“There is no subtler, no surer means of overturning the basis of society than to debauch the currency,” warned John Maynard Keynes, probably the greatest economist of the 20th century. Spare a thought, then, for Venezuelans. At the start of 2018 a cup of coffee typically cost them a quarter of a bolívar; today it comes in at more than 600 bolívars. Last week, President Nicolás Maduro won another six-year term, in an election sullied by an opposition boycott and dogged by accusations of vote-rigging.
The Venezuelan extreme is, of course, an outlier in a relatively undeveloped country. But it does provide useful context for some of recent volatility on developed markets; thus volatility has spiked on developed markets even as growth has persisted and inflation has remained contained. The S&P 500, for example, recently suffered its worst December since 1931 (back when Keynes was doing some of his most important work), despite fourth quarter US growth that is forecast to clock in at – a frankly healthy – 2.7% annualised.
Last week, however, global stocks enjoyed a little upward momentum, led by Wall Street. Three issues were perhaps most important in driving short-term sentiment: the direction of Federal Reserve policy; the US government shutdown; and US–China trade talks.
On Fed policy, investors were relieved at comments made by several senior officials to the effect that the Fed was data-dependent, was not merely following a pre-set course on rate rises,and was even willing to factor market reactions into its decision-making. If the officials had all been briefed to repeat a particular word, it was surely “patience”. Inevitably, this reassured investors wary of rate rises, given central banks’ reputation for killing growth – and perhaps bull runs – through programmes of interest rate rises.
Wall Street was also focused on Donald Trump’s proposed Mexico border wall, and his linked failure to broker a deal to end the government shutdown – now the longest in US history. The latter has a number of knock-on effects beyond the obvious ones, among them a reported lack of data on which traders might base buy and sell decisions. Sentiment was more positive over US-China trade talks and there was news on Friday that a senior Chinese official would visit Washington later this month. The S&P 500 ended the week up; the FTSE 100, TOPIX and EURO STOXX 50 all followed suit.
Growth trends for the eurozone and UK came in less healthy than for the US. Eurozone labour productivity has stopped growing and the economy is set to expand at only 1.6% in 2019, with Germany a sore point; eurozone unemployment, however, fell below 8% for the first time in a decade.
In the UK, GDP growth struck a six-month low and car manufacturing switched into reverse. Jaguar Land Rover announced it would be cutting 4,500 jobs; Ford is now expected to make cuts, too; and both companies warned of deeper cuts in the event of a no-deal Brexit. KPMG and British Retail Consortium figures showed the high street suffered its worst Christmas since the financial crisis, a trend confirmed by negative news last week on John Lewis, M&S and Debenhams. Morrisons and Tesco, however, offered some bright spots.
“Whilst the UK food retail market continues to be extremely tough and is certainly not being helped by the uncertainties surrounding Brexit, both Tesco and Morrisons seem to have navigated the Christmas trading period with some success,” said Nick Purves of RWC Partners. Chris Field of Majedie agreed. “Tesco has been the winner of the ‘Big Four’ supermarkets over the festive period and, importantly, customers’ perception of the supermarket’s offer went up by its biggest single increase in five years,” said Field. “This augurs well for the future,”
The government had other worries, of course, becoming the first UK government since 1978 to lose the parliamentary vote on its Finance Bill, only to suffer a second defeat the following day; one that will oblige it to publish an alternative Brexit plan within three days, should it lose Tuesday’s vote on Theresa May’s deal. It is indeed expected to lose that vote, and reports suggested it was already planning to change the Brexit timetable in response. Bookies’ expectations of the UK leaving the EU on 29 March had fallen below 35% by the end of the week. Sterling and the FTSE 100 remained relatively controlled over trading period, although politics may be strongly felt on markets in the week ahead.
“Even if we could predict the outcome of Tuesday’s vote, we would never want to base an investment strategy on a single event,” said Tom Beal, Deputy CIO at St. James’s Place. “However, if the outcome does take markets by surprise, then what we have seen in recent months is that our fund managers, who take a long-term view, have been taking advantage of the opportunities presented by market movements to actively reposition their portfolios.”
Majedie and RWC Partners are fund managers for St. James’s Place.
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