Market Bulletin - Division Bell
As the US president confronted perceived enemies at home and abroad, the annual meeting of the world’s central bankers delivered some balm for markets.
On Saturday, Floyd Mayweather and Conor McGregor met in Las Vegas, Nevada for the highest-grossing bout in history. The boxing match was, perhaps, a fitting close for a week in which political conflict and disagreement was to the fore, especially in the US.
A few days earlier, in the neighbouring state of Arizona, Donald Trump returned to the stump for a speech to his support base – and was no less pugnacious than he had been on the campaign trail. The president attacked several leading media outlets and Republicans in his address. He went on to say that, even if the government was shut down, he would make sure sure that the Mexican border wall was built. He also commented on prospects for the North America Free Trade Agreement (NAFTA) between the US, Canada and Mexico, saying that the US would “end up probably terminating NAFTA at some point, OK? Probably.”
A ‘shutdown of government' is supposedly risked every time the perennial need for the US Congress to vote for a rise in the federal debt ceiling arises. The president needs Congress to vote through a rise before mid-October.
The Trump administration did not shy away from conflicts on the international stage either, imposing sanctions on a range of Chinese and Russian companies that it accuses of facilitating North Korea’s nuclear weapons programme. The decision came despite the recent departure from the White House of Steve Bannon, the hawkish alt-right advisor who said, in his most recent interview, that the US is in an “economic war” with China. Meanwhile, Donald Trump committed thousands more troops to Afghanistan, signalling a more interventionist stance than he had taken on the campaign trail. Most momentously of all, North Korea launched a missile test over Japan into the North Pacific, pushing regional tensions to a new high.
Investors are certainly taking note. Last week Ray Dalio, head of the world’s largest hedge fund, Bridgewater, signalled that politics (most especially in the US) was pushing him into a more defensive position. “I believe that… politics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes.”
Yet many investors and Republicans alike still hold out hope for Trump’s promised programme of tax cuts, and last week White House officials made clear that these were currently a top priority – Gary Cohn said the administration planned to push the cuts through by the end of the year. Since disbanding his White House business councils, the president is keen to regain momentum – and markets may well be in ‘wait and see’ mode. The S&P 500 rose 0.5% last week, but still clocked its worst month of the year. Nevertheless, corporate earnings and a cheap dollar may have helped to prevent the president’s legislative failures from making a larger dent in stock prices.
Between the time of the president’s speech in Arizona and the bout in Nevada a few days later, the focus turned to Wyoming, where the annual gathering of central bankers was underway in Jackson Hole. The star attractions were, of course, Janet Yellen and Mario Draghi, although Draghi’s words were perhaps more keenly anticipated on markets, as Yellen has already indicated that the Fed will continue to creep out of quantitative easing (QE). The governor of the European Central Bank, on the other hand, holds more QE assets and, aside of a 25% cut to monthly purchases announced back in April, has yet to turn decisively in a post-QE direction.
Like his counterparts in the US, UK and Japan, Mario Draghi is somewhat boxed in. On the one hand, growth and employment trends appear ill-matched to the current easy monetary regime. On the other, inflation remains subdued – except in asset prices, of course. The scale of QE means that the withdrawal of central bank support could cause ructions on financial markets, if poorly managed. Like the Bank of Japan, the ECB is continuing its programme for the moment, but the ECB faces a fresh challenge next year: a shortage of (permissible) assets to buy. It cannot afford to wait too long.
In the event, Draghi gave little away on either rates or QE, thereby giving the impression that nothing too momentous is in the pipeline. He also refused to talk down the single currency (despite widely known ECB concerns about its strength) as the euro hit its highest level against the dollar since January 2015. Indeed, his key message concerned not rates and easing but trade and regulations, and was thought to be aimed at the US administration. “Any reversal [of post-crisis regulation] would call into question whether the lessons of the crisis have indeed been learnt,” he said. Janet Yellen was similarly forthright. The Wyoming meeting was reckoned to help global stocks, especially in Asia. The Nikkei 225 ended the week up 0.09%.
In London, the first day of the working week was marked by a landmark bong, as Big Ben (supposedly named after the boxer Ben Caunt, the ‘Torkard Giant’) let out its last regular chime for at least four years, while it undergoes repair work. The bell will continue to chime for New Year’s Eve and Remembrance Day.
There were also suggestions that it should chime for Brexit in 2019. Last week, David Davis proposed a “new and unique” court to supervise EU–UK relations post-Brexit, broadly modelled on the European Free Trade Association system. The UK’s first proposal on the new judicial regime is part of a bid to ensure that talks can move on to the future of the EU–UK relationship this autumn – so too, perhaps, was an acknowledgement by the foreign secretary that the UK will have to pay an exit bill, after all.
The Labour Party took a significant step by declaring itself in favour of the UK remaining a member of the single market for a transitional period, thereby setting out clear parliamentary battle lines. As the third round of Brexit talks opened this week, Michel Barnier warned that the UK was wasting time by trying to ignore divorce issues like the financial settlement. “To be honest, I am concerned,” said Barnier. “Time passes quickly… We must start negotiating seriously.”
Meanwhile, UK employers urged the government to provide clarity on the status of EU nationals post-Brexit as new data showed migration falling to its lowest level in three years following last year’s referendum. Net migration to the UK reached 246,000 in the first three months of the year, down by around a quarter from the previous year – more than half the drop was caused by a dip in the net number of EU nationals in the country. The immigration minister welcomed the fall, while the Confederation of British Industry and Institute of Directors expressed concern.
Reports on investment and corporate profits published last week made for sober reading. The first showed that business investment in the UK has remained flat since the referendum, having increased from 2009 to the second quarter of 2016. The second report predicted that company profits would fall by more than half in 2018. Meanwhile, a report by Countrywide said that house prices would rise by 1.5% in 2017, down from 5% last year.
Older homeowners may have reasons to focus their worry elsewhere, however. A report released last week showed that family disputes over inheritance spiked 36% in 2016, based on the number of cases brought to the High Court. The report highlighted a range of factors at play: more potential claimants for each estate, outdated intestacy laws, and the rapid rise in house prices in recent years in many parts of the country. The merits of careful planning, expert advice and regular reviews cannot be overstated.
UK stocks performed well over the course of the week, buoyed by a rising oil price as well as by a weak currency: the FTSE 100 rose 1.1%. The euro continued its recent climb against sterling, striking an eight-year high and, at almost 93 pence, bringing it another step closer to parity. In part, the shift reflected continued confidence in the eurozone economy. The composite Purchasing Managers’ Index for manufacturing and services edged up still further, continuing its extended high. The improvement largely came from the eurozone’s manufacturing sector, which has performed well despite the rise in the currency. The Eurofirst 300 rose 0.07%.
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