September Market Commentary

Introduction

August is traditionally known as the ‘silly season’. The great and the good are on holiday. Nothing is happening: there are no world events. So the newspapers have to resort to any number of peripheral and not-at-all-serious subjects to fill their columns.

Not this year.

Most of the headlines in the UK concerned Brexit. This Commentary is written on 1st September with no idea what will have happened by the end of the week, never mind by 31st October when the UK is – currently – scheduled to leave the European Union.

But the big story of the month was not Brexit, but the continuing trade war between the US and China. The President didn’t mince his words:

“Our country has lost, stupidly [sic], trillions of dollars to China over many years. They have stolen our intellectual property […] and they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far better off without them. […] Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies home and making your products in the USA.”

China was not slow to respond as these words went hand-in-hand with another raft of tariffs. China has hit back against the Trump administration with a drastic exchange rate devaluation, almost guaranteeing a superpower showdown and a lurch towards a full trade war. The yuan blew through the symbolic line of seven to the dollar for the first time since the global financial crisis. […] The calculated action by the People’s Bank threatens to unleash a wave of deflation across the world and risks pushing East Asian countries and much of Europe into recession. It is certain to provoke a furious response from the White House.

Capital Economics commented rather more succinctly that Beijing had taken the fateful step of ‘weaponising’ its currency.

It is therefore hardly surprising that Reuters described the world economy as ‘probably being in recession with most business indicators flat or falling.’ And this was reflected on world stock markets, as none of the major markets we cover managed to gain ground in August.

UK

Boris Johnson ‘enjoyed’ his first full month as Prime Minister with Brexit dominating the agenda: as always there is a special Brexit section below, so let’s push it to one side for the moment.

Figures released in the middle of the month showed that the UK economy had contracted for the first time since 2012, shrinking by 0.2% between April and June. However new Chancellor Sajid Javid has said that he does not expect the UK to slide into recession.

There’s plenty of gloom on the UK’s high streets. July 2019 was the worst month on record for retail sales growth as consumer spending fell to a record low. Unsurprisingly this will result in job losses – Tesco is to cut 4,500 jobs at its Metro stores – and store closures. Shoe retailer Office is to close half its UK stores and empty shops are at their highest level for four years.

There was one ray of sunshine – literally – as the good weather saw pubs and restaurants post modest monthly growth, although those with the beer glass half empty will point out that restaurant closures are continuing to rise.

There was, though, plenty of news for those who prefer to see their glass as half full.

Figures for June confirmed that wage growth had reached an 11 year high at 3.9% and that the employment rate was at its highest since 1971. The rate is estimated to be 76.1% with 32.81m people in employment – 425,000 more than a year ago.

There was plenty more good news: Derby train maker Bombardier won a £2.34bn contract to make trains for the Cairo monorail, beating off ‘pharaoh-cious’ competition from Chinese and Malaysian firms. Overall, exports from the UK were up by 4.5% in June, the best performance since October 2016.

There was also news of booming investment in the UK tech sector, especially from the US and Asia, as tech start-ups attracted a record $6.7bn (£5.58bn) in funding in the first seven months of this year.

Mortgage lending also jumped to a two-year high as figures for July confirmed the approval of 67,306 mortgages, up from 66,506 in June.

It wasn’t just the high street where there was bad news. Belfast ship maker Harland and Wolff – the firm best known for building the Titanic – called in the administrators, putting 120 jobs at risk. Optimism in the UK services sector also fell sharply and – in line with the rest of Europe – output was down in the UK car industry.

Unsurprisingly, the FTSE 100 index of leading shares – along with the world’s other markets – had a difficult time in August, falling by 5% to 7,207. The pound was unchanged in percentage terms, ending the month at $1.2165.

Brexit planning

This section could be out of date within a matter of hours.

Over the last month we have Boris Johnson in talks with Angela Merkel and Emmanuel Macron. One of his key demands has been the removal of the Irish backstop: do that, he has said, and then we can talk about the rest of the Withdrawal Agreement.

