Market Bulletin (19/06/2018)
Management matters
“I wouldn’t say I was the best manager in the business,” the Derby County and Nottingham Forest legend Brian Clough once told an interviewer. “But I was in the top one.”
In the week the World Cup got under way in Moscow, the varying fortunes of managers were plain to see, and not simply in the world of football. The manager of Spain – one of the biggest hopes for the title – was sacked two days before the team’s first match. Those tasked with managing the world’s two most important central banks, on the other hand, appeared very much in control of their respective briefs.
In the US, Jerome Powell, chair of the Federal Reserve, announced a rise in US interest rates and expressed his confidence that the US economy “is in great shape”. He also signalled his intentions to increase communication with markets by holding more frequent press conferences. The Bank raised rates by 0.25% and Powell turned the Bank’s rate rhetoric a touch more hawkish, signalling a steeper path of rate rises to come.
“There could be some interim volatility for bonds as interest rates go up,” said Brad Boyd of Payden & Rygel. “But if inflation stays relatively contained, then in the long term higher rates are a good thing as you’ll have more earning power for income investors. You never want to game [or bet on] rates but we do think it’s wise to keep your bond maturities quite short-dated – that way, when they mature, you can reinvest at higher rates with the proceeds.”
Economic data for the US last week looked particularly strong. Spending at US retailers jumped 0.8% in May, the largest gain in six months, while unemployment sits at its lowest level in half a century. Although the pace of growth reached just 2.2% (annualised) during the first quarter, it is on track to rise above 4% in the current one. If it follows through on those indications, it would make this quarter the best for US growth in nearly four years.
Economies around Europe do not appear to be in quite such fine fettle. On Thursday, the euro suffered its worst single-day drop against the dollar in two years – the last time it fell so far was when the UK voted to leave the EU. The reason was divergence. Jerome Powell had painted a rosy picture of accelerating US growth but Mario Draghi, speaking this week after a meeting of the European Central Bank, warned that interest rates in Europe would likely be held steady through to next summer – and potentially beyond. The guidance indicates relatively low confidence in the strength of the eurozone economy.
Nevertheless, Draghi was decisive in charting a new course, reporting that the Bank would halve its monthly asset purchases from September, and phase them out completely by the end of the year. So it is that quantitative easing – the biggest monetary experiment in history – continues to be wound down. This marks a significant moment for the ECB, which has trailed the Fed in moving away from its post-crisis stimulus policies. While the pledge not to raise rates softens the blow, some investors will inevitably focus more closely on the eurozone bonds they own, now that the central bank is withdrawing its own support. Ultimately, of course, the Bank will be hoping it can return rates to normality over time.
“We are seeing a turn in the rates cycle,” said Chris Ralph, Chief Investment Officer at St. James’s Place. “Interest rates are rising in the US and quantitative easing is being further eroded in Europe. But the impact of these trends on the pace of growth in both the US and Europe appears to be relatively insubstantial. Thus, companies are still able to grow their dividends and to issue bonds. At this stage, defaults are not rising.”
Early in the week, the S&P 500 banked the positive sentiment from the Fed chair and enjoyed a minor surge. It has also been helped by the pace of mergers & acquisitions reaching ever-higher velocities, not least in media. In the latest bout, Comcast last week initiated a bidding war with Disney by announcing an unsolicited offer for a majority stake in 21st Century Fox for around $65 billion. Moreover AT&T, the US telecoms giant, this week beat the US government in an antitrust case – the victory allows it to proceed with its $80 billion takeover of Time Warner.
Stocks switch
Yet as far as the S&P 500 was concerned, the work of central bankers last week had been more than undone by the end of the week, and the index ended down 0.5% as a result. The culprit, in this case, was that less than predictable of managers, Donald Trump. The US president on Friday announced $50 billion in tariffs on China, adding a new dimension to his protectionism push. The move brought a response from China’s commerce ministry that it would “immediately introduce countermeasures of the same scale and strength” – and that gains made at the last round of US–China talks would be shelved.
The fallout leaves the US in a very different position in East Asia than it was just a few months ago. Back then, the US had looked close to China and had warned North Korea of “fire and fury” to come as a result of its nuclear weapons testing. But early last week, Trump met with Kim Jong-un in Singapore, where the two signed off on an initial accord. It was a remarkable development, given the longevity of the two countries’ stand-off. Nevertheless, some analysts were left wondering why the US president had agreed to suspend US military exercises in South Korea without telling Seoul first, and with little more than broad commitments to eventual denuclearisation.
Battle of Brexit
In Westminster, meanwhile, management was clearly struggling. Theresa May faced an important Commons vote on whether to reject proposed Lords amendments to her Brexit bill – and Tory rebels were ready to pounce. A last-minute meeting with the rebels secured the vote for Theresa May, meaning the Lords will only have one final chance to review the bill before its ultimate passage to the Commons.
However, soon after the vote it was reported that wording had been changed once again after Theresa May’s meeting with the rebels. As a result, many were pledging to vote against the government at the final reading. Aside of potentially undermining the prime minister at a critical time, a vote to force acceptance of the Lords amendments would mean that the UK could not leave the EU in a no-deal Brexit without approval from parliament – in short, there is much still to be played for.
Consumers and savers in the UK still face elevated inflation. Last week’s figure of 2.4% for May shows it failing to drop since April, as fuel prices rose by 3.8% in a mere month. Trade tariffs are liable to add to inflationary pressures too; at the end of the week, they helped push the FTSE 100 down to a loss on the week.
Transfer troubles
For those looking further into the future, figures released by the Office of the Public Guardian are more likely to be relevant to their plans than intra-week stock market fluctuations. The release showed that the number of investigations into the use of power of attorney – for overstepping the boundaries of those powers, whether deliberate or mistakenly – has risen 45% in just 12 months. While it is important to take out a lasting power of attorney, rushing into it without properly understanding the implications has the potential to end badly. As ever, any solution in this area must properly account for your own particular situation and preferences.
Payden & Rygel is a fund manager for St. James’s Place.
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