These days America has two ‘Big Apples’, one on each coast, and they both pack a financial punch. New York City’s current GDP is some $1.5 trillion. At its peak in 2018, Apple Inc., listed in New York and based in California, had surged to $1.12 trillion. But a rough autumn and last week’s sell-off left it at $674 billion.
A fall of almost $450 billion – more than the GDP of Iran – in a mere three months represents an unenviable record for the world’s first trillion-dollar company. Its first revenue forecast cut in 16 years, which it pinned on poor iPhone sales in China, led investors to trim some 10% off the stock price last week. Apple has now slipped from the world’s largest company down to fourth spot.
If this is a crunch moment, then the first question must be: for who? Chinese consumers account for a third of all iPhone users globally; the problem could therefore be Apple, or it could be China. Apple dropped to third-largest mobile manufacturer worldwide last year and its autumn price rises coincided with a decline in global economic and consumer confidence. It certainly faces challenges.
Yet that decline in global confidence has been perhaps most apparent in China. Last week, figures showed Chinese manufacturing output contracting for the first time in seven months, car sales turning sharply negative and consumption tax revenues falling off a cliff. The indicators come in the wake of an official growth rate that slowed last year to 6.5% – the true figure could be much lower.
The Shanghai Composite index fell 25% in 2018 and stooped a little further midweek. A later rally was sparked by Beijing reopening trade talks with Washington, and possibly by The People’s Bank of China announcing a cut to banks’ reserve requirements; the cut translates into the freeing up of $218 billion of reserves. Major tax cuts are also expected in the year ahead. Meanwhile, figures showed foreign investor money rushing into the Chinese market, even as other emerging markets suffer outflows. Yet even if the policymakers make the right moves, investors should take care.
“Rules around A-shares [renminbi-denominated shares listed in mainland China] have now been relaxed, making it more accessible to overseas investors, but the market remains dominated by private investors, not professional, institutional players,” said Tom Beal, Deputy Chief Investment Officer at St. James’s Place. “As a result, price volatility is almost double developed market levels and that’s a double-edged sword – the market is very risky but, conversely, high-quality managers can find some good opportunities.”
The capacity of markets to undergo sudden bouts of extreme volatility was highlighted by a seven-minute ‘flash crash’ on Wednesday, as the Japanese yen broke out of bounds it had stayed within for a decade, rising 9% against the Australian dollar and 10% against the Turkish lira. Traders are still struggling to explain why the yen rose that day against every currency Bloomberg tracks. The event offers a salutary reminder that short-term market shifts don’t always make sense – even to experts.
One explanation proffered was that investors were looking for safe havens due to fears over growth in both China and the US. Last week, manufacturing survey figures for the US showed a sharp decline in December, although jobs numbers came in strong, prompting a presidential tweet. The pace of growth in the US decoupled from much of the developed world last year, reflecting the impact of Donald Trump’s tax cuts on corporate earnings. Yet the boost has made investors highly sensitive to any signs of the boost petering out – and to the risk of interest rate rises killing it.
On Friday, the chair of the Federal Reserve acknowledged market fears about global growth and hinted that the Fed wouldn’t be raising rates imminently. Perhaps more importantly, he suggested that quantitative tightening – which the Fed embarked on last year – could yet be put on hold. The market rallied in response, taking the S&P 500 positive for the week.
The ECB announced the end of its post-crisis quantitative easing programme in December; but the timing was arguably unfortunate, given the significant slowdown in eurozone growth over the course of 2018. After falling at the opening of the year, both the EURO STOXX 50 and FTSE 100 had more than made up their New Year losses by the weekend; although this probably had more to do with global market trends than local specifics.
The EU faces several looming challenges, from Italy’s budgetary plans to Eurosceptic forces amassing at European Parliament elections in May. Brexit may be the most immediate. Last week, Theresa May was back on the phone to Brussels, seeking those elusive “assurances” over the Northern Irish backstop. As yet, there are few signs she can sway recalcitrant MPs ahead of the looming vote.
Meanwhile, preparations continued for a no-deal outcome: with, on the one hand, a publicity campaign planned; and, on the other, news that 16 UK drug companies and 10 trade associations were asked by the government to sign non-disclosure agreements to prevent them talking publicly about any stockpiling plans.
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