His threat has always been that the UK would otherwise leave the European Union with ‘no deal.’ There seems to be a growing number of MPs getting ready to fight the Government and oppose a ‘no deal’ by seizing control of the House of Commons agenda – possibly aided by the Speaker – and making ‘no deal’ illegal. The Government hints that if this happens they will simply ignore the legislation.

All this is, of course, set against the background of the Prime Minister’s decision to prorogue parliament (ending what has been a very long sitting) in readiness for a Queen’s Speech. Depending on your view, this is either a ‘coup against democracy’ or a perfectly normal decision by the Executive.

As of early September, the country faces a possible General Election on 14th October, with the Prime Minister and Jeremy Corbyn trying to outwit each other. As we said earlier, there’s every possibility this is old news by the time you read this.

Europe

It was hard to find much good news in Europe. The month opened with the news that growth in the Eurozone economy had slowed as German output fell to a six-year low and the manufacturing sector continued to struggle. Germany’s overall Purchasing Managers’ Index was down to a 73-month low of 50.9 as the economy dealt with the US/China trade tensions, the overall global slowdown, weak demand from China and the uncertainty over Brexit.

Against this, the service sector did well and wages rose, as the Eurozone reflected what is now a familiar pattern for so many developed economies.

Figures in the middle of the month confirmed that the overall German economy had shrunk by 0.1% in the three months to June. A similar story in the three months to September would see Europe’s biggest economy officially in recession.

August saw the return of political uncertainty in Italy – inevitably leading to a sell-off of Italian bonds and a fall in the stock market – as Matteo Salvini, leader of the right-wing League party, called for a snap election.

By the end of the month a new government had been formed without Mr Salvini, as the anti-establishment Five Star movement formed a new coalition with the centre-left Democratic Party (PD). “We consider it worthwhile to try the experience,” said Nicola Zingaretti of the PD. We shall see…

Despite the gloom it was a relatively quiet month on Europe’s major stock markets. In keeping with the majority of world markets both Germany and France were down, but not significantly. The German DAX index dropped 2% to 11,939 while the French stock market fell just 1% to end the month at 5,480.

US

Given its impact on the wider world economy it seemed sensible to cover the US/China trade dispute in the Introduction, so this section deals purely with matters domestic.

August started with a spat between the President and the Federal Reserve, as the Fed – as expected – cut US rates by 0.25% to a range of 2% to 2.25% and the President – as expected – said that it wasn’t enough. Federal Reserve Chairman Jerome Powell described the cut as a ‘mid-cycle adjustment to policy.’ His boss demanded ‘an aggressive rate-cutting cycle that will keep pace with China, the EU and other countries around the world.’

A few days later it was announced that the US had added 164,000 jobs in July – well down on the 224,000 jobs created in June but broadly in line with expectations. Unemployment remained flat at 3.7% and hourly earnings were 3.2% up on the same period last year.

There was worse news later in the month as inflation rose to 1.8% (from a previous 1.6%) thanks to rises in gasoline and housing costs. This, of course, means that the Federal Reserve are likely to be more cautious about future rate cuts, which will presumably not do much for the President’s temper.

In company news, Uber’s shares dropped 13% as it unveiled what were coyly termed ‘disappointing profit figures’ but which were really a thumping record loss of over $5bn (more than £4bn) for the three months to June 2019. Meanwhile co-working space provider WeWork unveiled a loss of $900m (£750m) in the first six months of the year and announced that it would seek a stock market listing. Whatever happened to that quaint notion of companies making a profit and paying a dividend to shareholders?

By the end of the month the President was back on the attack, confirming that he was planning a new, temporary cut in payroll tax in a bid to further boost the US economy. “A lot of people would like to see it,” said the President.

Wall Street generally likes to see news of tax cuts, but in August there were just too many worries about the trade war with China for the Dow Jones index to make any headway. It was down 2% in the month, closing at 26,403.

