Market Bulletin (24/01/2017)
In 1793 Emperor Qianlong of China wrote a letter to George III to respond to the British king’s request to send a trade representative to China. After the usual pleasantries, the letter famously stated: “As your Ambassador can see for himself, we possess all things. I set no value on objects strange or ingenious, and have no use for your country’s manufactures.”
How times have changed. On Tuesday last week Xi Jinping, the Chinese president, delivered the keynote speech at the annual World Economic Forum in Davos – the first by a Chinese leader. In it, he made an assertive case for the benefits of global trade and exchange. “The problems troubling the world are not caused by globalisation,” he told the politicians and CEOs gathered in the Swiss Alps. As he spoke, his State Council announced it would further open China’s mining, infrastructure, services and technology sectors to foreign investment.
On the same day, the British prime minister used her first Brexit planning speech to make clear that the UK would be leaving the world’s largest market, and probably the customs union too. Prominent pro-Brexit figures were delighted; Paul Nuttall, leader of UKIP, commented: “Some of it did sound like a UKIP conference speech.” When she spoke at Davos later in the week, the conference’s ‘citizens of the world’ gave only polite applause.
There can be little doubt who owned the week. After a ten-week wait in which he had called into question the North American Free Trade Agreement, NATO, the European Union, and US–China trade relations, Donald Trump placed his hand on Abraham Lincoln’s old Bible to be sworn in as the 45th US president.
A series of senior appointments – several of which raised eyebrows in Washington – and a volley of opinionated tweets had marked the lead-up to the inauguration. By the time it came, the ‘Trump rally’ of November and December appeared to have fizzled out; the S&P 500 slipped 0.23% last week.
Even in the final days before his inauguration, Trump expressed strong enough opinions to move markets, saying he favoured a cheaper dollar (a view his commerce secretary later tempered) and a 35% tariff on Mexican-made BMWs. The combative rhetoric continued in his inauguration speech on Friday. “From this moment on,” he declared, “it’s going to be America first.” He attacked the Washington establishment before pledging: “We will bring back our jobs. We will bring back our borders. We will bring back our wealth.” Amid warnings of enemies within and enemies without, the key note was ‘protection’.
His impact had been felt on markets weeks before he moved into the White House, not least through rising bond yields, which aid bank profitability. Earnings reports for the fourth quarter published last week showed annualised revenues up dramatically at Citigroup, JPMorgan Chase, Goldman Sachs, and Morgan Stanley.
“The major banks were big early recipients of the so-called ‘sugar rush’ from Trump’s fiscal policy plans and bank-friendly regulatory reversals,” said Eoin Walsh of TwentyFour Asset Management. “However, these numbers are in comparison to what was a weak period for banks in Q4 2015, so it was an easy target to beat.”
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Last week, the yield on the US 10-year Treasury remained elevated, which often indicates heightened risk. China’s sales of US Treasuries reached a five-year high in November, as it continued to cede its position as top holder of US Treasuries to Japan, increasing pressure on US rates (although China may increasingly struggle for buyers). Meanwhile, Janet Yellen reported that she was not worried about US inflation because she didn’t expect growth to pick up any time soon, given weak international demand and rising interest rates – and foresees only a few Fed rises a year up to 2019. She also warned of a “nasty surprise” if the Fed held off on interest rate rises for too long.
A very different policy message emerged from the European Central Bank (ECB) last week. Mario Draghi said that the ECB plans to keep rates low through 2017 as the current spike in inflation was unlikely to persist. (Last week German inflation reached a new high of 1.7%.) He may do well to wait and see. Global markets last week were more bear than bull: the FTSEurofirst 300 dropped 1%, the Nikkei 225 by 0.77% and the FTSE 100 by 1.9%.
The previous week’s UK earnings releases had pointed to a positive end-of-year retail picture. But last week it was reported that December had in fact seen retail sales slip 2% both online and on the high street. The chancellor warned on Friday that UK households would face a much higher level of inflation in 2017, after figures showed it reached 1.6% in December, up from 1.2% in November. Mark Carney, governor of the Bank of England, warned of interest rate rises to come, blaming the fall in the pound.
The inflation news was another blow to savers. According to Moneyfacts data, there are now no easy access or short-notice savings accounts that match or beat inflation. Across the entire savings market, only 44 out of 669 accounts offer rates that still achieve that target, and only one of those is a Cash ISA; food for thought for those yet to use this tax year’s ISA allowance and, indeed, for those with accumulated Cash ISA savings.
In fact, the pound rose slightly after Theresa May’s Brexit speech on Wednesday, possibly reflecting relief that a clear strategy had been agreed and was now being pursued. The rise in the pound was negative for UK-listed stocks, just as the fall it underwent in recent months had been positive. Indeed, figures released last week showed that Q4 dividends in the UK rose by a record £5.2 billion. However, the FTSE 100 has performed less well in international terms. In the past 12 months, the FTSE All-World ex-UK (meaning it excludes the UK) has outperformed the FTSE 100 by ten percentage points. Diversification by currency and geography has paid off handsomely for UK investors since the Brexit vote.
Aside of Theresa May’s state visit to Washington DC this Friday (and a possible quick-fix US–UK trade deal), much of the focus in Britain last week was on Theresa May’s speech, which was well received by both the tabloids and Westminster. It laid out a plan for a more or less ‘hard’ Brexit, and many were relieved that it provided a clear, bold and positive vision of post-Brexit Britain. Criticism focused on whether she had been realistic (in terms of timeline, trade deals and budget contributions) and on her veiled threat to turn the UK into an offshore tax haven if the EU tried to punish the UK. Her foreign secretary was more brazen, with a World War II reference to Brexit “punishment beatings”.
Not all onlookers are optimistic. HSBC confirmed last week that it will move 1,000 jobs from London to Paris – UBS made a similar announcement. Toyota commented that it was looking at how it could “survive” in the UK after Brexit. JPMorgan Chase’s chief executive said more than 4,000 UK staff might be affected. But Jes Staley, the American banker who heads up Barclays, played down the impact of Brexit on the City of London.
For all the significance of Theresa May’s Brexit speech, not to mention Xi Jinping’s defence of globalisation, the eyes of the world, as of markets, are now firmly set on the White House. For investors, some context may be in order. Under Barack Obama, the US economy has staged a remarkable recovery from what many saw as the brink of a depression. Although inequality, poor productivity and social divisions persist, unemployment has sunk to new lows, wages are rising, the financial sector has recovered, growth is solid, and corporate earnings appear to have stabilised. Donald Trump may or may not “Make America Great Again”, but he isn’t starting from a bad position.
TwentyFour Asset Management is a fund manager for St. James’s Place.
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