Market Bulletin (27/02/2018)
Cashiered?
Herodotus reported – and archaeologists agree – that the Lydians were the first to mint coins. The earliest surviving coin (found in western Turkey) dates to around 2,700 years ago; making paper money, which first appeared in China just 1,300 years ago, a relative upstart.
The Bank of England, which has been issuing notes since the late 17th century, has sought to keep them modern, introducing plastic versions and slowly offering a greater diversity of notables on their surface, most recently Jane Austen. All the same, Victoria Cleland, the Bank’s chief cashier (and the third woman represented on the £10 note), said last week that she doesn’t use contactless.
Her comments came hard on the heels of a report showing cash on the slide in the UK – down from 62% of transactions in 2006 to just 40% in 2016, and potentially 21% in 2026, according to UK Finance forecasts. Of course, the Bank itself tends to operate electronically, as it will do in its largest acquisition of government debt (£18.3 billion) since it called time on quantitative easing last year – the purchase could offer support to government bond prices.
Following the end of QE, the Bank is now in the process of winding up two further crisis-response vehicles: the Funding for Lending Scheme, closed in January, and the Term Funding Scheme, which closes this week. Both were introduced to enable banks to borrow cheaply after the global financial crisis. The schemes have been accused of harming savers by removing the need for banks and building societies to compete for their deposits. There are hopes that the schemes’ withdrawal will lead to an increase in savings rates. Indeed, Cash ISA rates were last week reported to have risen for the second month running – the first such repeat since March 2011. However, since the banks’ debts to the schemes (more than £100 billion) are not due until 2022, it seems unlikely they will rush to raise rates significantly.
The employed can at least take heart that their wages appear to be finally growing, although the trend is still relatively nascent. Figures released last week showed that pay growth reached its fastest pace in a year, with average weekly earnings in the last three months of 2017 up by 2.5% annualised. Moreover, productivity growth, which has lagged for years, struck 0.8%. (Fourth-quarter GDP growth was revised downwards, but only marginally, while unemployment rose marginally.) Some economists see in these trends the arrival of a new phase – the post-crisis recovery saw companies create plenty of jobs but fail to invest, thereby hampering both wage growth and productivity gains.
“Many forecasters have set their 2018 UK growth forecasts down to 1.5%,” Capital Economics said in a recent report. “However, inflation is set to drop back – easing the squeeze on households’ real incomes – investment intentions remain strong, and exporters still benefit from a weaker pound – we expect annual GDP growth to strengthen to 2.0%.”
The government enjoyed further good financial news last week, as official estimates showed it is on course to borrow much less in 2017/18 than previously expected. In fact, borrowing in 2017/18 is down almost a quarter compared to the previous year. There is little expectation that the chancellor will start making the kind of theatrical giveaways that often marked the Budgets of his predecessors – it emerged last week that he won’t even be using the traditional red box at next month’s Spring Statement.
While headline economic numbers offered plenty of reasons for optimism, developments around Brexit were less clear-cut. It emerged that the European Commission’s UK exit treaty text, due for publication this Wednesday, will leave out wording on Northern Ireland formerly secured by Theresa May, notably a reference to “no new regulatory barriers” between Britain and Northern Ireland. Moreover, it will outline a last-resort option for Northern Ireland to remain under the EU’s regulatory regime, in order to avoid a hard border. The Spanish foreign minister also raised the stakes over Gibraltar, calling for joint UK–Spanish management of the contested territory’s airport. Finally, Donald Tusk ruled out the UK government’s preferred ‘Canada plus plus plus’ deal (as David Davis termed it), calling it “pure illusion”.
Jeremy Corbyn finally staked out Labour’s position on a customs union, making the case for a new UK-EU version; the position drew praise from the CBI. Keir Starmer, the Shadow Brexit minister, indicated Labour would back pro-EU amendments to a forthcoming trade and customs bill. Corbyn called for the UK to have “a strong relationship with the single market”. He also spoke out last week in opposition to hostile takeovers, thereby reaffirming his commitment to a more interventionist approach to the market. His words came in the same week as reports that Unilever, unsure whether to locate its headquarters in Rotterdam or London, is leaning towards Europe’s largest port, not its financial centre. While this could look like a case of Brexit-phobia, it is thought to have more to do with the relative difficulty of executing hostile takeovers in the Netherlands. (Perhaps more significant in terms of Brexit was Deutsche Bank’s statement last week that it will make Frankfurt, not London, its centre for booking trades.) The speculation had little impact on Unilever’s share price.
The FTSE 100, meanwhile, dropped 0.7%, while the MSCI Europe ex UK stayed flat. The former was hit by poor results for BHP Billiton and by a disappointing earnings report for HSBC. RBS reported its first annual profits since the global financial crisis, one of the last UK banks to emerge from the decade-long shadow of the Great Recession.
“RBS has been forced to withdraw from the more complicated areas of investment banking and is now much more focused on retail banking, and of course it’s been forced to massively improve its capital ratios,” said Nick Purves of RWC Partners. “So, a lot of capital has been injected into the company to the cost of the previous shareholders. As new shareholders today, however, boring banks aren’t actually bad businesses, and yet the market is still punishing RBS for all the horrors of 2008 and 2009. We think the share price can get to around £4 over time.”
Mrs. Watanabe
The S&P 500, meanwhile, ended the week up 0.9%, following a Friday rally. Figures released by the University of Michigan showed that consumer sentiment in the US is at its highest since 2000, even though the survey was conducted during the recent market dip. On the negative side, GE said it would cut profits by 15% due to new reporting rules.
The Fed, meanwhile, indicated a steepening path ahead for interest rates. The combination of rising rates and QE reversal (known as ‘quantitative tightening’) has unnerved some investors. Nevertheless, it is worth noting other possible forms of support for US stocks. Share buybacks and dividend pay-outs, taken together since 2010, add up to even more than the US’s QE programme. Moreover, the fruits of Donald Trump’s tax-cuts package may be partly ploughed back into stocks.
The Nikkei 225 had a middling week, falling just 0.05%, as the yen continued to rise. Yet sentiment towards Japan remains positive, and the index enjoyed a particularly strong bounce back after the recent global market dip. The bounce back, the biggest one-week buying spree in the index’s history, is thought to have been delivered by ‘Mrs. Watanabe’, the collective nickname for Japan’s significant cohort of retail investors, many of whom have (traditionally, at least) been housewives.
RWC Partners is a fund manager for St. James’s Place.
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