Market Bulletin (30/05/2017)
Machine learning
For more than 2,500 years, the Chinese game of Go has continued to attract new players, making it perhaps the oldest board game in the world with an unbroken history – it is also probably the most complex. Its longevity makes last week’s watershed all the more striking: in a game held on Thursday in the city of Wuzhen, near Shanghai, the current world number one lost to a computer program called AlphaGo.
Half the world away in Detroit, meanwhile, the CEO of Ford was losing his job after less than three years in post, to be replaced by the head of the company’s driverless cars division. The carmaker’s chairman said that the new CEO would modernise the business by focusing on artificial intelligence, robotics and 3D printing.
It is all too easy for investors to get carried away by such developments, as many found to their cost when the dotcom bubble burst in 2000. Yet technology companies have announced healthy results this year, and fears over Donald Trump’s policies creating headwinds for the sector appeared to have subsided. Last week the NASDAQ Composite Index, which is dominated by tech companies, enjoyed another strong run, rising more than 1.5% – it has gained more than 14% so far this year.
The S&P 500 also enjoyed a buoyant week, recovering quickly from the previous week’s dip to rise 1.4% over the five-day period – it closed at a record high for three days in a row. Among the reasons behind the rise was that minutes of the Federal Open Market Committee’s latest meeting, published last week, showed that the Fed intends to unwind its $4.2 trillion balance sheet (i.e. sell off the bond holdings acquired post-crisis) only very gradually.
The world’s leading index has had a strong year – despite the S&P 500’s sectoral breadth, most of its 2017 rise has been accounted for by technology companies. Sectoral surges and retreats are not uncommon on markets – when they happen, it is disciplined active investors who are best placed to benefit from any distortions.
As Donald Trump took a tour of several major allies in the Middle East and Europe, the US media provided reasons for him to remain abroad. The Russia scandal continued to hold headlines, while his launch of a new budget, which has many legislative hurdles ahead, met with immediate criticism. Major sticking points included an assumption that the budget could be balanced by 2027, a plan to make severe cuts to social provisions, and the contention that improved growth would compensate (in tax take terms) for the tax revenues forfeited by the president’s proposed tax cuts.
United response
The most significant moment of the week came at its beginning – a terrorist attack on a concert in Manchester in which 22 people were killed. Foreign leaders expressed solidarity with the victims, UK political parties put their campaigns on hold, and the city itself came together in grief.
Campaigning resumed late in the week, and there were immediate reminders of how much the polls had changed since April, as one poll showed the Conservative lead had been cut from 23 points to just five. Although Theresa May’s U-turn on social care costs was well-publicised, the poll change came largely from Labour gains rather than Tory losses. The possibility of a hung parliament is one investors tend to dislike, as it points to uncertainty. Meanwhile, the Institute for Fiscal Studies warned that neither party’s manifesto had “set out an honest set of choices” to the public over tax and spending plans. It particularly criticised Conservative policy on immigration and Labour spending pledges.
Domestic indicators told a varied tale. The UK had already reported meagre economic growth in the first quarter but last week it was revised down still further to just 0.2% – against 0.7% in the fourth quarter of 2016.
Yet other indicators pointed the opposite way. The Bank of England continues to issue gilts at historically low rates and business sentiment remains bullish. Multinationals listed on the FTSE enjoyed a strong period after the referendum, thanks to the fall in sterling, but the tide may now have turned. The domestically focused FTSE 250 broke through 20,000 for the first time in its history, while the FTSE 100 rose more gently by 1%. Among UK companies, Jaguar Land Rover saw profits hike 9%, while M&S appeared to please investors – the CEO said its position in the clothing market was finally stabilising after five rocky years – despite a sharp fall in earnings last year on lower sales and higher costs.
Meanwhile, UK pensions came under scrutiny at home and abroad. The Pensions Regulator published figures which showed that 67,700 people transferred out of defined benefit pension schemes in the past year, attracted by the high transfer values on offer. But the World Economic Forum (WEF) pointed to longer-term challenges, warning that the UK government needs to impose faster pension age rises, lest it face a £25 trillion shortfall by 2050. The WEF said that the UK was one of a number of countries facing a “pensions time-bomb”.
Business boost
Yet it was in Continental Europe that business sentiment was most pronounced last week, as figures showed that the hiring rate in the eurozone has hit its highest level since the global financial crisis. Moreover, the leading business sentiment indicator struck a new high for the single currency area – Germany and France both posted strong individual results too. A separate survey of confidence among German businesses by the Ifo Institute for Economic Research in Munich also struck a record high.
Capital continued to flow into European stocks last week, helped in part by continued optimism on the back of Emmanuel Macron’s election as French president. Yet the Eurofirst 300 ended the week down by 0.11%, as auto and oil stocks struggled. The price of a barrel of Brent crude slipped midweek to below $52 on oversupply fears, paring back gains on a number of major indices worldwide, including the Nikkei 225, which rose 0.49%.
Other commodities are facing much tougher times, however. Iron ore has been the worst-performing commodity of the year, and last week Fortescue, the world’s fourth-biggest producer, warned that the price may yet need to decline further due to oversupply. Commodities traders have suffered their worst first quarter in more than a decade this year; revenue from commodities has fallen 29% year on year at the top 12 investment banks.
Low prices should be good for China, the world’s leading consumer of iron ore, which is the main constituent of steel. Last week, however, the country had more immediate concerns as Moody’s, the US ratings agency, downgraded the country’s credit rating from Aa3 to A1. Moody’s put its decision down to China’s failure to reform its financial sector, but China’s finance ministry publicly criticised the decision – which also means an automatic downgrade on the ratings of 26 major state-owned enterprises. Less noticed was the credit agency’s upgrade to its outlook for China from stable to positive, which may please the Chinese Communist Party ahead of its key five-yearly National Congress later in the year.
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