Market Bulletin (27/03/2018)
The ‘slings and arrows of outrageous fortune’ were much in evidence on markets last week, as Wall Street suffered its worst week of trading since early 2016. Three developments overshadowed the period: two political and one monetary.
The first was the White House’s decision to impose $60 billion of tariffs on Chinese imports; its second protectionist measure targeting the world’s second-largest economy. An import duty of 25% will be imposed on a range of products, among which drugs and robots feature heavily. In the same week, China announced tariffs of its own – on $3 billion of US exports to China – although these may well only be a response to the first round of Trump-era US actions (on aluminium and steel), with more to come in response to Washington’s latest protectionist salvo.
A number of stocks suffered in the wake of the announcements, among them Boeing and Caterpillar, and the broader S&P 500 ended the week down by a hefty 5.9%. Volatility has been particularly noticeable recently: on Thursday last week, the S&P 500 fell by 2.5% in a single day – the 17th time it’s suffered a single-day shift of at least 1% since the start of February. In the 13 months to January, there had been just ten such moves. Investors have become jumpy.
The second immediate cause of concern was the emerging story about personal data harvested by Facebook, data which the company then shared with Cambridge Analytica, a UK-based consultancy, but failed to ensure was subsequently deleted – or to inform the regulator of the developments. Cambridge Analytica, meanwhile, stands accused of then misusing that data to target voters with online ads in the US election on behalf of its client, the Trump campaign team. The social media company’s market value fell by more than $50 billion last week – and even its CEO, more accustomed to showing his face in the good times, emerged with something like an apology in the middle of the week.
As Facebook faced mounting pressure, the EU imposed a new digital tax on tech companies with more than €750 million in annual global revenues – crucially, the tax (of 3%) is based on revenues. The European Commission aims to raise €5 billion a year with the measure, although Berlin expressed some reservations later in the week. The share price of Alphabet, Google’s parent, suffered over the course of the week, as did a number of other technology majors; the S&P 500 Information Technology Index slipped almost 6% over the week. Market participants feared the business impact of privacy issues highlighted by the Facebook story for the wider sector – but for Facebook most of all.
“The biggest threat to Facebook’s long-term prospects would be a loss of users and engagement, which the #deletefacebook movement is trying to achieve,” said Hamish Douglass of Magellan Asset Management. “Based on Facebook’s user behaviour around privacy issues in the past and the centrality its platforms have in the lives of its users, we consider this to be a low risk. Therefore, outside the potential for a monetary fine, and higher legal and compliance costs, we do not believe that the Cambridge Analytica situation will materially affect Facebook moving forward.”
It was a happier week on markets for Dropbox, as the online file hosting service launched a successful IPO last week, significantly beating its target price. As with the recent Snapchat IPO, however, some investors expressed reservations about the multi-class share structure of Dropbox’s offering, whereby some shares receive more voting rights than others. Doubters fear such models leave the companies insufficiently answerable to shareholders.
The third major moment of the week was more scripted, but investors found it compelling all the same. The Federal Open Market Committee, the Fed’s rate-setting team, held its first meeting under its new chair, Jerome Powell. As expected, the committee raised rates by 0.25%, but said that US productivity levels needed to improve. Markets had expected a hawkish tone, and the yield on the one-year Treasury rose to its highest level since 2008 ahead of the meeting. In the event, policymakers were divided over whether 2018 held three or four rises in store – market reaction was muted.
Washington politics had still more in store for markets last week, however, as Congress agreed to a huge spending bill of $1.3 billion in order to help avert a government shutdown as the Federal budget approaches its latest deficit ceiling. Yet Donald Trump soon tweeted that the spending bill didn’t go far enough and said he might choose to veto it – one particular concern was the lack of budgetary allocation to build a wall along the Mexican border.
The president also maintained his revolving-door appointments policy, and last week named John Bolton as his third national security adviser. The veteran security hawk completes a cabinet almost entirely shorn of globalists and military soft-pedallers. Four weeks ago, the Wall Street Journal published a piece by Bolton entitled ‘The Legal Case for Striking North Korea First’.
A similarly robust direction of political travel was apparent in Beijing last week, as Xi Jinping largely completed the biggest Chinese government restructuring for a decade. Several ministries were discontinued, a new central bank governor was appointed, and the current premier was given a second term. More importantly, Wang Qishan was voted in as vice president with an enviable votes tally of 2,969 for and 1 against. (Not bad, although not quite as good as his boss, who went one vote better in the previous week’s decision to remove any tenure limit on China’s presidency.) Xi Jinping has said that the quality of growth and risk control must now trump the headline growth rate on the list of policy priorities.
It was a significant week for Secretary of State for Exiting the European Union, David Davis, as he shook on a transition deal with Michel Barnier, his opposite number. Sterling rose on the announcement, and has remained up since, as it edges still nearer to its value it struck against the dollar the week before the referendum. A number of key areas received clarification in the release that followed: the transition period will end on 31 December 2020; the UK can negotiate its own trade deals during transition; in the absence of other solutions, Northern Ireland will effectively remain in parts of the single market and customs union; and the UK will remain de facto adherents to the Common Fisheries Policy, but without any say in policymaking. It was this last concession that particularly stuck in the craw of leading Brexit figures – given the industry’s decline in the years following the UK’s initial entry to the union.
Inflation in the UK, meanwhile, struck a seven-month low of 2.7%, raising questions over the Bank of England’s rate rise policy ahead. Sadly, the dip was nowhere near big enough to offer true respite to cash savers, who continue to lose money in real terms – whoever they bank with. Indeed, data from Moneyfacts revealed that the average no-notice rate actually fell last month; a response to savers spurning fixed-rate deals and opting for the flexibility of easy access in anticipation of an imminent interest rate rise. The news was more encouraging for earners, however, as wage growth rose to 2.8% in January, a whisker above inflation.
The FTSE 100 struggled over the course of the week, dropping 3.1%, although much of the fall was a result of the rise of sterling. (The MSCI Europe ex UK fell 3.2%.) There was bad news from the high street, as a series of retailers reported financial issues, among them Carpetright, Moss Bros and Kingfisher. Retailers in the UK have suffered their worst start to the year since 2013.
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