Market Bulletin - Contested connections
Despite protectionist momentum, figures showed strong economic activity in the US and UK, as stock markets continued their run.
A keynote of the campaigns for Brexit and for Donald Trump was opposition to globalisation and, at its extreme, a desire to recreate the ‘national economy’ that predated the open borders and global supply chains of today. Last week, despite signs that those protectionist impulses will indeed be translated into policy action, leading stock markets enjoyed a strong run, while economic indicators provided plenty of New Year cheer, notably the US payrolls report – non-farm payrolls rose by 156,000, while 2016 wages saw their fastest annual increase since 2009.
Donald Trump threatened Toyota with a ‘big border tax’ if it failed to build cars destined for US customers in the 50 states. It was his first post-election threat directed towards a foreign company. Meanwhile, Ford scrapped its own plans to build a $1.6 billion car plant in Mexico, saying Donald Trump’s policy plans had persuaded it to shift production to the US. It will now manufacture its electric and self-driving cars in Michigan, the old hub of the US auto industry, investing $700 million and creating 700 jobs. Meanwhile, Volkswagen learnt that US investors have been accorded the right to sue it over its emissions fiddling scandal, and the United States Department of Justice handed out fines worth $1 billion to RBS and Barclays for currency manipulation. Amid these frictions, the leading US manufacturing index showed its best reading in two years, and weekly initial unemployment claims struck a 43-year low.
The S&P 500 rose by 1.8%, boosted by the non-farm payrolls data, but investors were also holding on for earnings season, which begins today with the publication of Alcoa’s results. For Apple, the world’s most valuable company, there is reason for hope, after customers spent 40% more on apps in 2016 than in the previous year – the success of Pokémon Go and Super Mario Run countering the sagging effect of iPhones reaching a plateau. New Year’s Day saw record single-day sales on the App Store of $240 million.
Rates were also on the radar of investors, as the Federal Reserve released the minutes of its December meeting. In their comments, Fed officials acknowledged a “cloud of uncertainty” over which of Trump’s purported policies would see the light of day. Committee members suggested that a more rapid rate-rise trajectory might prove necessary, if Donald Trump’s spending plans did indeed materialise, since those plans could push growth and inflation up at a higher rate than had previously been anticipated. The yield on the more policy-sensitive two-year US Treasury rose in response to publication of the minutes. Meanwhile, bond issuance on Wall Street has begun 2017 at high levels, as companies lock in low rates while they can.
As in the US, so in the UK, corporate confidence and leading indicators painted a rosy picture across all major sectors of the economy. Business activity hit a 17-month high in December, and the economy grew by 2.2% in 2016 – a faster rate than all six other leading developed nations. UK growth was also higher in the second half of the year (i.e. after the Brexit vote) than in the first half. In December, construction and manufacturing grew at their fastest rate in 11 months; while orders in the services sector, which accounts for four fifths of the UK economy, reached a 17-month high.
The FTSE 100 has already risen more than 13% since Brexit polling day, and last Friday it clocked a record high for the seventh trading day in a row, the index’s best ever run, ending the week up by 0.94%. The housebuilding sector was a particularly sunny spot, after solid sales figures from Persimmon raised hopes that the sector would avoid a post-Brexit-vote lull in growth. Taylor Wimpey and Barratt also rose.
On the negative side, Next reported that sales had fallen and that 2017 would be “challenging” for the high street retailer, as rising inflation puts pressure on consumer spending. The British Retail Consortium announced that clothing and footwear prices rose in December – their first month-on-month rise in two years. Nick Purves of RWC Partners believes it remains too early to say whether Next’s troubles are a bellwether of the sector at large – or specific to the company itself.
“It may be a bit of both, but this was a continuation of a trend throughout 2016, with four factors at work,” said Purves. “The environment for high street retailers remains tough. Secondly, the company had increased its gross margin over the last few years despite slow sales growth; but this is harder to achieve in a falling sales environment – and the cost of goods will increase as a result of the decline in the pound. Thirdly, the company has increased inflation in its cost base as a result of the National Living Wage, business rates revaluation and energy taxes. Finally, within its online business, Next Directory, it suffered from competition from other online retailers who had improved their offerings and managed to catch up.”
There has, also, already been mergers and acquisitions activity in the new year. The London Stock Exchange sold its French clearing business to Euronext, in the hope that this will persuade regulators to approve its acquisition by Deutsche Börse at a meeting on 13 March. The low price of sterling was one reason that Sumitomo Rubber, a Japanese company, last week agreed the purchase of Micheldever, the UK’s second-largest tyre producer, for £215 million.
The UK’s future relationship with the EU remained an open question. The British ambassador to the EU last week resigned his position, apparently frustrated at his advice being ignored – despite calls for a pro-Brexit candidate, he was quickly replaced by a career diplomat; Nicola Sturgeon promised to forgo a rapid Scottish independence referendum in the event of a ‘soft’ Brexit; and Theresa May, in an interview with Sky News, appeared to indicate that the UK would be leaving the EU single market.
Yet there was at least one significant sign that the UK government remains committed to global trade and connectivity last week, when the first train delivery set off from Yiwu in east China, bound for London’s East End. ‘East Wind’ is carrying clothes and household goods destined, initially at least, for Barking – the method will be quicker than a container ship and cheaper than air delivery.
Two rival indicators (only one of them official) delivered a favourable portrait of the Chinese economy last week, showing manufacturing at its strongest level in two years. The renminbi experienced its biggest two-day gain against the dollar on record, thanks in part to the improved data, and the Shanghai Composite index enjoyed a strong week. Meanwhile, the government took one more small step towards letting the market determine prices as it signalled the end of its salt monopoly, which has been in place for 2,000 years.
There was also optimism in the eurozone, as factories in December enjoyed their best month in more than 15 years. Leading German and French indices were almost double-digit gainers in the fourth quarter of 2016, reflecting hopes of a strong economic recovery in 2017. Last week the FTSEurofirst 300 rose 1.2%.
Japan’s Nikkei 225 rose 1.8%. Should Japanese stock prices remain buoyant, they may enable Shinzo Abe, the prime minister, to press ahead with his reforms, notably some major state privatisations.
RWC Partners is a fund manager for St. James’s Place.
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