The surprise votes of 2016 echoed through the quarter, as the extended US bull run passed two milestones, reports CIO Chris Ralph.
The Brexit and Trump votes in 2016 hinged on promises of major change. Perhaps more than any time since then, the third quarter saw some of those promises beginning to be delivered, albeit in fits and starts.
In the UK, the prime minister finally published her ‘Chequers plan’ for a withdrawal deal with the European Union ahead of the UK’s formal exit in 2019. The plan’s launch sparked two high-profile resignations: the Foreign Secretary, Boris Johnson, and the Secretary for Exiting the European Union, David Davis.
Theresa May was only able to push her plan through parliament by accepting – and later insisting on – a set of ‘hard Brexit’ amendments. But victory in London did not translate into victory in Salzburg, where the European Council met in September. Instead, after receiving a firm rejection from all 27 EU national leaders, a defeated and angry prime minister told the press: “We are at an impasse”.
Sterling suffered its sharpest one-day drop against the dollar in a year, although remained significantly up for the year and even ended the quarter slightly higher. Its rise did not help the internationally-oriented FTSE 100, but both the blue chip and FTSE 250 indices felt the pressures on the UK high street, as Mothercare, New Look, Debenhams, House of Fraser and Carpetright variously announced closures or outright bankruptcy.
To add to Theresa May’s woes, the Labour Party leadership said it would vote against any Chequers-styled final deal in parliament. Moreover, the EU has said a new Irish border plan must be ready for mid-October. By quarter-end, leading bookmakers were offering odds near 2/1 on the UK leaving without a deal, despite a crescendo of warnings from business and labour groups. Faced with looming Brexit deadlines, the Chancellor brought the Budget date forward to 29 October.
Although the Bank of England introduced one interest rate rise in the period, headline growth was sluggish in the UK and across much of Europe too, not least in France, while Angela Merkel’s political ascendancy slipped in Germany, and a populist coalition in Italy announced a deficit-raising budget at the end of the quarter. European stocks ended the period little changed, but the EU did sign the largest bilateral trade deal in history with Japan.
In the US, however, this pattern was reversed, as growth accelerated and trade relationships were fractured. Second quarter growth was reported at 4.2% (annualised), and there were plenty of positive signals over the course of the third quarter too, among them manufacturing, employment and productivity figures, not to mention strong profits in the banking sector.1
The S&P 500 struck a new record high, gaining some 7% over the quarter – its largest quarterly gain since 2013 – aided by energy stocks (which benefited from the high price of oil) and technology majors. Apple and Amazon became the first and second companies, respectively, to be valued at a trillion dollars.2 More significantly, as the ten-year anniversary of Lehman’s collapse came and went, the S&P clocked what was – by some definitions – the longest bull run in its history. From an intraday level of 666 in March 2009, the index ended September at 2,914 points.3
Little wonder, then, that inflation struck a six-year high, and that the Fed continued its rate rises, delivering its third hike of 2018. More arresting was US policy internationally, particularly on trade. The US imposed sanctions on both Russia and Iran, as well as imposing two rounds of tariffs on billions of dollars’ worth of Chinese imports, turning a onetime rhetorical skirmish into the first major trade war since the 1930s. The US also signed a NAFTA successor deal with Mexico and cut an 11th hour deal with Canada to make it a true North American affair. The Trump administration complained loudly about EU imports to the US, particularly cars. Indications the US is ready to target Japan were upended at quarter-end on reports of imminent negotiations on a new US-Japan trade deal.
Japan’s economy reported relatively positive momentum, as GDP growth in the second quarter came in at 3% (annualised) and Shinzo Abe won a third term as leader of Japan’s Liberal Democratic Party. The Topix performed strongly, although much of the gains simply cancelled out losses in the previous quarter; the Nikkei 225 struck its highest level since 1991.4
In market terms, the most obvious victims of recent White House policies – or at least of the rising dollar – have been emerging markets (EMs), and EM fortunes worsened through the period, most notably via political or financial crises in Turkey, Argentina and Brazil. But it is China that investors will be watching most closely, as poor stock market performance and a changing relationship with the US through the quarter have only added to uncertainty.
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1 Bloomberg, accessed 1 October 2018
2 Bloomberg, accessed 1 October 2018
3 Bloomberg, accessed 1 October 2018
4 Bloomberg, accessed 1 October 2018