What the future brings
The US market stabilised last week. Well, on the surface, at least.
The S&P 500 was flat, but there were large deviations within it. Banks, technology hardware and automotive companies didn’t do so well because investors have become increasingly cagey about economic growth in 2019 and beyond. If interest rates continue to march higher, businesses’ and households’ higher borrowing costs and a general feeling that the days of easy money are gone could rein in spending and investment, leading to a dip in activity. The businesses that would be hit hardest will be those closely tied to cyclical winds, like lenders and car manufacturers. If you’re worried about a slowdown, you run for bullets, beans and a steady dividend: utilities, telcos, consumer staples and REITs did well last week.
We are pretty happy with how the US economy appears right now, and we’re resigned to the fact that there could be a lot of short-term swings and periods of panic as rates rise. As companies report over the coming week or two, the prevailing mood will be determined less by whether businesses will hit targets – given the recent boom and tax cuts, it’s a low bar. Instead, investors will take their lead from how optimistic companies are about future earnings. If a significant number appear hesitant or cut their expectations, markets could become very afraid. But if they hold their estimations, or even increase them, it could spark a relief rally that recovers more of the ground lost during the sell-off at the beginning of October. Another factor will be how the third-quarter GDP figure measures up to its 3.3% forecast on Friday.
Of course, there is a political facet, too. US President Donald Trump could upend the market by embarking on some left-field move. At the weekend he declared that the nation would withdraw from a nuclear disarmament treaty signed in the 1980s by Mikhail Gorbachev and Ronald Reagan that abolished “intermediate” warheads. Russia was accused of breaching the treaty in Barack Obama’s presidency and negotiations to make the nation stop creating these weapons were fruitless. Mr Trump has since ordered the development of America’s own missiles (legal under the treaty), but tearing up the agreement could create an overt arms race on the border between the EU and Russia, similar to the Cold War. Scrapping the deal would also allow the US to counter Chinese medium-range missiles in the Pacific (the country isn’t party to the treaty). It would mean the US peace dividend goes away. All that cash thrown at stockpiled death in the latter half of the 20th century could be directed at welfare and the betterment of society. A reversal of that would put even more strain on American finances.
There’s a line of argument that the prospect of nuclear war shouldn’t affect markets because if it ever came to pass, the performance of your financial assets would be at best irretrievable and at worst subordinate to your mortality. Not exactly a cheery thought, but a logical one. We think an escalation would probably lead to a market reaction similar to when North Korea shot missiles over Japan: a bit of tactical trading by investment banks, but essentially little lasting movement.
Source: FE Analytics, data sterling total return to 19 October
Misery loves company
China is hurting.
Chinese growth was 10 basis points lower than expected when released last week. Coming in at 6.6%, it was the weakest GDP figure since the financial crisis. Industrial growth and consumer spending were both disappointing, yet exports remained resilient despite recent tariffs. Next quarter may be less buoyant. Eastern markets took a dive early on, but rallied soon after a reassuring statement from the Chinese authorities. The heavy government buying of the stock market, rumoured to have been unleashed to shore up losses, probably had more effect. The Shanghai Stock Exchange Composite was down almost 30% over the year to Friday and the Chinese central bank has been burning through reserves to keep the renminbi stronger than the $1/RMB7 level.
But China has company in its pain. It really is crunch time for UK Prime Minister Theresa May. Hard-line Conservative Brexiteers, angered by her compromises with the EU, called for a leadership challenge at the weekend. At the same time, about 700,000 people filled the streets from Westminster to the West End calling for a people’s vote on the final deal. They almost certainly didn’t want to cast another vote for leave.
Some talking heads say the only way out for Mrs May would be a no-deal Brexit because Parliament wouldn’t accept any of the options currently on the table. But even that doesn’t make sense. If one of the major sticking points of any Brexit plan is the Irish border, a no-deal exit is probably the worst result for the island’s fragile politics. Some say that’s her plan: allow a second referendum on a no deal – the starkest Brexit imaginable – in the hope that the UK balks and changes its mind …
Hemmed in between two ardent and angry blocs of the population, Mrs May is probably regretting the day she triggered article 50 seemingly only to advertise her commitment to the Brexit cause. The Economist printed an illuminating chart showing the typical time taken to negotiate and phase in a free-trade deal with the EU. Needless to say, the UK’s less-than-two-years target is less than half the time taken to bring implement free trade between Georgia and the single market. And Georgia’s GDP is $15.2bn, compared with the UK’s $2.6tn. Canada’s deal took almost eight years and only just made it over the line this year. Mrs May didn’t need to trigger the clock immediately, she could have continued to negotiate and ensure that she was not vulnerable to stalling or hardball from across the Channel. Unfortunately, just like the snap election and predecessor David Cameron’s initial decision to hold a referendum on EU membership, the decision was made to take a short-term political move that led to a long-term nightmare.
Next Monday we’ll see the Budget. A cynic would say there will be a lot of spin in the red briefcase, given that it’s been moved from a traditional Wednesday release to the slowest news day of the week.
Bonds
UK 10-Year yield @ 1.58%
US 10-Year yield @ 3.19%
Germany 10-Year yield @ 0.46%
Italy 10-Year yield @ 3.48%
Spain 10-Year yield @ 1.73%
Economic data and companies reporting for week commencing 22 October
Monday 22 October
US: Chicago Fed National Activity Index
Tuesday 23 October
UK: CBI Trends Surveys
US: Richmond Fed Manufacturing Index
EU: Consumer Confidence; GER: Producer Price Index
Interim results: Bloomsbury Publishing, Whitbread
Quarterly results: Bunzl, Travis Perkins
Trading updates: Anglo American, Mcbride, Reckitt Benckiser, St James’s Place
Wednesday 24 October
UK: BBA Loans for House Purchase
US: MBA Mortgage Applications, House Price Index, Manufacturing PMI, Services PMI, New Home Sales, Federal Reserve Releases Beige Book
EU: M3 Money Supply, Services PMI, Manufacturing PMI; GER: Import Price Index, Manufacturing PMI, Services PMI; FRA: Manufacturing PMI, Services PMI
Interim results: Stobart Group
Quarterly results: Antofagasta, Avast, Barclays, Metro Bank
Trading update: Tatton Asset Management
Thursday 25 October
US: Advance Goods Trade Balance, Wholesale Inventories, Retail Inventories, Durable Goods Orders, Capital Goods Orders, Initial Jobless Claims, Continuing Claims, Pending Home Sales, Kansas City Fed Manufacturing Activity
EU: European Central Bank Rate Decision; GER: GfK Consumer Confidence, IFO Business Climate
Final results: Debenhams, Braemar Shipping Services
Quarterly results: Relx
Trading update: WPP
Friday 26 October
US: GDP (Q3), Personal Consumption, Core PCE, University of Michigan Sentiment
EU ECB Survey of Professional Forecasters
Quarterly results: International Consolidated Airlines Group, Royal Bank of Scotland Group
Trading update: AIB Group, Glencore, Pendragon