Market Bulletin (21/11/2017)
Tranquil times
A report last week showed that half of the world’s wealth is owned by 1% of its people. In an interview in the UK on Thursday, Joseph Stiglitz, the Nobel prize-winning economist who advised Bill Clinton and Jeremy Corbyn, said that the election of Donald Trump had been a direct result of rising inequality.
Prince Muhammad bin Salman has adopted a more direct approach to the problem. Last week, hundreds of Saudi Arabia’s wealthiest royals, politicians and business leaders were being held under ‘house arrest’ – in Riyadh’s Ritz Hotel – where they were offered their freedom in exchange for a proportion of their wealth – in one reported case, 70% was demanded. Prince Muhammad’s initiative aims both to punish graft and to shore up the state coffers.
Yet when it comes to political hijinks and rising inequality, investor insouciance apparently knows no bounds – at least in stock markets. Since the shock election of Donald Trump, US stocks have enjoyed their least volatile 12-month period in 50 years. Curiously enough, the last time a 12-month stretch was so calm, John F Kennedy was not long dead, there was a presidential election, and a new resolution was passed to enable a US escalation in Vietnam – hardly politics as usual.
As it happened, the Saudi turn of events did have one notable market outcome: the price of oil went up. Since that initial spike, oil has lost some ground but remains buoyed all the same. Last week, Opec also raised its demand forecasts for 2018. A barrel of Brent crude ended last week above $62; until this month, oil was last at $62 in mid-2015. The fuel is arguably not quite as dominant on markets as once it was – at the start of 2017, total oil consumption accounted for 2.05% of global GDP, against 7.5% in the early 1980s, or 5% just five years ago.
Energy stocks have not enjoyed a particularly strong year, despite the price rise. Last week, the Norwegian sovereign wealth fund, a significant force on markets (with more than $1 trillion in assets), announced it would be selling off its energy holdings, which account for 6% of the fund, and a few other investors quickly followed suit. The S&P 500 Energy index is down by more than 10% this year, which is a far cry from the hi-octane performance of the broader S&P 500. The latter was flat last week (down just 0.02%), held back by some disappointing corporate announcements, not least GE announcing restructuring plans and a hefty reduction to its dividend. Conversely, WalMart’s share price rose after it announced its strongest US sales in eight years, stoking speculation over the capacity of Amazon to dominate the sector. Despite the mix of results, investors are hardly suffering – the third quarter saw global dividends growing at the fastest rate in three years.
Earnings were varied in Europe too. EDF was a particular low point, as the power company saw profits fall due to delays in its nuclear projects. There was better news for Airbus, which agreed its biggest ever deal to sell 430 aircraft to low-cost airlines for $50 billion. The FTSE 100 was down 0.7%, while the Eurofirst 300 slipped 1.3%, although growth in central Europe struck a nine-year high, boosted by Germany. Coalition talks in Berlin, however, failed on Sunday night, casting doubt over Angela Merkel’s future. The euro slipped against the dollar in response but only temporarily.
Meanwhile, Japan clocked its seventh consecutive quarter of economic growth, marking its longest run since 2001. The Nikkei 225 enjoyed a strong session on Friday, helped by gains across most sectors, but ended down 1.3% for the five-day period after a nine-week winning streak. Household incomes in Japan continue to rise and recent momentum may yet finally return inflation to healthy levels – inflation’s long absence in Japan has turned it into a holy grail for policymakers.
Deflated expectations
Inflation in the UK, on the other hand, persisted at 3%, meaning it remains significantly above target. The most important contributor was food inflation, which rose at its fastest level in four years. The UK imports around half of its food, mostly from the EU. The continued high for inflation arguably validates the Bank of England’s recent interest rate rise, but that will come as cold comfort for savers, since at the start of last week just 17 of the 150 providers in the market place had passed on the rise to savers. Even for those that did, there remain no UK savings accounts offering a rate that matches inflation. It is an expensive time to be holding cash.
Both Theresa May and David Davis showed increasing signs of acquiescence over the nature of the UK’s EU exit. The prime minister agreed to let parliament hold a vote on the EU divorce deal, while David Davis promised City firms a bespoke travel deal for the two-year transition period. At the end of the week, however, he took a more pointed turn, claiming that France and Germany were blocking the UK from making progress on a deal, whereas other a number of countries were more flexible – among others, he listed Italy, Spain and the Netherlands.
Members of the Dutch parliament apparently saw matters somewhat differently. The parliament’s European Affairs Committee last week said it was time to start preparing for a no-deal Brexit and blamed the UK’s “unrealistic expectations” and “inconsistency”. Its report concluded: “What was long considered impossible is suddenly thinkable: a chaos scenario in which the UK abruptly leaves the EU on 29 March 2019 without an exit agreement, a transition period or a framework for future relations.”
Yet by the end of the week, it appeared that the greatest stumbling block to the UK progressing to phase two of negotiations in December might in fact be the Irish border question. The disintegration of the Northern Irish government meant that UK ministers imposed a £10.6 billion budget, bringing the province a step closer to rule from Westminster. In more ordinary times, this would win plenty of attention but, instead, it was the words of the Irish Taoiseach that caught the headlines. Shortly before a meeting with Theresa May, Leo Varadkar warned that he would block UK-EU negotiations progressing to phase two, unless the UK was willing to sign up to ruling out a hard land border between Ireland and Northern Ireland. On Friday evening, Donald Tusk stepped in to say that the UK needed to make a meaningful offer on both the exit bill and the Irish border question before negotiations could move onto the second phase.
There was pressure in the other direction over this week’s Budget, however. Jacob Rees-Mogg MP said that Philip Hammond should be willing to announce an increase in spending, as part of taking a more “optimistic” line on Brexit, echoing the recent comments of John Redwood, a fellow Conservative MP. The chancellor has made clear on several occasions that his priority is deficit reduction. Reports on Friday evening said he was planning to take advantage of a change in the accounting status of housing associations to offer him £5 billion more in slack. Moreover, the continued lows for gilt yields suggest investors might themselves cut the chancellor some slack for fiscal stimulus. Two-year gilts ended the working week trading just below 0.48%, which is below the Bank of England rate of 0.5%. The UK’s debt-to-GDP ratio reduction plans are also slightly ahead of budget.
There was speculation that the chancellor might cut stamp duty for first time buyers, toughen tax rules for non-doms and extend a crackdown on illegitimate self-employment. However, he is also known for his caution and will be eager to avoid a repeat of the post-Budget U-turn forced on him last time round – not to mention adding another gaffe to his comment on weekend television that there are “no unemployed” in the UK. Hammond warned Cabinet colleagues last week that he would stick to his own fiscal rules. Given the track record of chancellors past, it would certainly be a radical approach.
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