Market Bulletin (08/02/2016)
Monkey business
After the previous week’s gains, the sense of unease that has dominated since the New Year saw stock markets lose ground once again last week. The S&P 500, the world’s leading stock index, is down almost 5% since the year began. Last week, as manufacturing and services indicators both showed decline, and falling US unemployment raised the spectre of further rate rises by the Federal Reserve, the index slipped 2.9%.
In this light, it seems appropriate to be entering the Chinese Year of the Monkey this week. According to the traditions of the Chinese zodiac, monkeys at their worst are naughty, reckless, suspicious and restless – not a bad summary of behaviour on world stock markets in the first few weeks of 2016. Indeed, volatility remained elevated on the S&P 500 last week, according to the VIX index, as it has done since the first week of January.
“Markets tend to shoot first and ask questions later,” said Nigel Ridge of BlackRock last week. “At the moment, the first thing I look at on my screen in the morning is the oil price because its correlation with equity markets is so high.”
Last week, an anticipated rapprochement between Russia and OPEC to discuss oil production cuts began to look less likely. But it was the announcement of corporate earnings by oil majors which provided the lowest point of the week. The oil-sensitive FTSE 100 ended the week down 3.87%.
Perhaps most tellingly, markets were relieved when ExxonMobil announced that its net income in the fourth quarter of 2015 was down a mere 58% (annualised). BP announced its worst-ever annual loss – of $6.5 billion– for 2015. Shares are down a quarter from a year ago and the company has outlined 7,000 job losses over the next two years. Shell published an 80% fall in profits for 2015, and announced 10,000 job losses; the UK’s largest listed company insisted its dividend is safe.
Shell announced last week that it plans to divest itself of $10 billion of assets this year but insisted it “does not intend to hold a fire sale”. A major part of the company’s non-fire sale came on Monday, when it agreed to sell its 51% stake in a Malaysian refinery business. The business was sold to Shandong Hengyuan Petrochemical, illustrating a major corporate theme of recent months: Chinese companies going on a global shopping spree.
Sino-Swiss synergies
The headline deal of this story came last week, when ChemChina agreed a $43 billion bid for Syngenta, the Swiss seeds and pesticides company. As with many such major deals, Beijing’s priorities are paramount; in this case, it was food security, but there are plenty of others, large and small.
Broadly speaking, this wave of Chinese acquisitions provides a boost for both the global economy and for stocks. It enables struggling companies in hard-hit sectors like oil to rationalise, while ensuring that growing companies are able to expand and, in China’s case, to secure better technologies and production line processes.
Last week the Chinese government announced its economic growth target for the year ahead, setting a minimum annual rate of 6.5%. While this is far from the double-digit growth of a decade ago, IMF figures show that the renminbi value of China’s 2015 growth was worth more than 15 times the value of the figure for 2005, when growth exceeded 11%. China is therefore a far greater contributor to global growth than it was a decade ago.
Nevertheless, financial policy remains a sore spot. While communications with the market remain poor, China’s most immediate financial challenge is to manage the upsurge in currency outflows. Recent figures show capital transfers into Hong Kong remain exceptionally high; more than $1 trillion may have been moved out of mainland China in this way last year, according to press reports last week.
“China is new to financial markets and will make mistakes with policy,” said BlackRock’s Nigel Ridge.
High outflows and the occasional policy missteps will unnerve markets in the short term, but the broader direction of travel will remain far more important for long-term investors.
Tale of two banks
The banking sector has disappointed markets so far in 2016; the FTSE All-Share Banks Index is down around 15% this year. Last week provided no respite. Lloyds announced it would cut 1,755 jobs and close 29 branches across the UK. UBS announced a 63% decline in fourth-quarter profits. Deutsche Bank had an especially bad quarter; last week it warned it faced a 2015 net loss of $6.7 billion – $2.7 billion of that came in the final quarter.
If investment and retail banks offered sour news, central banks gave markets what they were looking for last week. Haruhiko Kuroda, Japan’s central banker, said there was “no limit” to monetary easing and promised to send rates (currently -0.1%) still lower if necessary, as well as to employ new tools to reach the 2% inflation target. The Nikkei 225 dropped 3.98% over the five-day period.
There had been increased speculation last week that the Federal Reserve may have acted hastily in December. Moreover, midweek data releases suggested that growth in business activity is proving hard to come by in the US. Manufacturing data last week certainly mitigated against any imminent rise; US factory orders for December fell by 2.9%, the most in a year. Even services, which have hitherto helped to offset manufacturing declines, dipped to a two-year low.
Better news came on Friday, however, in the form of non-farm payrolls data. In January, a drop of 150,000 in the number of unemployed brought the jobless rate below 5% for the first time since 2008; although the drop was significantly smaller than the previous month’s fall. Meanwhile, average hourly earnings rose by 2.5% year-on-year, suggesting that the inflation outlook may be changing. Expectations of a rate rise rose on the news.
In the eurozone, manufacturing and services continued to push in different directions. Figures released last week showed eurozone unemployment dropping to 10.4% in December. The manufacturing PMI for the eurozone, on the other hand, delivered a December reading of 49.4, down from the November figure. The FTSEurofirst 300 finished the week down 4.82%.
If Japan’s central banker looked committed to activism last week, Mark Carney appeared resigned to inaction. As expected, the Bank of England declined to raise rates last week. It also warned that UK growth would slow in 2016 and that inflation would take a couple of years to reach the 2% target. This implies that rate rises remain some way off. In short, policy is a boon to markets: predictions are not.
Pensions and politics
The UK Chancellor, on the other hand, appears to remain committed to radicalism. Last week, press reports suggested that George Osborne was coming down in favour of introducing a 25% flat rate of tax relief on pension contributions. As well as saving the Treasury a great deal of money, the reform would redistribute some of the benefit of tax relief from higher earners to lower earners. Since the formal announcement of further pension reforms is expected in the Budget on 16 March, this means that higher rate taxpayers may have only a month to take advantage of the current, more generous system.
Last week David Cameron obtained a list of concessions for Britain following his negotiations with European Union leaders. That paves the way for a national vote on EU membership later in 2016. Britain’s Year of the Monkey looks set to be an eventful one.
BlackRock is a fund manager for St. James’s Place.
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