Market Bulletin (07/08/2018)
According to IMF definitions, the last global recession lasted from 2009 to 2010. Yet if the memory is increasingly hazy, the effects are very much still present. ‘Pump priming’ an economy during a recession has a long history, and usually involves a mix of increased government spending, lower interest rates, and lower taxes. But the response to the global financial crisis was of a different order, as central banks around the world began a process of injecting their economies with trillions of dollars via the purchase of government (and some corporate) bonds.
The unprecedented move continues to loom large on markets. Last week, three of the world’s leading central banks communicated to markets just how quickly they intend to return monetary policy to something like normality. If they had a collective take, it was that, even a decade after the crisis began, they weren’t going to be rushed, although each of the three had its own particular line.
In the US, the Federal Reserve chose to leave interest rates unchanged, although it continues with its policy of scaling back its presence in the market via quantitative tightening. Despite the rate hold, it still stirred market interest with suggestions that another rise was not far off. As a result, markets are now pricing in an almost 90% chance of a rise in September. The 10-year US Treasury yield – the world’s most important bond yield – crested above 3% for the first time since May in response.
Indeed, the Fed arguably has more reasons than most central banks to tighten financial conditions – despite the US president making clear his opposition to rate rises. The reality is that US growth is outperforming where so many other major economies are falling short of their own long-term averages. (Eurozone growth for the second quarter – published last week – came in at its slowest rate in two years.) On Friday, the all-important US payrolls report confirmed that unemployment sits at a nearly two-decade low.
Moreover, US earnings season is delivering plenty of good news. Thus far, S&P 500 companies have outdone earnings expectations by an average of more than 3%. Utilities, healthcare and technology companies have been particularly strong. By contrast, corporate earnings in other major economies are lagging.
The headline news for earnings and markets came from the world’s largest listed company. Founded in 1976, Apple last week became (by most mainstream estimates) the first company in history to be valued above $1,000,000,000,000 – otherwise known as a trillion dollars. The company reported its best-ever earnings, with demand for increasingly expensive iPhones proving buoyant, and services revenues striking new highs.
The ensuing share price spike came despite recent market troubles for the technology sector. The S&P 500 Information Technology Index is struggling; Morgan Stanley said last week that the sector was in the midst of a market correction. Indeed, one recent analysis found that 40% of US tech listings have this year suffered a market correction, which is defined as a fall of 10% or more from the last peak. That includes big names such as Netflix and Facebook, but it is not simply a US phenomenon – Baidu and Alibaba in China have also suffered corrections.
Brewers continued to struggle in earnings season, amid the rising popularity of spirits. Beer’s share of the US young drinker market in 2016 was 43%, down from 65% a decade earlier. Anheuser-Busch InBev was among those to suffer after posting earnings figures that fell short of expectations.
Elsewhere in the world, earnings season was more mixed. Volkswagen delivered record revenues but its share price suffered due to its warnings about a volatile year ahead. In the UK, Barclays bounced back with £1.6 billion in profits (up 10%). But worrying signs persisted for the retail sector: House of Fraser is now fighting for its survival after a Chinese fashion group annulled its potential rescue investment; Mothercare, New Look, CarpetRight and Debenhams have all been struggling lately – problems at Debenhams have also hit the share price of Sports Direct, which owns a 30% stake.
Yet if UK high street woes afflicted one sector in particular, worries about tariff wars are not limited to a few exporters or manufacturers. Indeed, Bespoke Investment Group research found that tariffs were mentioned in almost 40% of S&P 500 earnings calls for the second quarter – up from below 17% in the first. Concern is understandable. In fact, since that research, the argument appears to have worsened. Last week, Donald Trump threatened to impose not 10% (as previously touted) but 25% tariffs on $200 billion of Chinese imports to the US. In response, China pledged to impose new tariffs on $60 billion of US goods if the US administration followed through on its threat.
Beijing won’t be encouraged by the latest Chinese business activity numbers either; official surveys of service providers and factories pointed to lacklustre domestic demand and limited investment. The leading manufacturing sentiment indicator struck a five-month low. Exports maintained a similar level on a falling yuan, but imports dipped. A few US indicators suggested something similar: costs rising, construction stalling, exports slowing and business activity growth flattening off. The US threats also hit the share prices of GM, Boeing, GE and Caterpillar.
Of all the major central banks, none have done more to boost the market since the crisis than the Bank of Japan (BoJ), whose balance sheet sits just shy of 100% of the country’s GDP. Investors felt well primed for last week’s BoJ meeting and expected it to announce the beginning of its great unwinding – the reversal of quantitative easing. Instead, governor Haruhiko Kuroda made clear it would not be rolling back QE and would in fact be keeping rates “extremely low” for some time yet – some analysts took his words to imply no action before 2020. Bond markets rallied in response and the 10-year Japanese government bond dropped, as the yen weakened.
The Bank of England bucked the trend and opted for a summer rise of 0.25%, taking the official rate to 0.75%, its highest for a decade. The move was widely expected; what came as a surprise was the unanimity of the Monetary Policy Committee’s vote and the implication (contained in the Bank’s Inflation Report) that this was no mere one-off.
The pound rose against the dollar in response, although it continues to be held down by uncertainty surrounding the outcome of Brexit negotiations. Last week, the EU appeared to soften somewhat towards the UK’s latest Brexit white paper, even as Deutsche Bank announced it was moving half its euro clearing operations from London to Frankfurt.
Although the rate rise will have been welcomed by hard-pressed cash savers, it is unlikely to offer any meaningful relief. Figures from Moneyfacts reveal that since the last hike (of the same 0.25%), the rate paid by the average no-notice account has increased by 0.06%; adding just 60p to the annual return for every £1,000 deposited. It remains to be seen the extent to which banks pass on this latest rise.
Meanwhile, HMRC reported that Treasury receipts from Inheritance Tax reached a record £5.2 billion in the 2017/18 tax year, up 8%. The number of estates liable has risen every year since 2009/10. The residence nil-rate band, introduced last year, should progressively raise the tax-exempt ceiling on property for inheritance purposes. However, recent comments by the chancellor suggest further reforms are on the cards later this year, potentially complicating estate planning still further.
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