Market Bulletin - Penny pinching
The chancellor delivered a continuity Spring Statement, as both the UK and US imposed sanctions on Russia – and Vladimir Putin won domestic elections in a landslide.
In 1869, Eugène Meyer patented his 'high' pedal bicycle in France. In England, it soon became known as the penny-farthing, since the size mismatch between the two wheels mirrored the mismatch between the larger penny and smaller farthing. The latter was killed off by inflation in 1960, to be followed in 1984 by the halfpenny. Last week, faced with some robust public campaigning, the government chose to keep the humble penny in circulation.
Yet, beyond the penny pushers that totter on in a few old amusement arcades, it’s not easy to find anything to spend one of them on – even the 2p piece is largely redundant in value terms. The culprit, of course, has been inflation, which currently stands at 3%, significantly above the 2% level targeted by Bank of England. Moneyfacts data continues to show that not a single savings account offers anywhere near that level; as a result, it is all too easy to suffer the ‘1p effect’ by staying in cash. As the tax year-end deadline looms, savers yet to use their annual ISA allowance should invest it wisely.
Last week, the chancellor once again made a show of being penny-wise. Delivering his new-look Spring Statement, Philip Hammond sought to perform an awkward political balancing act. On the one hand, the usually dour Mr Hammond described himself as “positively Tigger-like” about the broader economic outlook and headline trends. After all, growth figures are looking slightly better than they did in the last round of estimates, and tax receipts have given the public finances a boost, lowering the debt burden.
Yet his chipper political message was diluted by an apparent determination to prioritise budget reduction over public service increases. In reality, the chancellor believes his headroom remains somewhat limited and he is keen not to promise too much to fellow ministers too soon – perhaps unsurprisingly, pressure for increased budget allocations is reportedly especially high from the ministers for education, health and defence. However, he was keen to signal that the Autumn Budget may provide a little wiggle room. With a Whitehall spending review due in 2019, ministerial jostling for increased budget allocations is doubtless already well under way.
Accompanying forecasts from the Office for Budget Responsibility (OBR) didn’t lift the mood. The OBR said that the recent upgrade to the 2017 economic growth rate (now calculated at 1.7%) was merely a “modest cyclical upgrade” and that, over the medium term, the outlook is “little changed”. OBR figures also showed a £37 billion “Brexit bill” to come.
Nevertheless, the chancellor succeeded in at least one of his aims: not doing too much. Judging by chancellors past, that is no mean feat. The unusual British tradition of two annual budgets can make financial planning difficult, particularly if chancellors turn overactive – potentially for short-term political reasons. Those investing and planning for retirement would therefore do well to take advantage of the current spell of policymaking restraint by using up their allowances.
Stocks in the UK declined slightly over the course of the week – the FTSE 100 dropped 0.9%, and volatility remained controlled. One company to dip somewhat more dramatically last week was Unilever, whose products range from Dove Soap to Marmite. The Anglo-Dutch consumer goods giant, whose history dates back to 1872, finally announced its decision over whether to place its new single headquarters in London or Rotterdam – and plumped for the latter. The decision comes as a blow to the prime minister, whose commitment to UK plc has been questioned ever since her first party conference speech as leader.
Stocks in continental Europe were only mildly better-performing across the week, and the MSCI Europe ex UK ended the period up 0.2%. Adidas was a particular highlight; its stock rose by more than 10% following an encouraging set of corporate earnings. Italy remained without a new government following recent elections, and may remain so for some time yet. At 131%, the country’s debt-to-GDP ratio remains exceptionally high, but Italian stocks continued to perform well last week, and the yield on 10-year government bonds remains at a controlled level. Whether the rise of the populist vote in Italy translates into a more arm’s length approach to the EU remains to be seen, but the election result hardly improves the prospects for Emmanuel Macron’s EU reform programme – nor, if last week’s reports are to be believed, does Berlin’s growing coolness towards the programme.
The S&P 500 fell in the first half of the week, before settling in the second - it ended down 0.2%. As ever, it’s not easy to be sure about short-term market moves, let alone to make money out of them. One analyst put Thursday and Friday’s relative quietude down to investors clocking off to attend or watch the annual NCAA Men’s Basketball ‘March madness’ tournament – historically, US productivity statistics show a dip at the time the tournament takes place.
Like markets, politics also appeared to be moving in sync on either side of the Atlantic last week, as the White House swung in behind Theresa May’s condemnation of Russia’s purported poisoning of Sergei Skripal, a former spy, and his daughter in Salisbury. The prime minister announced the expulsion of 23 diplomats from London – Russia responded by announcing the expulsion of 23 UK diplomats from Russia. In a separate development, the US announced sanctions of its own, citing Russia’s cyber interference in the 2016 US election and in its power network. Five groups and 19 individuals were targeted in the move. Putin’s election campaign spokesman thanked the UK for its role in boosting the president’s support at the polls over the weekend, as he rode to a commanding victory in national elections with high turnout. (Or so the official figures showed, but reports emerged of ballot stuffing – as did videos seemingly showing the same.)
Donald Trump showed no signs of flagging on his trade sanctions either, and last week he began to receive some support from a handful of elected Democrats too, potentially creating momentum for future protectionist legislation.
Yet attention on markets was already turning to the Fed, where incoming Chair Jerome Powell will hold his first formal rates meeting this week. Headline inflation in the US currently sits at 2.2% but core inflation, the Fed’s primary target, is just 1.8%, still slightly below the 2% objective. The prospect of rising interest rates has contributed to recent rises in bond yields, making bonds potentially more attractive for some investors.
Powell is widely expected to introduce the Fed’s first rate rise of 2018, but received a warning shot last week from the chair of the St. Louis Fed – one of the US’s 12 regional ‘sub-Feds’. James Bullard, the St. Louis Chair, warned that interest rate rises and balance sheet cuts at the Fed could put the ongoing US recovery at risk. Downward pressure on inflation would be sub-optimal, Bullard said, “in an environment where inflation is already below target”.
Given recent goings-on at the White House, however, the changing of the guard at the Fed now looks like old news. Last week, the president announced he was sacking Rex Tillerson, his Secretary of State – and without telling him first. Tillerson becomes just the latest on a growing list of White House departures. Reports surfaced late in the week that the National Security Adviser is next on the list for the exit.
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