Market Bulletin (05/09/2017)
Summer saga
It was not a quiet and sunny month on markets. The August performance of the S&P 500 and FTSE 100, leading indices for the US and UK respectively, looks decidedly alpine, with peaks and valleys that in many cases reflected a high level of sensitivity to global politics. The VIX, which measures S&P 500 volatility, recorded two significant spikes in August, doubling the number seen so far this year.
Despite the craggy trajectory, however, the S&P 500 ended the month in the black, buoyed by an odd pair: technology and utility stocks. It finished last week up 1.4%, as healthcare and technology stocks both enjoyed strong weeks and as revised GDP data showed that the economy had grown faster than expected in the second quarter. Concerns over Hurricane Harvey persisted, while the saga of North Korea’s nuclear programme became more dangerous than ever at the weekend, as the hermit state conducted a weapons test of what it claimed was a hydrogen bomb. The test generated an earthquake with a magnitude of 6.5 and drew strong criticisms from the US, Russia and China.
More direct US economic concerns also made themselves felt last week, in the form of disappointing jobs and wages figures in the monthly payroll report – a publication that had been delivering largely good news in previous months. Employment figures rose by 156,000 in August, against a forecast of 180,000, potentially denting the Fed’s growing hawkishness over interest rates.
Government funding is also a growing concern, as the perennial need to raise the US debt ceiling approaches – and requires a Congressional vote. Last week, leading credit agencies voiced their own concerns. S&P Global warned that failure to raise the ceiling in time would probably be “more catastrophic” than Lehman’s fall in 2008, while Fitch Ratings said that such a failure would lead the agency to downgrade US debt from its current AAA rating.
Meanwhile, business leaders in both the US and Mexico began to look at legal options to defend the status quo should Donald Trump follow through on threats to bring to an end the North American Free Trade Agreement (NAFTA), a trade agreement between the US, Canada and Mexico that has been in place for 23 years.
What protectionism?
Whether the president chooses (or is able) to follow through on such plans remains to be seen. Yet there is no uncertainty over the current trade momentum at America’s ports. Six of the nine largest US ports have broken monthly traffic records in the past year – and August was the busiest month on record. The rise was seen in both imports and exports, which enjoyed a combined year-on-year rise of 6% in the first half of 2017.
In part, this may reflect the growing willingness of consumers and companies alike to spend money. The summer earnings season in the US pointed to supportive tailwinds in the corporate sector, while the weaker dollar may be helping US exporters.
The US is buoyed by global trends too. Indicators for each of its five largest trading partners – the EU, China, Canada, Mexico and Japan – have offered reasons for confidence in recent months. Canada recently struck its highest growth rate in six years, while the US’s other NAFTA partner, Mexico, has just seen its growth forecast upgraded by its central bank.
In China last week, manufacturing surveys showed confidence in the sector rising, with one leading survey striking a six-month high. In Japan, where growth (if not yet inflation) has recently found new momentum, labour shortages last week fell to a 43-year low, with an average 1.52 applicants per job advertised. The Nikkei 225 ended the week up 1.2%, helped in part by a falling yen.
Unity pitch
The US’s largest trading partner, the European Union, enjoyed perhaps the strongest week of the lot, as consumer confidence rose to its highest level since July 2007 – before the global financial crisis. The growing bullishness was felt across a range of sectors, as both industry and services showed signs of momentum. Italy’s official economic confidence measure struck a ten-year high, and Germany’s Ifo Business Climate Index set a new record. Moody’s has upgraded its forecasts for European growth.
Moreover, there were encouraging political signs for Emmanuel Macron, the French president, despite a sharp decline in popularity since he took office. Among his more contentious policy proposals is his labour reform plan, but last week unions provided unusually muted opposition to the president’s offer of further detail. The plans include a number of measures designed to increase corporate confidence and investment: capping the damages that courts can make employers pay for wrongful dismissal; allowing businesses with fewer than 50 workers to negotiate deals with employees directly; and permitting larger companies to make isolated agreements with unions – and even sometimes organise employee referendums.
Such plans play well to German ears, which is just as well for Angela Merkel, as last week the German chancellor finally came off the fence – or at least edged a little to the side – over the French president’s call for a common eurozone budget. Merkel said she now favoured a “small” common budget, with a regional finance minister to steer economic terms. The chancellor is known for her caution – thus the introduction to the German language of ‘merkeln’ (meaning, roughly, ‘to dither’). Yet she also has a strong standing in the polls ahead of this September’s federal elections, and may be keen to capitalise on the current Franco–German momentum while it lasts. The Eurofirst 300 ended the week up 0.55%, aided by corporate earnings, but the euro remains historically strong against both the dollar and the pound.
Cooling on cash
The EU is having less success in the latest round of Brexit negotiations, which continued last week. David Davis and Michel Barnier could barely contain their frustration with one another in a joint press conference. As it happened, there had been some progress on frontier workers’ rights and the UK–Ireland common travel area, but not on the larger matters of the UK’s exit bill; judicial supervision for the new agreement; and the contours of the broader negotiating process that lies ahead. Barnier said “no decisive progress” had been made while Davis said that the EU needed to show greater “creativity” in its approach.
Meanwhile, on a visit to Japan the prime minister announced her plan to stand for re-election in 2022, apparently blindsiding many in her own party. There were encouraging signs back at home for Theresa May, as UK manufacturing sentiment struck a four-month high, suggesting growing momentum for the sector. The FTSE 100 ended the five-day period up 0.5%, its gains largely eked out by energy companies.
Figures released last week by HMRC suggest that an increasing number of UK savers are turning to equity markets in the search for better returns, at the expense of low-paying cash alternatives. Subscriptions to Cash ISAs fell by a third in the last tax year – down nearly £20 billion. In contrast, a rise in Stocks & Shares ISA subscriptions means that the amount invested in Stocks & Shares ISAs has overtaken the total value of Cash ISA savings for the first time.
The new personal savings allowance is one factor contributing to this trend, but low interest rates continue to frustrate savers. Data released this summer by Moneyfacts revealed that the average no-notice Cash ISA rate has fallen by a third in the last year, to just 0.61%. Of 1,721 savings products on the market, none offers a rate that beats inflation. It is sobering to consider that more than £1,585 billion is held in retail savings accounts (according to the Bank of England) – all of it is losing money in real terms. Moreover, a BBC survey published early this week shows that most economists do not expect UK interest rates to rise until 2019. Those still relying on cash for long-term savings needs continue to face a mountainous challenge.
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