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WeekWatch (22/07/2019)

WeekWatch (22/07/2019)

The Beatles performed their last live concert on a rooftop in London just a few months earlier; Bryan Adams was enjoying “the best days of my life”; and, 50 years ago last Saturday, Apollo 11 landed the first men on the moon. 1969 was, indeed, quite a year but, as the space mission ascended through the atmosphere, the Dow Jones Industrial Average was suffering a major slide – a prelude to a tough 1970s for what was then the world’s leading index.

One of the issues pushing down on returns through the 1970s was the energy crisis, which culminated in the oil crisis of 1979, when the Iranian Revolution led the price of oil to double. Last week, both oil and Iran were back at the forefront of world markets, albeit in far less cataclysmic form. The US shot down an Iranian drone in the Strait of Hormuz, adding to the recent rise in US–Iranian tensions, and pushing the price of a barrel of Brent crude up 1.5%, before Iran seized a UK tanker.

Stock markets, however, were still more sensitive to developments on terra firma, as corporate earnings season rolled on and central banks delivered their policy prognostications.

In the US, earnings season was mixed. Netflix, hitherto a steamrollering tech major, suffered a 10% fall in its share price after reporting earnings far short of projections and the loss of 100,000 subscribers in the US; the company had been forecast to gain 300,000 new clients. BlackRock was another disappointment, as advice and securities lending revenues fell, while costs rose. Citigroup, J. P. Morgan and Wells Fargo reported drops in net interest margins, hurting profitability. There were highlights too, such as Microsoft and Blackstone, but fears remain that US equities may have been priced only for good news.

All the same, the S&P 500 hardly fell out of the sky. In fact, the index ended the week only marginally down, and other major global indices generally ended flat or only marginally down too, among them the FTSE 100, EURO STOXX 50, Shanghai Composite and TOPIX in Japan.

Much of this came down to the fact that, while oil and earnings certainly matter to investors, central bankers appear to matter more – at least for the time being. In a speech last week John Williams, president of the New York Fed, said that “it’s better to take preventative measures than to wait for disaster to unfold”. Later the same day Richard Clarida, Fed vice-chair, told the Fox TV network that policymakers can only lower interest rates to combat rising economic risks.

Investors took the comments to mean that a Fed rate cut later this month had just become more likely. They made a similar assumption about the ECB, which is due to meet this week to make its next rates decision; the market is now pricing in a cut as the most likely outcome – potentially taking the base rate from its current -0.4% to -0.5%. The assumption boosted European bonds and stocks alike.

Moreover, the ECB is hardly behaving like it plans to get tough any time soon. The appointment of Christine Lagarde as the new chair suggests easy policy is unlikely to reverse in the near future. Lagarde will certainly need all her political skills for the role, but the more difficult job probably falls to Ursula van der Leyen, confirmed this week (by a secret ballot in the European Parliament) as the new president of the European Commission. Her slender majority, the rise of extremism, the continuing Brexit saga, and the challenge of keeping Italy on board give her plenty to think about; not to mention the fraying transatlantic alliance, Turkey’s gradual defection from NATO to Russia (illustrated by its receipt, this week, of the S-400 anti-aircraft missile system from Moscow); and Russia’s increasingly assertive role in Eastern Europe and in Western elections.

She will also need to manage a shifting relationship with Beijing; the EU and China are, by some measures, the two largest trade partners in the world. Figures released by the IMF last week showed that China is no longer a net lender to the world and now operates a 0.4% surplus (against a 1.4% deficit last year, and a 10% deficit in 2007) – the eurozone still posted a surplus of 2.9% last year.

Meanwhile, in the UK, the final week of canvassing took place before the Conservative Party announces its choice to be new prime minister on Tuesday. Last week, the country’s fiscal watchdog warned that a no-deal Brexit would drop the country into recession, while Gordon Brown forecast that Boris Johnson (the clear favourite) may be the last prime minister of the UK, as Scotland could leave the union over Brexit. Parliament voted to make a no-deal Brexit somewhat harder than it had been (although certainly not impossible) and the Bank of England struggled to attract applications from two of its favoured candidates to succeed Mark Carney as governor: Janet Yellen and Raghuram Rajan – reports claimed candidates had been put off applying by the lack of resolution over Brexit.

Finally, China this Monday launched its aptly named Star Market, a science and tech-focused equity exchange in Shanghai. At close on the first day, shares on the index had rocketed to more than 400% their opening price.

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