Market Bulletin (08/05/2017)
There can be few times in living memory when major national votes in the US, UK and France have all taken place in the space of twelve months – and yet only the French result was the outcome preferred by markets. So it was that, on Sunday, markets got their man in the shape of the 39-year independent candidate Emmanuel Macron. On 14 May, he will be sworn in as France’s 25th president.
It would be an understatement to say that Macron’s task as president will be harder than his historic election campaign, which has taken him from rank outsider to the Élysée Palace. France’s legislative elections will take place next month and winning a majority in the house in five weeks’ time looks to be an enormous task. His next option is to build a coalition government, which would undoubtedly complicate his plans. Without a ruling coalition, he has to fall back on ‘cohabitation’, in which another party dominates parliament, potentially neutering his presidency.
One trend in his favour is the current macro environment. The eurozone was shown last week to have reached a faster pace of economic growth than either the UK or US. Combined with expectations of a Macron victory, this provided upward momentum for European stocks, and the Eurofirst 300 climbed 1.8% over the five-day period. French banks were another highlight; revenues at both Société Générale and BNP Paribas increased markedly. Finally, eurozone unemployment appears to be headed resolutely in the right direction, having struck an eight-year low.
Stocks in the US took the slow road as several worries weighed on sentiment. The S&P 500 ended the week up 0.33%, after a few midweek jitters. Congress voted through the White House’s second attempt at an Obamacare repeal bill – it must now pass to the Senate. Meanwhile, Apple – the world’s largest listed company – reported an unexpected drop in iPhone sales, even as it regained its status as the world’s largest dividend payer. Meanwhile, US company earnings season appeared to offer largely positive news, not least for energy companies.
Yet it was Wednesday’s meeting at the Federal Reserve which probably exerted the greatest one-off impact on US stocks last week. Janet Yellen reported the central bank’s view that the country’s subdued first quarter growth rate had been a blip, rather than the beginning of a longer-term trend. Although the Federal Open Market Committee, which sets interest rates, chose to leave the current level unchanged, the press conference raised market expectations of a June hike to 90%, having been at 60% just a week before.
One variable adding to anxiety at the Federal Reserve is US household debt. On Monday last week, the central bank published its forecast that household debt would reach $12.68 trillion, which would put it back at 2008 levels for the first time since the global financial crisis.
In the UK, mortgage trends offered a very different kind of signal last week, as research published by Legal & General showed that the so-called ‘Bank of Mum and Dad’ had effectively become the country’s ninth largest lender, and will make £6.5 billion in loans this year – a 30% increase. Among UK citizens under the age of 35, some 62% of those purchasing property now seek help from parents, family and friends. The report serves as a reminder of how far house price growth has outpaced wage growth in recent years. Yet as an increasing proportion of UK wealth is inherited not earned, it is also points to the rising importance – and urgency – of intergenerational tax planning.
The chancellor provided further reasons for tax vigilance last week. Together with David Davis, the Secretary for Exiting the European Union, Philip Hammond launched a new anti-Labour election poster last Wednesday. Speaking at the launch, he refused to rule out further tax rises for the rich, arguing that the Conservative Party was a “low-tax” Party but one which wants to “focus on working people”. In this context, it is reasonable to assume that, given a Conservative victory in next month’s election, certain tax reliefs and allowances remain under threat, and should therefore be utilised while they are still available. The situation regarding the money purchase annual allowance – the amount that those already flexibly accessing their benefits can contribute tax-free each year to their pension – illustrates the current uncertainty. Government plans to reduce the allowance from £10,000 to £4,000 a year in April were ditched from the Finance Bill, raising confusion over what can legitimately be invested this tax year without incurring a retrospective tax bill, assuming the measure is reintroduced later this year.
If the front pages were anything to go by last week, then the most important news was the very public fallout between Jean-Claude Juncker and Theresa May. The extended after-dinner spat has raised all kinds of questions about the prospects for Brexit negotiations. In the end, Donald Tusk had to step in to calm the squabbling parties.
Much of what took place may have been playing to the gallery. The UK press has always revelled in a good verbal joust between Britain and France or, increasingly, London and Brussels. Some argued Theresa May probably had one eye on last week’s local elections and next week’s general election – and wanted to look strong and resolute in the face of forthcoming Brexit negotiations. The truth may in fact be that it was both eyes.
Either way, local elections certainly went her way, offering further hints that dozens of Labour MPs are going to be losing their jobs next month. For UKIP, however, last week’s results pose an existential threat – the party lost 108 councillors and made just one gain. Paul Nuttall said UKIP was “the victim of its own success”. Whatever the reason, the local elections made clear that Theresa May has successfully brought Brexit under Conservative auspices.
Meanwhile, Brussels appeared to pilot a new negotiating tactic last week, perhaps learned from the resident of the White House: price discovery. Instead of sticking to the usual EU claim that the UK’s exit bill would amount to some €60 billion, Michel Barnier gave an estimate of €100 billion. It remains to be seen whether starting high will be an effective negotiating tactic but, all told, the week did little to reassure those concerned at the prospects for an amicable exit deal, although Theresa May ended the week with her domestic position stronger than ever.
Meanwhile, UK factory output struck its fastest growth rate in three years. Encouraging corporate results began to trickle out too, perhaps most notably some meteoric profit rises at BP and Shell. The energy majors helped the FTSE 100 to a 1.3% weekly rise. In fact, the FTSE All-Share is up by 18% in just twelve months – nine times more than the rate of inflation in the broader economy, and some three times more even than average house price increases over the period. The broader global trend is similarly positive – the MSCI All-Country Index has crested above $50 trillion twice in the last fortnight, having never done so before. Sitting on the sidelines of the market is becoming an expensive hobby.
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