China produces 70% of the world’s mobile phones; half its cement, steel and aluminium; and a third of its cars – and doesn’t Donald Trump know it.
Trade negotiations between the US and China continued last week, and investors were especially cheered when the US president said that the 1 March deadline for a deal was “not a magical date” – he has since formally delayed it. The S&P 500 ended the week positive, while Chinese stocks entered a fresh bull market this morning; the last Chinese bull market peaked in January 2018.
Both manufacturing output and industrial production indices showed negative readings for the start of 2019 in the US. There were also signs that hiring is beginning to slow; the Morgan Stanley Business Conditions Index showed that consumer inflation expectations are falling; meanwhile, import prices continue to fall. A study by Goldman Sachs showed that the pace of the US expansion has roughly halved since November. The latest earnings season shows more companies reporting compression of earnings than expansion.
Slower they may be, but the profits keep rolling in all the same. Walmart, the world’s largest company by revenue, gave markets a boost when it published quarterly earnings last week. Moreover, the Fed continues to act as bedrock for markets thanks to its New Year dovishness, although the publication last week of the minutes of its January rates meeting suggested a residual bias towards future rate rises.
The Shanghai Composite also rose last week, partly on hopes of a government stimulus. Chinese New Year aside, Chinese consumption growth has slowed – a fact keenly felt by its major trading partners. Japan last week announced positive business investment and consumption for the fourth quarter, giving its economy a relatively strong finish to the year; the TOPIX ended the week higher. But Japan’s exports took a dive, the latest Asian victim of China’s sagging demand growth. Indeed, Japan’s exports fell 8.4% in January (annualised), but its exports to China fell 17.4%.
Germany has felt a similar chill Chinese wind blowing, but also faces the implications of Brexit and Donald Trump’s threat of 25% tariffs on European cars. (Volkswagen warned these tariffs could cost it billions of euros a year.) Last week came news that Europe’s trade surplus with the US rose to $160 billion last year – up around $40 billion; the White House is unlikely to celebrate. Europe’s trade deficit with China, meanwhile, was more than $200 billion.
In the UK, the Brexit story rumbled on, with three Conservative MPs leaving their party for the new Independent Group; there were also signs that the push to extend Article 50 was gaining new converts among MPs ahead of Wednesday’s ‘indicative’ vote. Talks in Brussels made little headway, and Theresa May postponed parliament’s next vote on her deal to March 12, a mere 17 days before the exit date.
Economic news was more encouraging. Last week, retail sales and wage growth came through stronger than expected; and the government reported the best January surplus on record – £14.9 billion – while borrowing was at its lowest for 17 years.
Meanwhile, the European Securities and Markets Authority agreed to issue temporary licences allowing European traders to continue using UK clearing houses – Europe’s derivatives market was worth €660 trillion in 2017. (This may reflect how much the EU needs London for financial services; manufacturing is, of course, another story.)
“I don’t think Brexit is a systemic issue for global financial markets, although it might have implications for UK growth, with a bit of a knock-on effect on European growth depending on the deal,” said Johanna Kyrklund of Schroders, manager of the St. James’s Place Managed Growth fund. “Sterling has weakened considerably, boosting companies with overseas earnings. As for the UK stock market, it suffered, particularly in the fourth quarter, because of Brexit uncertainty, but a lot of these companies are not going to be affected by Brexit. So, my bias is to actually rotate some money back into the UK.”
The FTSE 100 struggled slightly over the week but remains sharply up for the year. BAE, the UK’s largest defence manufacturer, suffered last week after it said a German ban on arms exports to Saudi Arabia would negatively affect its business – the news overshadowed an £8 billion boost to the order book in 2018. Sainsbury’s suffered a similar fall over news that the regulator had raised concerns over its proposed tie-up with Asda.
“The provisional findings on Sainsbury’s proposed merger with Asda were harsher than the market was expecting and appear to make the deal less likely to happen,” said Chris Field of Majedie Asset Management, manager of the St. James’s Place UK Growth fund. “Recent trading has been lacklustre relative to the industry, but Sainsburys has a well-crafted cost plan to more than offset operational expenditure inflation and the shares are now cheap. Our bigger positions in the sector are in Tesco and WM Morrison and the news does not materially change the investment case on each.”
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