August 2018 Market Commentary

Introduction

The news in July really could not have been much worse. The threat of a trade war between the US and China simmered throughout the month, and then on 31st July President Trump ramped up the tension with proposals of a 25% tariff on $200bn (£152bn) of Chinese imports.

China has already placed retaliatory tariffs on some American imports in response to the first wave of ‘Trump Tariffs’ (they even have their own page on Wikipedia now) and will surely do the same to counter this latest move. Small wonder that credit ratings agency, Moody’s, warned that there could ultimately be tariffs on 5% of total world imports if the trade war continues to escalate.

Closer to home there was Brexit. It was Karl Marx who wrote that ‘history repeats itself, first as tragedy then as farce’. Depending on your view of the referendum result we may already have had the tragedy: we certainly now have the farce as the Prime Minister takes responsibility for the negotiations herself, two prominent cabinet ministers resign and – with eight months to go until that date on which we leave the EU – we still have no idea of what shape Brexit will take. Business is getting increasingly frustrated…

So July was a month where it was easy to get depressed: good news was in short supply. So it naturally followed that nearly all the major stock markets on which we report in this commentary had a good month. Only two of them were down and those only marginally: several markets enjoyed some good gains. As always, let’s have a look at the various parts of the world in more detail…

UK

The big news in the UK? We are tempted to write that it finally rained…

As we will see in the ‘And finally’ section, the long, hot, dry spell was not entirely good news but – along with the World Cup – the sun did its very best to boost the British economy.

There was real optimism around England’s chances of reaching the World Cup final, with the Centre for Retail Research (CRR) estimating that it would have been worth £2.7bn to the economy.

We know now that it sadly did not happen, but England’s progress to the semi-finals still gave the economy a significant shot in the arm, with Professor Joshua Barnfield, the CRR director, estimating that every goal England scored, ‘could be worth £165.3m to England’s retailers and an extra £33.2m to pubs, hotels and restaurants’.

It is tempting to think that the retail boost was wholly down to people buying Gareth Southgate waistcoats – in reality, it was largely spent at supermarkets. With 80% of people watching the games at home, food and drink sales in the 12 weeks to 15th July were up by 3.6% on the same period in 2017. In the week that England played Colombia and Sweden, alcohol sales had a record week, excluding the Christmas and Easter holidays.

July also brought good news for both the service and manufacturing sectors. The service sector was another beneficiary of the World Cup as people watched the Three Lions on brand new widescreen TVs and grandparents up and down the land bought replica kit for their grandchildren. Andy Haldane, the Bank of England’s chief economist, said, “The underlying picture does now appear to be one of gradually rising household spending”.

Perhaps more significantly, in the long run a CBI survey pointed to the best news for manufacturing for 12 months, with 41% of firms reporting that output was up – although concerns over the final shape of Brexit were making some firms delay investment.

There was the inevitable retail gloom as both Poundworld and Mothercare announced plans to close stores, but overall July was a promising month for the UK. Governor of the Bank of England, Mark Carney, echoed the sentiments about rising household spending, and said that he had ‘greater confidence’ that the poor performance in the first quarter of the year was down to the weather. The flip side, of course, is that an interest rate rise in August or September now looks increasingly likely.

The FTSE-100 index of leading shares was up slightly in the month. Having closed June at 7,637 it ended the month at 7,749 for a rise of just 1%. The pound, though, was down by a similar amount, closing July at $1.3129.

Brexit

Well, we are now just eight months away from the date on which the UK will – in theory – leave the EU. Are we any further forward, as the UK Chambers of Commerce report that firms increasingly say they are ‘running out of patience’ with the Government’s delays?

The answer could be yes, but whether anyone is pleased with that is open to doubt. Having convened her Cabinet at Chequers, Theresa May, presented her vision of Brexit – only to see Brexit Minister, David Davis, and Foreign Secretary, Boris Johnson, resign in the immediate aftermath. May has now taken charge of the negotiations herself and has jetted off to Europe to discuss her plans with various heads of state (having supposedly cleared them with German Chancellor, Angela Merkel, before she presented them to the Cabinet).

Each time we come to write this section of the commentary, the state of play seems increasingly chaotic. It does look as if we are seeing the first intimations that the UK may not leave the EU in March of next year.

We’re beginning to wonder if ‘extra time will be allowed to negotiate a deal that is in everyone’s best interests.’ When Theresa May eventually triggered Article 50 there was ‘no way’ that the two year period allowed for negotiation could be extended. Now, it’s looking a distinct possibility. Ireland’s deputy prime minister has already spoken of a willingness to extend the date, which would be very much in Ireland’s interests as – according to the International Monetary Fund – its economy would suffer a 4% hit from a ‘no deal’ Brexit.

It is only a hunch. But the EU does not want the UK to leave and Theresa May campaigned for Remain. Then again, Tory activists up and down the land are telling their MPs how unhappy they are with the Prime Minister. Maybe the Autumn will see a new Prime Minister and the negotiations starting again from scratch…

Europe

Brexit aside, July was an unusually quiet month in Europe – so goodness only knows what the traditional holiday month of August will bring.

But the month did see the European parliament reject (by 318 to 278) an overhaul of the copyright laws, which had sparked a fierce debate between the internet giants and content creators, the latter fearing increasing infringement of their copyright and exploitation of their content. Perhaps the European parliament decided that the introduction of GDPR was enough of an administrative burden for one year…

Meanwhile, French President, Emmanuel Macron, headed to his holiday retreat at Fort Bregancon, near Toulon, and invited Theresa May to visit him there. She cut short her walking holiday in Italy to accept the invitation, apparently bidding to get Macron’s support for her Chequers proposals.