Far East

All roads in the Far East led to Hong Kong in August as the pro-democracy protests continued and the authorities became more and more determined to quash them. The month ended with tear gas, water cannons and threats of five-year jail sentences for anyone taking part in the protests.

Throw in the continuing trade war between the US and China and August was inevitably a difficult month for the region’s stock markets, as we will see below.

The month had also started with another trade row, albeit on a much smaller scale. Japan has removed South Korea from its list of ‘trusted trading partners,’ citing security concerns and poor export controls. Unsurprisingly, Japanese car sales in South Korea duly slumped.

There are now growing fears that the US/China trade war and general worries about the global economy will push some of the smaller, ‘innocent bystanders’ in the Far East – such as Hong Kong and Singapore – into recession.

In the region’s company news Samsung launched a range of new phones – but Samsung heir Lee Jae-yong, along with disgraced former President Park Geun-hye, now faces a retrial on bribery charges. Meanwhile China’s leading specialist facial recognition company Megvii decided to seek a stock market listing.

Inevitably the pro-democracy problems and general unrest in Hong Kong had to impact economic growth at some point. Figures for the second quarter of the year showed that the economy had grown at just 0.5% year-on-year, which was below expectations. So it was no surprise to see the Hong Kong stock market down by 7% in the month, as it closed August at 25,725.

China’s Shanghai Composite index was down 2% at 2,886 and the South Korean market fell 3% to 1,968. Japan completed a miserable month for the region’s stock markets as it dropped 4% to close August at 20,704.

Emerging Markets

It is easy to think that the big story in Emerging Markets was the fires in the Amazon rainforest. The G7 offered Brazil money to combat the fires – which President Jair Bolsonaro immediately rejected as he traded insults with French President Emmanuel Macron.

Of greater long term significance to the financial markets – and the wider economy of South America – might well be the political and economic developments in Argentina. Both the peso and the Argentinian stock market plunged after a shock defeat for President Mauricio Macri in mid-month primary elections. The peso fell 15% against the dollar, while some of Argentina’s leading stocks lost 50% of their value.

In early September, the Argentine Central Bank imposed currency controls as the crisis deepens, with the country also looking to suspend debt repayments to the International Monetary Fund.

Fortunately, it was a much more sober month for the three major emerging stock markets we cover. The Russian market barely moved at all, rising just one point in the month to 2,740. The Indian market was also unchanged in percentage terms, closing August at 37,333 and, despite all the controversy and criticism of the government’s response to the fires, the Brazilian stock market was down just 1% in the month at 101,135.

And finally…

All too often, the news was depressing. That is especially true if you are one of the directors of that well-known financial institution the Bank of Mum and Dad, now one of the biggest mortgage lenders in the UK.

According to recent figures from L&G the Bank of Mum and Dad lent (or gave) a total of £6.3bn last year to help its children get on the housing ladder. The UK’s 10th biggest mortgage lender, the Clydesdale Bank, lent just £5bn.

The average amount lent by the Bank of Mum and Dad is £24,100 – up by £6,000 on the previous year. But not content with running a bank, it appears that Mum and Dad have decided to diversify – and the Hotel of Mum and Dad is doing record business.

According to the Office for National Statistics a quarter of the young adults in the UK – those aged 20 to 34 – live at home, with the number growing steadily over the past 15 years. According to a survey by MoneySuperMarket of 500 adults living at home and 500 parents who had adult children living with them, the ‘kidults’ were at home for an average 9.7 months and cost Mum and Dad £895 as they emptied the fridge, had their washing done for them and demanded that the old people open a Netflix account.

This year the stay has extended to more than 10 months and the cost has escalated to more than £1,600 as water, heating and electricity costs have risen at the hotel.

Apparently many of the guests are also demanding a steady stream of takeaways. A welcome distraction, perhaps, from reading the latest Brexit updates.