Market Bulletin - Market leaders
Politics continued to weigh on markets, as the US presidential nominees held their first TV debate and Theresa May began to offer some detail on ‘Brexit’.
The first televised debate between Donald Trump and Hillary Clinton was the most-watched presidential debate in US history. Leaving out those who watched it at parties, offices and bars, the audience was estimated at 84 million, not far off a third of the country’s voting population, while Twitter reported that it had been “the most tweeted debate ever”.
Pundits took the view that Hillary Clinton came off best, helped in part by attacks that sometimes appeared to rattle Donald Trump, such as over his decision not to publish his tax returns. Markets showed their Clinton bias in the aftermath of the debate; aside of a rise for the S&P 500 (which ended the week up 0.2%), the Mexican peso and Canadian dollar both enjoyed a boost – Trump has promised protectionist trade measures which would penalise Mexican and Canadian imports to the US. Yet global trade is already experiencing headwinds – global deal-making hit a three-year low last week, with almost $700 billion in cancelled deals; although the AB InBev–SABMiller tie-up – which would be the third-largest merger in corporate history – moved one step closer as SABMiller shareholders voted in approval.
Pharmaceutical stocks suffered after the presidential debate, reflecting Hillary Clinton’s stated determination to crack down on high drug prices. Yet the most significant intervention for markets came in the form of Donald Trump’s comments about the Federal Reserve.
“We are in a big, fat, ugly bubble and we have a Fed that’s doing political things… by keeping interest rates at this level,” said Trump. “The Fed is being more political than Secretary Clinton.”
Whatever the merits and flaws of Trump’s claims, he has certainly touched on a live issue. Not only has the Fed pumped trillions of dollars into the markets since the global financial crisis – it has also kept interest rates low. Last week Judy Shelton, an economist who sits on Donald Trump’s economic advisory council, said that the Fed’s loose monetary policy has offered cheap funding to “wealthy investors and corporate borrowers”, at the expense of those with ordinary bank savings accounts and retirees with fixed income pensions.
These are not merely the views of an outlier. A report published earlier this month by Federal Financial Analytics, a respected research house in Washington DC, highlighted the same issue, arguing that post-crisis monetary policy had made the poor poorer and the rich richer, in great part because it had inflated the value of those assets generally owned only by the better-off. “It is thus now impossible for retirees to ensure quality of life and others to save for retirement through the deposit and investment options suitable for and available to low-middle-income households,” wrote Karen Petrou, the institute’s founder. “Current income-distribution distortions are likely only to get worse... Contemplate rising inflation without rising savings and be particularly afraid.”
The problem Petrou highlights is, of course, not limited to the US, but is in play across most of the developed world, young workers face significant challenges in providing for their own retirement, and pension funds grapple with lower yields – yields that look likely to persist.
“We have seen accommodative stands from the Federal Reserve, which means a lower-for-longer yield environment is likely to remain,” said Polina Kurdyavko of Bluebay Asset Management.
In the UK Baroness Altmann, a former pensions minister under David Cameron, said at a conference last week that the priority must be “to try and find ways to help ordinary people have better pensions and make pensions themselves work better”. Yet for younger people, even getting started appears to be a problem. Steve Webb, Altmann’s predecessor as pensions minister, went so far as to argue that the word ‘pension’ might need changing.
“Pensions sounds like ‘pensioners’, [and] young people don’t think they will get old,” said Webb. “You could call it your ‘freedom pot’, or your ‘life choices pot’, or whatever, but it means you can have a conversation that isn’t about pensions, but your choices later in life.”
Ten-year gilt yields have fallen by 65% in 2016 alone, while 30-year gilt yields are down by more than 45%. Inevitably, declining gilt yields take corporate bond yields down with them – and last week the Bank of England began its new programme of buying corporate bonds, which will simply depress yields further. For those either saving for, or looking for income in, retirement, current markets illustrate very clearly the value of diversifying holdings by both geography and asset class, not least because stocks in the UK and the US have held up well this year – last week the FTSE 100 slipped 0.15% but is up 10% for the year as a whole.
Politics remained dominant on UK markets last week. Trade bodies complained about Theresa May’s ‘responsible capitalism’ project (which includes enforcing worker representation on boards), while the shadow chancellor used the Labour Party Conference in Liverpool to set out a radical economic agenda: £250 billion in infrastructure investment; a £10 per hour minimum wage; an end to austerity and free trade deals; and the repeal of Tory trade union laws.
Jeremy Corbyn mentioned Brexit only once in his own speech, allowing Theresa May to steal a march by finally giving some detail at her own party’s conference in Birmingham at the weekend. She did so against the backdrop of a week of public comments from Conservative MPs on the subject. Boris Johnson said it was “absolute baloney” that the UK couldn’t control its borders and retain free access to the single market, prompting the German finance minister to offer to “send Her Majesty’s foreign minister a copy of the Lisbon Treaty” (which stipulates that free movement and single market membership go hand in hand). Former chancellor Ken Clarke said Theresa May was running a “government with no policies” and warned that “nobody in the government has the first idea of what they’re going to do next on the Brexit front.”
Yet the prime minister broke her silence in Birmingham, announcing plans to repeal the European Communities Act 1972 (which was interpreted by UK courts as granting EU law precedence over UK law). She stipulated that she would activate Article 50 of the Lisbon Treaty – the exit clause – no later than the end of March next year. Finally, and perhaps most importantly of all, she emphasised her commitment to regaining full control of immigration. In response, the pound dipped to its lowest level against the dollar since the referendum result was first announced, reflecting not just acceptance on markets that Brexit did, after all, mean Brexit, but also that it probably meant losing free access to the single market – even though the prime minister avoided saying so. A report published last week by the Centre for European Reform found that the UK already performs poorly relative to its continental peers in terms of growth, output, productivity, working hours and economic equality. Brexit, it warned, risked exacerbating these weaknesses.
Relief was express by Donald Tusk, President of the European Council, that Theresa May had announced her plans, but EU officials had plenty of other issues to worry about last week, not least the fate of Deutsche Bank, which said its stock had dipped because hedge funds were reducing their exposure to the German multinational – even the Nikkei 225’s 1.8% slip last week was in great part due to worries about the German bank. Berlin was at pains last week to say it had no intention of bailing out the bank, but there are signs the bank may not be able to meet its capital shortfall – it certainly faces major challenges. The FTSEurofirst 300 slipped 0.65%.
Bluebay Asset Management are fund managers for St. James’s Place.
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