Market Bulletin (17/05/2016)
Watching from the wings
Market participants tend to like their politicians quiet, predictable and acquiescent; in short, they like to be able to ignore them. In recent months they have not been able to do so, and last week politicians were particularly dominant.
The US primary and Britain’s EU referendum campaign seasons both gained fresh momentum; a Brazilian president was voted out of office to face impeachment proceedings; the European Parliament voted by 546 to 28 against China being accorded ‘market economy status’ at the World Trade Organization (WTO); the US opened a new anti-dumping case against China; European finance ministers used a meeting in Brussels to edge closer to a long-awaited deal with creditors on Greece’s debt; and politicians in London ratcheted up rhetoric about chasing down illicit money in tax havens.
Preoccupied by political uncertainties, markets last week continued on the same aimless course seen in recent weeks. Thin trading volumes suggested investors are sitting on their hands, increasing the potential for volatility and for markets to meander in the lead-up to major forthcoming political events. Investors need to remain patient.
In the US, there were two significant political developments for markets to ponder. The current administration took its 12th anti-dumping case against China to the WTO – in this case, poultry products were the bone of contention. But the White House may be happy to ruffle Chinese feathers for the sake of looking tough on Chinese exporters; Obama hopes to persuade Congress to approve the proposed Trans-Pacific Partnership (TPP), a trade deal with 11 other countries (including Australia, Japan and Mexico) around the Pacific Rim that excludes China.
Meanwhile, the outlook for the US presidential election took a new turn, as signs emerged of a rapprochement between Donald Trump and a co-chair of the Republican National Convention – anointment would extend Trump’s perceived legitimacy. Markets remain nervous about the impact of a Trump presidency on financial assets, given his comments on immigration and trade tariffs (not to mention debt). Nevertheless, the dollar rose against the euro and the yen last week – the latter dropped as Japan’s central bank said it was considering market interventions.
Fuel for growth
Last week, while the Nikkei jumped 1.9%, the S&P 500 gained a slim 0.23%. On Tuesday, the US index saw its best day in two months, thanks to a rising oil price and a rally for Amazon, which launched Amazon Video Direct the same day. But Apple and healthcare stocks struggled later in the week.
Oil remained buoyant, however – Brent crude ended the week up 5% at almost $48 a barrel. That is good news for Saudi Arabia, the world’s leading producer, and last week Saudi Aramco confirmed that it would be raising production – the state oil company pumps out more than one in eight barrels of crude globally.
Other recent commodity rallies have proved less sustained. Copper and iron ore both lost value last week, in part due to slack Chinese demand. New figures showed that China’s imports of copper, coal and iron fell in April this year. That did not prevent BHP Billiton, the world’s largest miner, from announcing the expansion of its oil and copper exploration programme, after three years of defensive measures.
Official figures released last Tuesday showed the UK trade deficit had reached £13.3 billion in the first quarter – the largest figure since the start of the financial crisis. Net trade had also weighed down on overall economic growth. This means the UK is reliant on money from abroad to help make up the difference. Meanwhile, industrial production rose slightly in March, but by too little to prevent Britain clocking a second consecutive quarter of contraction in the sector – in other words, a recession in the industrial sector. The FTSE 100 rose 0.21% over the five-day period.
The Bank of England’s Monetary Policy Committee voted to keep the base rate at 0.5% for the 86th consecutive month, and there was news that savings rates have fallen to new record lows, providing another blow to those relying on cash to supplement their income. The introduction of the new Personal Savings Allowance has been cited as one reason for further savings rate cuts, as has the worsening economic outlook. Research shows that in 2016 alone there have already been 230 rate cuts to Cash ISAs, fixed-rate bonds and easy-access accounts. Savers would be wise to check what rate they are getting and consider ways to make their money work harder, as interest rates show no sign of rising in the near future.
Yet, for much of the week, attention was trained not on corporate news or interest rates but on senior figures in politics and economics. Mark Carney, governor of the Bank of England (BoE), warned that the risks of leaving the EU “could possibly include a technical recession” and that the Bank warns that jobs could be lost, prices could rise and the pound could fall sharply, in the event of a British exit. A BoE report claimed that half of sterling’s recent 9% drop had been caused by the prospect of the UK’s referendum. A market intervention by the BoE has not been ruled out. Christine Lagarde, chair of the International Monetary Fund, added her own voice to the week’s naysayers, saying a British exit could “precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output.”
Despite these warnings, more new office buildings have been begun in central London over the past six months than at any time in the past 20 years – in terms of square feet, it marks the greatest expansion since 2008. Moreover, bond issuance denominated in sterling may have been struggling badly this year (down 63% according to Dealogic) but it enjoyed an uptick last week.
Trade was the subject at the European Commission (EC) last week, when it blocked a bid by CK Hutchison (owner of Three) to acquire O2 on antitrust concerns. Once again, the EC is eagerly playing monopoly-buster – Google is currently the subject of an EC antitrust action related to its Android phones. The European Parliament was no less forthright last week, voting against China’s quest for market economy status at the WTO, a tag it expects to receive in December – the status would make anti-dumping suits against China much trickier.
Politicians were more amenable to their own offenders last week, however. A meeting of European Union finance ministers saw a new tone taken towards Greece over its debt problems, suggesting that some kind of arrangement may yet be reached with creditors to postpone and reduce the debt payments – a well-oiled practice referred to by sceptics as ‘extend and pretend’. Greek bonds rallied last week, and the FTSEurofirst 300 rose 0.97%; but news emerged that, while the German economy enjoyed a strong quarter, eurozone GDP growth had missed expectations over the same period.
At least the currency area is growing. In Brazil, the prospect of economic growth remains distant; and last week the country’s Senate voted to impeach its president, thereby forcing her deputy to take her office for at least the duration of the process.
Last week, then, belonged to the politicians. Markets hesitated slightly as a result, but long-term investors might remember what Elizabeth II reportedly said to a newly elected Tony Blair in 1997: “You are my tenth prime minister, Mr Blair.” Like the monarchy, markets are above a few political turnarounds.
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