Market Bulletin - Signal worries
Investors contemplated the direction of inflation and interest rates, as stockmarkets rose on energy, trade and earnings tailwinds.
Equity investors largely enjoyed last week, as the correction of February felt increasingly distant. Even the VIX, leading measure of volatility on the world’s leading index, was back below its long-term average, having tracked gradually downhill over the course of the month. Moreover, as the current global economic expansion approaches its tenth year, even corporate earnings offered reasons for optimism.
Industry data showed that bank lending to US companies has picked up again in recent weeks, with an increase of more than 9% in March – its largest rise since Donald Trump took office. Bank of America Merrill Lynch, reporting better-than-expected first quarter results, can now point to double-digit shareholder returns for the first time in seven years. The bank also benefited from the US president’s tax reform package, introduced in November; although is yet to recover fully from reports of its $42 million settlement for “systematically” masking its trading practices, which emerged in mid-March.
It was largely a good week for technology stocks, which contributed significantly to rises on broader indices, given their large weighting within the investment universe. In part, this reflected a lack of major negative news stories. This marked a change from recent weeks, which saw Facebook suffer from failing to protect user data, a self-drive car involved in a fatality in the US, and Donald Trump attack Amazon over its tax arrangements.
Yet tech stocks suffered a small reversal later in the week, as a major bank issued a warning on Apple’s forthcoming earnings, and one of its major suppliers warned of poor demand for mobile handsets. Taiwan Semiconductor fell 5.5% in Taiwan following a disappointing earnings forecast for the second quarter. Netflix, meanwhile, announced exceptionally strong results last Monday, and announced plans to increase its content in Europe by doubling its investment in the region. Even Facebook, despite New York’s comptroller warning that Mark Zuckerberg should not be both CEO and chairman, enjoyed a positive week on markets. The NASDAQ had a particularly good week, while the S&P 500 ended the week up just over 1%, having forfeited some of its early gains. Stocks worldwide largely followed suit – the MSCI Europe ex UK ended up by around 1% and Japan’s TOPIX by a little more.
Another contributor to improving sentiment was the energy sector. Tensions in the Middle East, notably in Syria, the current geopolitical focus of US–Russia discord, contributed to supply worries for the sector. An unexpected dip in US inventories added to concerns over supply, pushing the price of a barrel of Brent up to $74.74, its highest since 2014. Speculation also coalesced around Saudi Arabia, which appears increasingly at ease with a higher oil price, perhaps in part due to its need to pay for the ambitious reform programme currently being introduced by Prince Mohammed bin Salman. At time of writing, the energy portion of the S&P 500 is up by some 9% in April alone. ConocoPhillips, BP and Shell were among the oil majors to benefit.
While oil benefited from global tensions last week, there were some signs of progress in the world of diplomacy, albeit only in the context of recent months. Perhaps most significantly, it emerged that Mike Pompeo, the director of the CIA, had met with Kim Jong-un to discuss the possibility of a formal nuclear deal; and South Korea indicated later in the week that North Korea had acquiesced to the idea of US troops remaining on South Korean soil – contrary to its former position. At the weekend, Kim said North Korea no longer needed to conduct any missile or nuclear tests.
Yet despite the lack of fresh sanctions last week, measures introduced earlier in the month against Rusal, Russia’s largest aluminium producer, were sorely felt. Rusal was effectively cut off from world markets and the price of alumina – the chief input for aluminium – has gained almost 50% in value since. The prices of aluminium, nickel and palladium also rose. Commodity majors elsewhere have had a better time of it, as could be seen in the stock prices of both Rio Tinto and BHP Billiton last week. Each of the mining majors is listed on the FTSE 100, which last week rose by almost 1.5%, reflecting the large weighting of energy and mining stocks within the index.
Bond markets, however, told a less happy tale. The yield on the 10-year US Treasury, the most important debt number in the world, climbed ever closer to the 3% mark. Reaching 3% is viewed as a signal that investors expect rising inflation to persuade the Federal Reserve to take more precipitate action in raising rates. Last week, Donald Trump also began to step into the fray – the president made no secret on the campaign trail of his preference for low rates.
Most notable, however, was the decline for major tobacco companies. Philip Morris lost around 15% over the course of the week, sparked in part by poor results – and its statement that take-up for alternative devices might not be as quick as some had hoped. The company suffered the worst trading day in its long history. BAT and Imperial Brands also had a bad week, suffering contagion from the worries over Philip Morris.
Unreliable boyfriend redux
Just as the rest of the world followed the US’s lead on equity markets, so concerns about inflation and interest rates were not confined to North America. In the UK, Mark Carney signalled that the Bank of England might not raise rates after all when it meets in May. The comments swung against the tone of his previous statements, prompting fresh accusations that he was an “unreliable boyfriend” to markets. However, the governor was responding to an unexpected dip in inflation in March. Despite the drop, the latest Moneyfacts figures confirmed that just four of the 399 Cash ISA accounts on offer pays a rate that beats it. However, that didn’t stop UK savers depositing a two-year high £1.2 billion into Cash ISAs in February, suggesting that caution is still winning over prudent long-term planning.
As inflation fell to 2.5% in March, so it emerged that wage growth in the three months to February was 2.8% – slightly above the average inflation rate across that longer period. That will come as good news for many further down the income spectrum, although it barely moves the dial on some of the affordability issues facing the younger generation, not least the challenge of home ownership. Figures published by the Resolution Foundation last week showed that 40% of millennials (which it defines as those born between 1980 and 1996) were living in rented accommodation at the age of 30 – double the rate in the years 1965–80. Up to a third of people, it found, face living in rented accommodation all their lives. With house prices up by 30% since 2013 (54% in London), it’s little wonder that families are increasingly turning to intergenerational planning to help children onto the housing ladder.
The prime minister, however, faced far greater domestic pressures, as London hosted the Commonwealth Heads of Government Meeting – and she came under attack for hardline immigration decisions. She also came under parliamentary pressure to explain why she hadn’t sought a Commons vote before agreeing to take part in military action against Syria. Trouble apparently does come in threes, as she also faced a vote in the Lords – and lost. The question of continued customs union membership may not be quite as fully resolved as she would want.
At least she still had a job by the weekend. Last week saw the resignation of one of the most successful business heads in the UK. Sir Martin Sorrell, the best-paid CEO in the FTSE 100, has built WPP, the advertising agency, into a £30 billion business, but resigned last week following the launch of a personal misconduct inquiry. WPP’s shares slid following the Sorrell announcement, but recovered later in the week.
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