It was a week to look back: Western leaders gathered in Normandy to mark 75 years since D-Day; Lech Walęsa, former Polish president and winner of the Nobel Peace Prize, spoke in memory of Poland’s first semi-free elections 30 years ago; and Hong Kong residents held a candlelit vigil in honour of those demonstrators killed by Chinese troops in Beijing in 1989.
The themes on which traders and investors were focused last week may have felt more immediate, but they were not entirely unrelated: the openness of markets, the openness of borders, and government control over both technology and information. On these fronts, investors appeared to believe the week was more good than bad; although gains need to be seen in the context of recent losses.
The U.S. Department of Justice announced it was preparing an antitrust investigation of Google and Amazon; the Federal Trade Commission said it would investigate Facebook and Amazon; and the House Judiciary Committee announced it was launching its own probe into the sector. Apple, meanwhile, announced that it will shut down its hugely successful iTunes service and replace it with its music, TV and podcasts app.
Meanwhile, the White House indicated that it was making progress in talks with Mexico – source of a third of the US’s imported cars – and duly struck a deal with the trade partner over the weekend. Meanwhile, on a state visit to the UK, Donald Trump floated the possibility of a US–UK trade deal.
Yet everyone knows which trade relationship matters most these days. Last week, Tim Cook, Apple’s CEO, said he didn’t expect Apple to be targeted by China in a trade war – its share price rose in response, taking some fellow tech companies up with it. The S&P 500 ended the week up, too.
Yet Beijing did report that it is compiling a list of “unreliable” foreign firms – presumably retaliation for the US creating its own, equivalent blacklist, a list that includes Huawei.
When it comes to technology companies, China seemed most concerned last week about what was going on at home. One of the most recent crackdowns by state censors has been against financial bloggers, notably on WeChat and Weibo. Beijing also persuaded Refinitiv, the financial data major, to remove all stories relating to Tiananmen ’89 from its Eikon terminals in China.
It cannot scrub stock market history in quite the same way. Last week, the Shanghai Composite index finished the week down, as the trade war continues to scare away investors. Indeed, investor outflows from China in April and May struck a new record, and the renminbi remains not far off multi-year lows against the dollar.
Stocks in Japan are certainly sensitive to Chinese fortunes but enjoyed a stronger week, despite the economy “worsening” for the first time in more than six years, according to one of the government’s leading indicators.
“If the US-China trade war continues to escalate, the Chinese slowdown would hurt Japanese companies who have business in China – such as in auto sales and tours,” said Yoshihiko Ito of Nippon Value Investors, manager of the St. James’s Place Japan fund. “Second, Japanese suppliers would be hit by the increased tariffs on Chinese products sold in the US.”
Markets in both the UK and eurozone performed relatively strongly over the week. UK construction activity fell but service sector growth rallied. In the eurozone, Italy was found to be in violation of its fiscal rules; but Italy’s governing party floated the idea of issuing a secondary currency to cover its debts.
None of this was as important to investors as the words of Mario Draghi, who told press last week that the ECB is ready “to use all the instruments that are in the toolbox”, including both interest rate cuts and fresh bond purchases.
A similar tone was adopted by Jerome Powell, Chair of the Federal Reserve, last week, when he said the Fed would “act as appropriate to sustain the expansion”. Futures markets were giving a rate cut by July a 60% chance; the chances doubtless boosted by a disappointing May jobs report. Powell also referenced the bank’s readiness to deal with fallout from the trade war: “We are closely monitoring the implications of these developments for the U.S. economic outlook”.
In the UK, while the FTSE 100 meandered upwards, the front pages were held by shots of the Queen with the US president. But most of the action was in Peterborough, where Labour only narrowly beat The Brexit Party to hold onto its seat, pushing the Tories into third place. (Indeed, two polls last week – polls, mind! – placed the Tories third or fourth in a national election.)
It now looks as though parliament will not in fact go into recess before a new prime minister is in post, thereby smoothing the way for Labour to hold a parliamentary vote of no confidence in the new leader before the break – as ever, it remains unclear whether a change in leader will indeed translate into greater political stability and progress.
There was more positive news this morning that the UK and South Korea have agreed to sign a post-Brexit trade deal; but it was quickly overshadowed by the news that the UK economy shrank by 0.4% in April – manufacturing in April fell by a stunning 44.5% (annualised). Mike Hawes, Chief Executive of the Society of Motor Manufacturers and Trading, described the fall’s scale as “extraordinary”, adding that the figures “are evidence of the vast cost and upheaval Brexit uncertainty has already wrought on UK automotive manufacturing businesses and workers”.
Nippon Value Investors is a fund manager for St. James’s Place.
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