Market Bulletin (06/03/2018)
The ‘Overton window’ refers to the accepted spectrum of political views in a given culture. Joseph Overton, its creator, argued that the window could in fact be shifted, bringing ideas once considered fringe into the mainstream. Last week provided further evidence of just such a shift.
It played out, at least in part, on Twitter, as Donald Trump confirmed plans to impose major tariffs on steel and aluminium imports to the US. Although China appeared to be the primary target of the sanctions – Beijing described the tariffs proposal as “stupid” – appeals by Canada and the EU to attenuate the new rules fell on deaf ears. When the latter warned that tariff rises might be reciprocated and that it might take the matter to the World Trade Organisation, Trump tweeted back that the US would then set a tariff on imported European cars.
Shares in Chinese steelmakers slipped on the news, while the S&P 500 fell 2% over the five-day period, following a stronger fortnight. Although the oil price slipped a little, comments made by the chair of the Federal Reserve were probably the bigger influence midweek. Jerome Powell delivered his first testimony before Congress as the new chair, forecasting gradual rate rises ahead, and warning that failure to raise rates could result in an “overheated economy”. Although his message was little changed from Yellen’s, his delivery was more forthright and less hedged, and was viewed as hawkish. The yield on the 10-year Treasury ended last week around 2.85%.
Back in politics, shifting ground was once again apparent in the Italian elections, as momentum swayed in favour of the Five Star Movement and Northern League, both of them anti-establishment, Eurosceptic parties. (UKIP was quick to laud the shift.) A hung parliament resulted; Five Star has won the largest share of the vote, and negotiations will be needed to determine some form of coalition. Italian stocks have had a particularly good run this year, although they have been sliding since Wednesday.
Politically, there was relief that protracted negotiations in Germany ended with a coalition deal – and Angela Merkel confirmed as chancellor. Growth across EU countries picked up significantly in 2017, although in the UK it fell to a five-year low. (Several leading economists also warned that the recent weather would hit first-quarter UK GDP growth.) The continent’s four largest investment banks are increasing staff numbers for the first time since 2015, and investors poured a record €729 billion into European funds in 2017. But the MSCI Europe ex UK fell by almost 4%, presumably on trade war fears.
In the UK, the FTSE 100 dropped 2.5%, taking its lead from the US but also reflecting its own internal disappointments. Profits at Hiscox, the British insurer, fell by more than 90% last year due to a series of costly natural disasters, while Martin Sorrell’s WPP, the multinational advertising and PR company based in London and Dublin, announced poor results, and faced accusations it has been too slow to embrace digital media. Laird Group, meanwhile, agreed to be bought out by Advent International, a US group, after 200 years as a UK company.
There was yet another twist in the tale for Rupert Murdoch last week, as Comcast made a late bid for Sky, potentially upsetting his plans to buy back the remaining 61% of Sky he doesn’t own before selling 21st Century Fox to Disney. The family saga shows no signs as yet of the Hollywood ending its chairman is looking for. 21st Century Fox’s share price slipped last week.
There was bad news on the high street: after a disappointing Christmas period, a January consumer spending decline followed that was the largest in five years. The UK franchise of Toys “R” Us fell into insolvency, as did Maplin Electronics, while Prezzo announced that it would be restructuring. This may reflect broader economic momentum – the week before last, it was confirmed that the UK economy grew more slowly than any other G7 economy last year.
Yet most of the focus was on politics, as three of the five living UK prime ministers (past and present) delivered major speeches or interventions on Brexit. Theresa May argued that both sides of the Brexit debate would ultimately need to compromise to bring the country together, and that the exit deal must respect the vote to “take control of our borders, laws and money”. She called for a permanent agreement that protects jobs and security, strengthens the union of the UK, and enables the country to remain “a modern, open, outward-looking, tolerant, European democracy”.
Earlier in the week, John Major used his platform to make the case for a free parliamentary vote on whatever deal was agreed, with the option for parliament to call a second referendum if needed. Tony Blair, meanwhile, argued UK citizens should undo a “historic mistake”; he claimed there was a 50% chance of Brexit not happening at all, and called on the EU to offer immigration concessions.
Brussels offered up its own opinions. The European Parliament, whose vote is needed to ratify any deal, said that the prime minister’s proposals for EU citizen visas had fallen too far short to win its approval. Meanwhile, the European Commission published its own draft withdrawal text, offering a fall-back position whereby Northern Ireland would maintain regulatory consistency with Eire. “No UK prime minister could ever agree to it,” came the reply from Number 10.
Yet Theresa May’s most immediate challenge may come from Europhiles on her own backbenches, some of whom last week expressed an interest in voting with Labour in favour of some form of EU–UK customs union, and even Labour Eurosceptics looked set to join the rebellion. The EU has already said it would probably reject Theresa May’s current customs proposal in short order. She will now be looking to move fast: as of Monday, the UK’s formal exit is due in 389 days.
There were signs of growing political confidence within two major emerging powers last week. Vladimir Putin used his annual state of the union address to announce that Russia had developed nuclear weapons capable of penetrating all missile defence systems, including those of the US.
The Communist Party of China, meanwhile, confirmed plans to remove the two-term limit on the Chinese presidency, an anti-authoritarian measure introduced after the Mao era. Questions remain over the implications for state-owned enterprise reform and private sector latitude. As it happened, Chinese factories last month suffered their largest fall in activity since 2011, hitting the share prices of some UK-listed mining companies.
Yet there were plenty of signs last week of positive economic momentum across emerging markets. India’s growth rate overtook that of China in the fourth quarter. A separate release showed that emerging markets issued a record amount of government debt in the 12 months to 31 January. New issuance of emerging market (EM) hard currency sovereign debt has increased by 70% thus far this year.
“The pick-up in issuance has been driven by two factors: higher risk appetite for EM debt and better funding costs available for EM issuers,” said Polina Kurdyavko of BlueBay Asset Management. “EM issuers were also keen to take advantage of a more risk-on tone and complete the bulk of their financing before core market yields rose further. At this stage we do not feel issuance has been excessive and do not see any signs of supply indigestion thus far. We are likely to see more issuance in the months ahead, in particular from the Middle East and North Africa.”
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