As so often happens, Europe’s two major stock markets moved in step during the month. Both the French and German markets rose by 4% during July, France to 5,511 and the German DAX index to 12,805.

US

What happened in the United States? As usual, Donald Trump happened.

The month started well for the economy – and the President – with the news that the US had added another 213,000 jobs in June as the economy’s long-running growth streak continued. Then came the news that the economy had grown at an annualised rate of 4.1% in the second quarter of the year, helped by strong consumer spending and a surge in exports. President Trump was quick to seize on the news as proof that his policies were working as the US economy recorded its fastest rate of growth since 2014.

There was significantly less good news for Facebook, which set a record of entirely the wrong kind. Hit by a backlash over its handling of fake news and its users’ data, Facebook warned of slower revenue growth and increased costs – and promptly saw its shares fall by 19%, wiping nearly $120bn (£92bn) off the value of the company. Meanwhile, Alphabet (the parent company of Google) advanced as ad sales for the third quarter came in at $32.7bn (£25bn) comfortably beating expectations.

Uber announced that it was abandoning its development of self-driving trucks to focus the autonomous technology solely on cars – despite successfully delivering a truckload of Budweiser without a driver in 2016.

But all the news was really about trade wars, and about the President, who held a meeting with President of the European Commission, Jean-Claude Juncker, which seemed to avert the threat of a US/Europe trade war. But – as we reported above – there was no let up in the war of words and threatened sanctions with China.

Having imposed a 25% tariff on an initial $34bn (£26bn) of Chinese goods in July – which naturally provoked retaliatory measures from Beijing – the President is now proposing a similar tariff on up to $200bn of imports, apparently in an attempt to force the Chinese government into trade concessions. As we will see below, the Chinese government has now taken steps to strengthen its economy against a protracted trade war: the omens do not look good…

…But in July Wall Street shrugged off the worries, with the Dow Jones index rising 5% in the month to close at 25,415.

Far East

The month opened badly for the Chinese stock market, which fell 2.5% in one day as the deadline for the first raft of Trump Tariffs arrived. However, as with so many stock markets the real damage was done in June, in the anticipation of the tariffs. As we will see below, the Shanghai Composite index had regained the ground by the end of the month.

Later in the month, the Chinese government took steps to protect its economy against the possibility of a long trade war after a slight slowdown in 2nd quarter growth, introducing some tax cuts and taking steps to issue special bonds for local government infrastructure projects.

The economy had slowed slightly in the three months to June, meeting official expectations of 6.7% annualised growth, but falling slightly behind the 6.8% recorded in the first quarter.

You suspect that Samsung would have settled for the words ‘falling slightly’ as the South Korean company posted its slowest quarterly profit growth in more than a year on the back of weak sales of its Galaxy S9 smartphones. That said, ‘slow growth’ still translated into a quarterly profit of £10.2bn (£7.78bn).

What of the Far Eastern stock markets? As above, the Chinese market had recovered the lost ground by the end of the month, where it closed up 1% at 2,876. The Japanese market was up by a similar amount to 22,554. In contrast, both the Hong Kong and South Korean markets fell by 1% in July, down to 28,583 and 2,295 respectively.

Emerging Markets

July brought us the 10th annual summit of BRICS – the meeting of the heads of state of the major developing economies: Brazil, Russia, India, China and South Africa. The meeting – held in Johannesburg – committed itself to the importance of an ‘open world economy’ with all countries benefiting from globalisation. The BRICS countries backed an ‘open and inclusive’ multilateral trading system under World Trade Organisation rules – but they did warn that multilateral trading faced ‘unprecedented challenges’. No prizes for guessing who they were referring to there…

We have already reported on the Chinese stock market: what of the other three markets we cover in this commentary? They were all up in July, with Brazil leading the way, rising by 9% to 79,220 – and back into positive territory for the year as a whole. The Indian stock market rose 6% to close at 37,607 while Russia was up by just 1% to 2,321.

And finally

We mentioned in the introduction that July was a bad month for anyone who likes peas. Last month, we brought you the news that the heatwave could lead to a shortage of iceberg lettuce and now it is threatening the same with peas, as growers report that hot weather and the lack of rain mean that peas are struggling to form in their pods and the crop could be as much as 30% below normal.

With plenty of stories also making the news suggesting a ‘no deal’, Brexit could lead to a shortage of sandwiches in the UK – your BLT, for example, could go back to being just a B – July was a bad month for the nation’s foodies…

…As it was for Fiat workers in Italy. Both Fiat and Juventus Football Club are controlled by the Agnelli family, and you would have thought that many Fiat workers would be Juve supporters and therefore overjoyed when the club stumped up €112m (£99.2bn) to buy Cristiano Ronaldo from Real Madrid. Far from it, with the USB union leading the workers out on strike, declaring that the transfer meant Fiat was ‘missing out on investment’. Woe betide CR7 if he puts his first shot at goal into Row Z.

As for the USA, it was business – or magic – as normal. A company in California developed a flying car. It will travel for 25 miles at up to 60mph, won’t require a pilot’s licence and will eventually cost the same as a sports utility vehicle. And to think that Harry Potter and Ron Weasley were once impressed by a flying Ford Anglia…

Sources:

https://cs.mail-first.co.uk/media/2018/08/August-sources.pdf