Market Bulletin (20/09/2016)
Blue Danube
Johann Strauss II’s father wanted his musical son to be a banker – and beat him for secretly practising the violin – but the ‘Waltz King’ had his way in the end. Last Friday the eponymous subject of his most famous waltz, Blue Danube, played host to a meeting of the leaders of all EU member states – all, that is, except the UK. Meanwhile, a thousand miles away on the ‘Bournemouth Riviera’, the UKIP Annual Conference was already in full celebratory mode – and naming its new leader.
Last week, the stream of economic indicators continued to offer a positive assessment of the UK’s outlook since the referendum. Inflation remained unchanged at a manageable 0.6% and retail sales barely shifted, while unemployment struck a post-financial crisis low of 4.9%, and even a cooling in UK house sales still left sales growth at 8.3% in the year to July. The CEO of Ocado warned that the supermarket price war showed no signs of abating – his company’s stock price quickly dropped 13% in response, despite an encouraging earnings announcement.
Yet opinion remains divided on the economic and financial impact of the Brexit vote. While some of George Osborne’s short-term doomsday predictions appear to have been averted, many economists argue that the 13% fall in sterling against the dollar implies that the UK itself has already been severely devalued (in global terms), adding that economic growth figures for the post-vote period will not be known for some time.
“In the UK, although consumption is so far holding up quite well, investment is starting to fall off; but it’ll be another quarter or so before the pattern for slowdown will start to show through in the economy,” said James de Uphaugh of Majedie Asset Management.
Markets appear to have shrugged the vote off, at least for the moment. The FTSE 100 may have slipped 0.98% last week, but it remains significantly above where it closed the night of the vote itself.
Among those that warned of the short-term risks posed by a Leave vote was the Bank of England. Last week, Mark Carney defended himself against accusations of scaremongering, arguing that the actions taken by the Bank of England over the summer had been one of the reasons behind continued confidence on markets. Nevertheless, the Monetary Policy Committee chose to leave both interest rates and its QE programme unchanged, although it did extend the limits of its purchasing mandate to include foreign companies. Further details of its purchasing plans made clear that energy companies were likely to benefit.
In fact, the Bank appeared to receive more attention for its launch of the new polymer £5 note than for its policy decisions. Aside of its durability and the difficulty of forging it, the rollout of the Bank’s new notes is also indicative of its monetary priorities. There will be no polymer £50 note, which has been interpreted by many as part of an attempt to stifle not just the underground economy but also ‘excessive’ saving.
There is much at the moment to back up Carney’s apparent argument that holding excess amounts in cash may not be advisable. But Cash ISAs and savings accounts are not alone in failing to match income requirements – annuity returns are also slipping. Figures released last week showed that 2016 was the worst year for UK annuity pay-outs in recorded history, and that average incomes for retiring pensioners have thus far fallen by 15% this year alone, according to Moneyfacts. Low interest rates and extended lifespans are the principal culprits. Moreover, interest rates are expected to remain ‘lower for longer’, making it all the more important to find the right blend of retirement income solutions.
Step in time
If Carney now receives less attention than he has become used to, the reason may be that central bank easing in the developed world has only so far left to run. Indeed, last week there were already signs on markets that expectations of central bank largesse were slipping – although some later switched back, it was notable midweek that $1 trillion of debt swung from negative-yielding to positive-yielding. Even German Bund yields temporarily turned positive after two months in negative territory. Moreover, the extent of QE has sparked fears of an excess of money in the system – a study published last week by Bank of America Merrill Lynch found that 54% of the fund managers it surveyed believe stocks and equities are overvalued – and valuations are at their highest since 2000. The Nikkei 225 slipped 2.6% last week on similar fears.
“We do feel that the UK, and the US especially, are late cycle in terms of economic expansion,” said Majedie’s de Uphaugh. “For the US, at 87 months and counting, this is the fourth-longest period of expansion since the Second World War.”
Ordinarily, the end of QE programmes and interest-rate-lowering schedules follow a significant upswing in growth. Such improvements are not much in evidence today. Instead, there is increasing recognition that accommodative central bank policy is getting ever less bang for its buck. As a result, expectations are turning towards politicians instead, and towards fiscal policy.
But if you were to choose a time to rely on politicians in the developed world, it probably wouldn’t be now. As EU leaders gathered at Bratislava Castle on the Danube last week, they did so with widely different agendas. Leaders in several Eastern and Central European member states are pushing hard for repatriation of certain powers from Brussels – not least border policies, an issue of almost existential significance for the EU. Moreover, many economists now argue that Europe needs both a coordinated fiscal response among EU members to sluggish growth, and increased centralisation of economic policymaking in the eurozone – neither looks likely for the moment. No wonder the mood was so blue.
The EU also faced enemies without last week, as the US Department of Justice slapped a $14 billion fine on Deutsche Bank for mis-selling mortgage-backed financial products in the run-up to the financial crisis. Deutsche said it had no intention of paying the fine but its stock slid quickly, taking several other banks down with it – the FTSEurofirst 300 ended the week down 2.2%. The fine is some four times bigger than had been expected.
Echo chamber
There was speculation that the size of the fine may have been in response to the European Commission’s recent decision to send Apple a €13 billion tax bill, although it also came on the eighth anniversary of the fall of Lehman Brothers – often viewed as the tipping point of the financial crisis. While far from being a trade war, any tit-for-tat measures risk tapping into growing anti-globalisation sentiment, and providing a headwind for cross-border investment.
Again, politicians appear to hold the key. Last week, Donald Trump set out his own economic vision for the US at the Economic Club of New York – trade protectionism is a crucial ingredient. Major increases in the tariffs placed on Chinese and Mexican goods would not only disrupt trade flows – and perhaps spark retaliatory tariffs – but could pose a risk to inflation. Last week, the odds on Trump becoming president shortened in the wake of Hillary Clinton’s bout of pneumonia – and her campaign team’s slowness to acknowledge it.
Nevertheless, the S&P 500 rose 0.46% over the week. Reports that US retail sales and industrial production fell in August added to expectations that the Federal Reserve would refrain from raising rates in the immediate term, as did dovish comments from one of the bank’s governors. While this helped to buoy markets, it was technology stocks that pushed the index higher late in the week, as a couple of recent technologies were launched at home and abroad.
In the US, Uber began trialling its self-drive taxis with residents in Pittsburgh, Pennsylvania and Apple launched the iPhone 7 worldwide. Meanwhile, Amazon began its UK launch for the ‘Echo’. The nine-inch smart speaker answers any question posed to ‘Alexa’, its voice service, as well as playing podcasts and music from your other devices – waltzes and all.
Majedie Asset Management is a fund manager for St. James’s Place.
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