Market Bulletin (24/07/2018)
Turn of phrase
It was a week to make a Surrealist blush. The strangeness began on Monday in Helsinki at a joint press conference between Vladimir Putin and Donald Trump, when the US president sided with the Russian president against his own intelligence agencies in suggesting that Russia had not, in fact, attempted to influence the outcome of the US presidential election of 2016. “I don’t see any reason why it would be [Russia],” said Donald Trump, before going on to describe the federal investigation into election meddling as “a disaster for our country”.
Republicans were swift to reprimand him. Presumably as a result, the US president walked back his words a mere day later: “In a key sentence in my remarks, I said the word would instead of wouldn’t… The sentence should have been, ‘I don’t see any reason why it wouldn’t be Russia.’” Nevertheless, the president later said he had invited Putin to Russia, news that took the US intelligence chief (on stage at a public forum at the time) by surprise. “Say that again. Did I hear you?” pleaded Dan Coats, Director of National Intelligence.
Investors and traders are perhaps a little slower to allow Trump’s words to direct markets these days. Besides, there was good news, back in the more concrete world of economic data. Retail sales in the US came in very positive, and a Goldman Sachs economic forecast showed US growth for the second quarter comfortably above 3%. Unemployment, meanwhile, struck a 48-year low, although housing starts fell.
Jay Powell, delivering his own testimony, expressed the positivity generally implied by the figures. The Federal Reserve governor said that both economic growth and inflation were rising at a sufficient clip to merit further interest rate rises – he doesn’t fear imminent recession, despite some contrary market signals. If Powell’s explanation placated markets in the short term, the US president felt differently about the rises. “I am not happy about it,” he warned, potentially chipping away at the Fed’s supposed independence from Washington politics. In fact, despite Powell’s words, market forecasts show Fed rate rises ending in 2019.
Yet the US president still wasn’t done with dominating the week. In an interview trailed by CNBC on Thursday, Donald Trump said that he was now willing to put tariffs on all Chinese imports to the US – currently valued at over $500 billion. The full interview, released on Friday, was felt on markets. (The S&P 500 ended the week essentially flat and the FTSE 100 up only marginally.) Trade tensions have already exerted a significant impact on trade and prices, with all sorts of unforeseen consequences, such as a price spike for US washing machines. Estimates last week by the Alliance of Automobile Manufacturers show that the looming 25% tariff on cars imported to the US will add an average $5,880 to the price paid by US consumers.
Earnings season continued in the US last week, with signs that the stellar figures of the first quarter might not be repeated. Nevertheless, earnings for major US banks came in strong. Morgan Stanley reported a 39% jump in profits; Goldman Sachs – 44%; Bank of America Merrill Lynch – 36%; and Citigroup reported 16%. Improved balance sheets, rising interest rates and buoyant M&A activity may have helped. Over the week ahead, around a third of S&P 500 companies are set to report.
It was a mixed week for the major technology stocks, however. The FAANMGs, as they have become known – Facebook, Amazon, Apple, Netflix, Microsoft and Google – make up a staggering 17% of the S&P 500, meaning their role in broader market trends is unparalleled among US companies. Yet Netflix shares plunged by more than 14% in after-hours trading on Monday, due to slipping subscriber growth; the company added a mere 5.2 million subscribers in the second quarter, having forecast 6.2 million.
“Results were still strong in an absolute sense, with 43% year-over-year streaming revenue growth, supported by 26% subscriber growth, while average revenue per user increased 14%,” said David Levanson of Sands Capital, co-manager of the St. James’s Place Global Equity and Global Growth funds. “However, net subscriber additions in both the US and international businesses fell short of guidance and consensus estimates. But we don’t think that missing expectations by a few hundred thousand subscribers in a given quarter is indicative of a change in Netflix’s long-term trajectory: 700,000 net new US subscribers is still at the high end of historical US performance in the second quarter, typically the weakest seasonally. Seasonality, in addition to the World Cup, likely weighed.”
While the US cooled still further on trade relations, the EU and Japan pedalled hard in the opposite direction, formally signing off on the largest bilateral trade deal in history, one that covers 30% of global GDP. This week, Japan is also expected to announce progress on a new Asia trade deal (the Trans-Pacific Partnership without the US); which will, likewise, cover around 30% of global GDP.
“Provided that the EU–Japan deal comes into force by the end of 2018, it is expected that there will be positive impact on some of the companies in our portfolio,” said Yoshihiko Ito of Nippon Value Investors, manager of the St. James’s Place Japan fund. “For example, since most of the tariffs on industrial products will be removed immediately under the pact, Tamron [a camera lens manufacturer], and Ricoh [an office automation manufacturer] both of which have around 20% of sales generated in Europe, are likely to benefit. In addition, European tariffs on automobiles exported from Japan, currently at 10%, will be eliminated in eight years under the pact, which is expected to benefit Japanese auto manufacturers, including Toyota Motors, which is also in the portfolio.”
The UK, of course, is headed in a somewhat different direction, although you could be forgiven for struggling to identify what exactly that direction was. Last week, the prime minister brought her White Paper to Parliament and immediately faced five amendments tabled by William Rees-Mogg, who leads the Eurosceptic European Research Group. Even though the amendments were to her own White Paper, the prime minister whipped her party to vote them through. When Europhile MPs then introduced their own amendments, however, she whipped her party to reject them, winning by only a handful of votes. (It later emerged her chief whip had pressurised MPs to renege on ‘pairing’ voting arrangements.) Her position appears increasingly precarious, not least according to the polls, which now show Labour leading the Tories.
As Dominic Raab headed to Brussels, the Irish border issue remained unresolved, and subject to strong rhetoric on both sides. Raab himself said the UK wouldn’t meet its financial commitments to the EU in the case of no deal, while the EU also warned that some of the Eurosceptics’ amendments undermined pledges previously made by the UK government; it rejected the proposals for City of London access to the European market. Plans for a no-deal outcome are now being made by companies and governments around Europe. (The Netherlands has hired 1,000 new customs officials in anticipation.)
It also emerged last week that National Savings and Investments is cutting the interest it pays on Direct ISAs, hitting nearly 400,000 savers still further – £4.6 billion in savings will be affected. Alongside the National Savings news, figures from Moneyfacts revealed that the average no-notice Cash ISA rate had nudged down for the first time since November, and still remains significantly below its August 2016 level (when base rates were last at the current level). The Personal Savings Allowance continues to lessen consumers’ appetite for Cash ISAs, and mainstream providers are still not competing on rates despite the closure of the Term Funding Scheme (a cheap credit introduced in 2016 by the Bank of England to incentivise bank lending). Saving, it seems, can be an expensive habit if not done with care.
Nippon Value Investors and Sands Capital are fund managers for St. James’s Place.
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