC said. That is "entirely due to the stronger-than-expected" growth in the last quarter, helped by the Olympic Games.

But it now sees growth of 1% for the whole of 2013, down from the 1.2% it had forecast in September.

"As we wait in anticipation for the chancellor to deliver his Autumn Statement tomorrow, our new forecast highlights the challenges still facing the UK economy over the months and years ahead," said John Longworth, director-general of the BCC.

A brief roundup of key events over the last few days:

• Mark Carney has been named as the new governor of the Bank of England by Chancellor George Osborne. Mr Carney, the governor of the Canadian central bank, will serve for five years and will hold new regulatory powers over banks. He was a surprise choice for the head of the UK's central bank and had previously ruled himself out.
• The UK economy grew by 1% between July and September, official figures have confirmed. The Olympic Games helped to boost growth over the summer. Compared with a year earlier, as opposed to the previous quarter, the economy contracted by 0.1%, whereas the previous estimate had shown flat growth.
• Eurozone finance ministers and the IMF have reached a deal on an urgently needed bailout for debt-laden Greece. They have agreed to cut debts by 40bn euros ($51bn; £32bn) and have paved the way for releasing the next tranche of bailout loans - some 44bn euros.

With the ongoing struggles for UK businesses receiving much press coverage, there have been mixed messages about their future prospects, depending on whether your rose-tinted spectacles are on or not.

According to Business Secretary Vince Cable, there are "reassuring" signs the economy is continuing to recover and there is a "more upbeat mood" among the business community. "In the UK we have had a difficult time, but there are some reassuring figures on job creation, falling unemployment and business start-ups," Mr Cable said.

However, more than one in 10 shops is empty, according to the British Retail Consortium (BRC), the highest since it began collecting data on occupancy levels of High Street premises. The BRC said the town centre vacancy rate of 11.3% was the worst figure since its nationwide survey began in July 2011.

Clearly there are reasons to be optimistic but there may well be more pain for our high streets and businesses before we can be sure things are on the up.