Market Bulletin (03/07/2018)
The US economy, engine of global growth, appears to be firing on all cylinders. Seasonally adjusted second-quarter growth is now set for 5.3% on an annualised basis, according to figures released last week by Macroeconomic Advisers, up from the previous forecast of 4.6%.
If proved correct, that would make the current three-month period the fastest-growing for the US economy since 2003. Behind at least some of the surge lies a material reduction of the US trade deficit, down 3.7% in May (versus April). The narrowing was mostly due to a surge in exports, while imports rose only marginally. Had companies been changing their plans in light of politics?
Only last year, President Trump described Harley-Davidson as a “true American icon, one of the greats”. His view has
shifted since. Retaliatory EU tariffs against the US led Harley to announce it would have to move some production overseas. (One report put the cost to Harley of US steel and aluminium tariffs at $20 million – and the cost of Europe’s retaliatory tariffs at $45 million.) Trump’s response came last week when he opened a new $10 billion Foxconn factory a few miles up the road from Harley’s own Wisconsin headquarters. “We won’t forget [Harley’s decision] … watch, it will be the beginning of the end… they will be taxed like never before.”
The new Foxconn factory, on the other hand, will employ 13,000 people – in the US. “This is magnitude like nobody’s ever seen… I think we can say, [it is] the eighth wonder of the world.”
On markets, Harley-Davidson slowed while Foxconn’s share price rose. The broader S&P 500 ended slightly weaker, as trade war worries pushed business optimism to a four-year low. The US said it would limit Chinese investment in the States and ended up threatening tariffs on as much as $450 billion of exports from China; China then lowered tariffs for Asian neighbours and eased restrictions on foreign investment across a number of sectors. Donald Trump also returned to the theme of putting tariffs on EU car imports, but the EU warned of retaliation.
One of the US’s long-standing complaints against China has been that its cheap currency makes US exports uncompetitive. In June, however, the renminbi underwent its largest monthly fall against the dollar since China first established its foreign exchange market in 1994. China’s central bank has not yet intervened to arrest the decline, raising speculation it might use the currency as leverage with Washington. It did intervene last week, however, to ease reserve ratios for banks to aid growth.
Growth and trade fears helped push the Shanghai Composite index last week into official bear territory, defined as 20% below its previous peak. Another Chinese index, the CSI 300, closed at a fresh one-year low on Thursday. These falls came despite mainland stocks (‘A-shares’) being recently added to the MSCI Emerging Markets index, which tends to drive inflows.
Yet China’s market travails were not always repeated elsewhere. The FTSE 100 ended up for the week (and finished June with its best quarterly performance in five years). It was boosted in part by energy and mining companies, which account for a disproportionate share of the FTSE 100. A slight upward revision to UK GDP didn’t hurt either, nor did news that Andy Haldane, the Bank of England’s chief economist, had voted to raise rates at the last meeting. (Haldane even said that England’s recent cricketing and football success contributed to his reasoning.)
The agreement of a compensation deal for a mining disaster in Brazil pushed BHP Billiton’s share price up late in the week, as Shell and BP both rose. Brent crude ended the week at around $80, continuing its strong run; but over the weekend, the Trump administration leant on Saudi Arabia to increase production quickly, weighing a little on the price. As of last week, Saudi’s stock of domestic drivers is set to boom; for the first time since 1957, women were allowed to get behind the wheel.
If Washington is close to Saudi Arabia, so too is London. The kingdom now buys half the UK’s military exports, following a boost in the last couple of years that some commentators link to Saudi Arabia’s military participation in the Yemeni Civil War, which began in 2015. Last week, the UK’s defence secretary had much to celebrate as BAE Systems, the UK’s largest defence company, won a major contract to build Australia’s new fleet – nine Type 26 submarine hunters. The company’s share price rose in response.
As the England team faced off against Belgium in Kaliningrad last week, the UK prime minister was making her way to a European Council meeting in Brussels. It was not clear that she came away with a better result. The official Council communiqué expressed “concern that no substantial progress has yet been achieved on agreeing a backstop solution for Ireland/Northern Ireland”. She has since told her Cabinet that a bespoke deal will now not be possible ahead of the deadline.
Indeed, the issue of Brexit has become so charged in the UK that the prime minister last week witnessed the unlikely spectacle of representatives of both labour and capital uniting to pressurise her to make faster progress, as the Trades Union Congress and Confederation of British Industry (CBI) joined forces – echoing recent warnings by Airbus and BMW. Faced with the complaints, Jeremy Hunt said that “threats” from business were “completely inappropriate”; Iain Duncan Smith wrote in the Daily Mail linking the CBI to appeasement of the Nazis in the run-up to World War II; and Boris Johnson reportedly delivered a pithier, less printable retort.
On the high street, John Lewis announced half-yearly earnings barely above zero and the closure of five Waitrose stores; it expects profits to be significantly down for the year. The retailer plans heavy investment in technology across the business and rapid improvements in profitability at Waitrose.
Saving v. spending
On a more personal level, new research by The Wisdom Council underscores assumptions that consumers are saving too little, are taking too little risk, and have limited understanding of what to do with their money. The study, which was partly funded by St. James’s Place, shows that awareness of tax relief on pension contributions is still very poor across generations – only one in five recognise this as a feature of workplace schemes. The same research found that the gender pay and pensions gaps are exacerbated by a lower propensity amongst women to invest, greater lack of awareness and lower levels of confidence in their financial knowledge.
Furthermore, the Financial Conduct Authority’s retirement outcomes report, published on Thursday, confirmed that many consumers who go without financial advice struggle with making decisions, such as where to invest their pension and how quickly to draw it. The research also found that around one in three consumers who have gone into drawdown recently are unaware of where their money is invested.
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