Market Bulletin (22/10/2018)
The disruptor has been disrupted. Sears, Roebuck and Company was founded in 1892, selling a huge range of products by mail order: bicycles, sewing machines, cars, then fridges, groceries and cooking stoves too. In short, Sears provided ordinary consumers with the capacity to order a huge range of affordable goods from home.
Sound familiar? With the dazzling rise of Amazon in recent years, it certainly should do. But it is the rise of Amazon – and, in earlier years, Walmart – that best explains the fact that, last week, the queen of 20th century US retail finally filed for bankruptcy. (One symbol of its troubles came in 2009, when its eponymous Chicago tower, pictured above, was renamed after another company.) The latest figures from the United States Department of Labor show the direction of shopper traffic: as of last year, some 1.4 million Americans are employed in fields related to e-commerce, almost double that in 2001.
As Sears has retreated, the US has been going the other way. A report published last week by the World Economic Forum saw the US take back top spot as the most competitive economy in the world, having lost its crown during the financial crisis. A slew of positive quarterly earnings came in last week too, including for Netflix, Goldman Sachs and Morgan Stanley. Volatility may be back up from its historic lows, but the S&P 500 finished up for the week.
Nevertheless, some of the good news has come at a cost; or, to be precise, at the cost of a 17% rise in the government deficit during the last US fiscal year, which ended in September. This is atypical for an economy that is growing so quickly; tax cuts have, thus far, led to a major loss in tax revenues. The deficit, at $779 billion (3.9% of GDP), is forecast to reach $1 trillion by October 2019.
While some shopping decisions are merely financial, others are political. Recent US–China tariff wars largely fall into the latter category. Last week they showed up in the data, as Chinese GDP growth fell to 6.5% (annualised) in the third quarter, its lowest level since the global financial crisis. Industrial output slowed in unison with the headline figure, as did consumption growth – car sales in China hit a seven-year low. The Shanghai Composite index struck its lowest point since 2014, before staging a recovery on Friday (which continues at time of writing). It is surely no coincidence that China’s growth slippage coincides with reports of significant job losses in Guangdong province, the country’s factory (and export) hub.
Yet last week China’s trade surplus with the US hit a new record, possibly as suppliers try to increase volumes ahead of tariff deadlines, and US inventories rise. Meanwhile, China’s central bank has been happy to let its currency slip 9% against the dollar since April – ammunition for Washington.
Despite some shaky moments midweek, it ended up as a positive five-day period for the FTSE 100. The key exceptions were supermarkets. Pressure from Aldi and Lidl pushed Tesco to bottom spot in the FTSE 100 and Sainsbury’s saw its market share fall from 15.8% to 15.4% in the 12 weeks to 7 October. The FTSE 250, which is more sensitive to domestic developments, fell during the week.
Amend & extend
Indeed, across Europe, concerns were focused on the UK, and also on Italy. In both cases, the chief worry was that pain was merely being delayed. Rome submitted its new budget to Brussels and, suffice to say, it is planning to spend far more than Brussels allows for. As a result, yields on Italian debt rose still further last week; the ECB president warned Italy should not expect help if it now encountered debt troubles. Those troubles could come in 2019 and 2020, when Italy faces a massive increase in debt maturity; it may yet face trouble rolling the debt over.
One well-worn technique for bond issuers struggling to roll over their debt on markets is to resort to ‘amend & extend’ contracts to soften the terms by, among other measures, extending the maturity date of the debt. Theresa May appears to be countenancing a similar strategy in Brexit negotiations; as last week’s European Council summit passed without any progress on Brexit, she expressed her openness to the EU’s suggestion of extending the transition period by another year. That drew immediate criticism from both hard-Brexit and anti-Brexit backbenchers in the UK. Whether pushing back deadlines will work remains to be seen. (Ominously, traders often refer to the ‘amend & extend’ procedure as ‘amend and pretend’.)
Assuming she survives another week, attention now turns to the Budget. Last week’s figures show borrowing in this fiscal year at £19.9 billion, some £10.7 billion less than in the same period last year. Yet the extra wiggle room many not defer the chancellor from targeting those tax breaks enjoyed by pensioners, as he seeks to raise money for extra funding of the NHS.
Admittedly, the government has confirmed that the State Pension triple lock will remain “for the rest of this parliament” at the least, and argued that there is “no clear consensus” for reforming pensions tax relief. It has not, however, committed to maintaining the current pension savings allowances.
One such allowance is the Lifetime Allowance – an overall limit on the amount anyone can take from their pension schemes without triggering an extra tax charge. This is expected to jump from £1,030,000 to £1,054,720 from April 2019, providing wealthier savers with the opportunity to save a little more into their pensions before they are hit by a potential 55% tax penalty. While the chancellor could be persuaded to cut the Lifetime Allowance in the Budget, Royal London argues that a reduction in the Annual Allowance is more likely: from today’s £40,000 to £35,000 or even £30,000. That would translate into more than 100,000 higher earners losing up to £4,000 in tax relief.
Meanwhile, 1.6 million lost pensions pots worth nearly £20 billion could remain unclaimed according to latest research carried out on behalf of the Association of British Insurers (ABI). Dr Yvonne Braun, ABI’s Director of Long-Term Savings and Protection, said that the findings highlight the “jaw-dropping” scale of the lost pensions problem. The situation could be alleviated by the pensions dashboard, which will enable anyone to see all their pension savings in one place online. This is due to launch in 2019, although the minister for pensions and financial inclusion, Guy Opperman, hasn’t guaranteed that it will be delivered on time.
Speaking at the Pensions and Lifetime Savings Association annual conference on Thursday, he told reporters: “We are doing a feasibility study soon, and I realise that in parliamentary language ‘soon’ can stretch, but I certainly think there is much we can be doing in 2019.”
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