Market Bulletin - High Marx
Interest rate expectations and a rising dollar held down US stocks, as eurozone growth slowed.
“The production of too many useful things results in too many useless people,” warned Karl Marx, who was born 200 years ago last Saturday. What, then, might capitalism’s most famous critic have made of the 52.2 million people who bought themselves a new iPhone in the first quarter of 2018?
The markets delivered their own response as results were published last week, pushing the share price of Apple, the world’s largest listed company, up by more than 10% over the period, courtesy of a share buyback announcement and a strong start for the new iPhone X, despite its $999 price tag. Nevertheless, the S&P 500, whose recent run has been driven by energy and technology stocks, ended the week slightly down, possibly on fatigue, but also on expectations of Fed tightening to come.
The economy certainly isn’t flagging. Last week, the US’s economic expansion became the second longest since records began 164 years ago. Already at 107 months, it need only continue to July 2019 in order to set a new record. On Friday the good news continued, as the official unemployment rate dipped yet further to 3.9%. However, wage growth remained sluggish and April’s jobs growth, while still positive, was slower than expected. At 2.4%, inflation in the US – at least for the present – remains not too far off target.
Nevertheless, concern about inflation persists, and the yield on the 10-year US Treasury remained not far off 3% over the course of the week, indicating continued expectations of rate rises. As it happened, the Fed chose to leave rates on hold, but expressed confidence that inflation was now here to stay. If true, that would validate further rate rises to come, and the market expects a further three over the course of 2018, with the next move possible in June. The increased confidence weighed on US stocks and pushed the dollar up against a basket of leading currencies – it is now up against the basket in 2018.
The ripple effect of the rising dollar has been strongly felt in emerging markets; companies and governments that borrow in dollars have seen their debt profiles worsen, unnerving some foreign investors. Last week, the most sudden effects were felt in Argentina, despite the current administration’s relative fiscal rectitude. In a bid to shore up the peso, the central bank in Buenos Aires raised rates from close to 30% on Monday to 40% by Saturday.
Argentinian stocks suffered a steady decline over the course of the week, as did emerging market stocks more broadly. A notable exception was mainland China where – a public tribute to Marx by the president notwithstanding – the Shanghai Composite made gains, aided by rising commodity prices. Hong Kong’s Hang Seng Index suffered, however, held back in part by a first-quarter profits dip at HSBC.
Art of the deal
Another notable trend on markets last week was the continued run of corporate mergers and acquisitions (M&A). The working week opened with a record $120 billion of agreements announced in a single day, with telecoms, energy and retail deals announced on both sides of the Atlantic. A combination of buoyant markets, economic growth and the continued availability of cheap borrowing is thought to have helped secure the deal for, among others, T-Mobile’s acquisition of Sprint.
Amid all these developments, it was easy to forget that Donald Trump’s protectionist agenda has not waned. Last week, even as he offered a one-month postponement of steel and aluminium tariffs, EU officials had reportedly resigned themselves to not reaching a deal with the president before the amnesty expires. While Argentina, Australia and Brazil managed to garner exemptions, the White House remained unhappy with the automotive tariff differential between the US and Europe.
That wasn’t the only worry for European leaders last week, however, as growth numbers came in lower than hoped at 0.4% for the first quarter, its lowest level in 18 months (albeit far above the UK’s rate of 0.1%). The European Commission said it still expects strong growth through 2018 as a whole, and warned of the dangers posed by the protectionist policies emerging from Washington. It also faced the ongoing failure of Italy’s political parties to find a coalition arrangement that enables a majority government, making repeat elections all the more likely.
Earnings in Europe followed no clear trajectory, with disappointments at Smith & Nephew, Europe’s largest artificial hip and knee manufacturer; Adidas, the sportswear giant; and Bayer, the drug and chemical group. These were offset, however, by revenue figures for Inmarsat, a satellite telecoms company, and Novo Nordisk, a pharmaceutical major. The MSCI Europe ex UK ended the week comfortably ahead; and might have risen further, were it not for eurozone inflation coming in at just 1.2% in April.
Mario Draghi, the president of the ECB, told markets the previous week that the bank retained confidence in the growth trajectory and in the outlook for wage growth, but averred that the eurozone would need some continued support. The inflation number lowered expectations on markets that the ECB would be in any hurry to start raising rates – or even to exit its quantitative easing programme.
In the UK, following the change at the top of the Home Office, Europe remained the headline issue. Indeed, the appointment of Sajid Javid as home secretary swung the balance among the heavyweight Cabinet positions towards the Eurosceptic side. Within days of his appointment, Javid was one of a number of Eurosceptic Cabinet members pressuring Theresa May not to go ahead with commitment to a “customs partnership” with the EU. As a result, the prime minister must now go back to the drawing board. The Lords, moreover, backed Parliament’s right to force her back to the negotiating table if its members are unhappy with the deal she strikes. She could draw some comfort, however, from the fact that local elections weren’t the success the Labour Party had been hoping for.
Markets marched on unhindered, and the FTSE 100 finished the period up almost 1%, its sixth consecutive week of gains. There were good results reported at WPP, the world’s largest advertising agency, despite the recent exit of its CEO. BT announced it would need to enact further job losses, having already announced 4,000 just one year ago. RBS, meanwhile, announced the closure of a further 162 branches and the loss of almost 800 jobs.
When it comes to their own finances, however, UK citizens could be forgiven for focusing instead on their pensions, given news released last week. Tax penalties incurred for breaching the lifetime allowance (LTA) have almost tripled over two years as successive cuts have been made to the relief. HMRC figures show that the tax collected from such breaches rose from £40 million in 2014/15 to £110 million in 2016/17, and that the number of people caught out more than doubled.
Research by Zurich, moreover, revealed that just under a third of retirees planning to take their pension through drawdown have no investment experience; underlining fears that a lack of advice and awareness could increase the risk of people running out of money in retirement.
Finally, Prudential figures showed that, three years on from pension freedoms, one in three people over the age of 55 say the risk of being defrauded is now a major concern. For retirees, getting professional and trusted advice has arguably never been more important.
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