Market Bulletin - Grand Tour
Inflationary fears helped push US debt yields to multi-year highs, as growth figures in the UK disappointed markets.
During the Napoleonic Wars, well-heeled young ladies and gentlemen could no longer cross the Channel to swan through the towns of France and Italy on an extended ‘Grand Tour’ of European civilisation, as they had done for decades. So it was that the ‘Wye Tour’ was born, taking homeland tourists from Ross-on-Wye to see the glories of Goodrich Castle, Symond’s Yat and Tintern Abbey (pictured).
If Brexit doesn’t encourage more holidaying Brits to head for the Shires this summer, last Friday’s sudden fall in sterling just might. The dip came in response to economic growth numbers for the first quarter, which clocked in at a dismal 0.1%: the worst quarterly rate of growth in five years. Less noticed was that the UK’s budget deficit beat market expectations, coming in at £42.6 billion in the 12 months to 31 March, having been £46.2 billion in the previous year. The achievement marks the first time since 2002 that the government has actually met its deficit reduction target, and the first time the headline figure has fallen back to pre-crisis levels. The news probably helped end a recent run of increases in the yield on the 10-year UK government bond, which ended the week back below 1.5%.
Yet investors were more interested in the growth figures. As the news was published, so sterling stumbled against both the dollar and the euro – and stayed down. It was also notable that UK inflation fell to 2.5% during the week, its lowest level for a year. Whilst news of lower inflation offered a glimmer of hope for UK cash savers, the disappointing growth figure was a blow because it makes a May interest rate rise far less probable. The struggle to achieve a real return on cash continues.
Yet the silver lining on the bad news for growth and sterling came in the form of stock prices. The FTSE 100, buoyed by a weak pound, rose by almost 2%. Moreover, corporate earnings for the first quarter stood in contrast to broader economic performance, as a number of major players announced good results. Among them was Shell, the largest listing in the UK; the oil major reported a 42% rise in profits. Indeed, the FTSE 100 Index benefited from its significant weighting to oil and mining companies, as oil spent most of the week around $74. At the weekend came confirmation that Sainsbury’s and Asda do indeed plan to join forces – the former’s share price rose more than 15% in early Monday trading.
Another London-listed company to hit the headlines was Shire, the Irish pharmaceutical, as it finally accepted a takeover bid made by Takeda. Not all investors were convinced the Japanese company could make a significant financial gain out of the deal and its own stock suffered somewhat over the week (and, when it comes to long-term cost, Takeda’s purchase would have made far less sense were Japanese interest rates not so low). The broader TOPIX, Japan’s leading index, enjoyed a stronger week, rising around 1.5%. Data showed that foreign investors had been net buyers of Japanese stocks for the fourth week running; although a fall in the price of the yen against the dollar doubtless contributed to sentiment.
Across the Channel, signs emerged that the eurozone economy might also be slowing, albeit less dramatically than the UK's, if German manufacturing and export figures are anything to go by. However, after a concerning start to the year, further figures published on Friday showed that economic sentiment across the eurozone had in fact found an equilibrium in April, with the reading unchanged from the previous month. In a press conference the previous day, Mario Draghi acknowledged that eurozone growth had slowed a little, suggesting that the Bank may now be less eager to wind down its balance sheet than it was just a few weeks ago.
Meanwhile, politicians in Europe appeared to be in overdrive. Leaders in Brussels and major capitals were looking at imposing new sanctions on Iran to persuade Washington not to pull out of a nuclear deal signed under Obama. European stocks inched upwards over the week; the MSCI Europe ex UK ended the period up by almost 0.5%.
The most visibly active of Europe’s political leaders was in Washington last week, seeking to shore up Franco-US relations. As far as optics go, the push worked – the Trump–Macron bromance now appears to be in full bloom.
It was less clear whether the US would accept its oldest ally’s challenge to stick to the Iran nuclear deal. But in terms of sanctions and geopolitics, the week probably moved the dial closer to the pre-Trump status quo. The US said it might ease recent sanctions on Rusal, the Russian commodities company, if Oleg Deripaska sold his stake, pushing the price of aluminium up 10%. Meanwhile, in the Koreas, leaders of North and South agreed to work towards peace and “complete denuclearization”. There is a long way to go, but the end to a 68-year state of war is now being openly discussed.
Companies in the US appear to have enjoyed a strong start to the year, with earnings striking a multi-year high and pushing up global equities in the process. Nevertheless, the S&P 500 ended the week only marginally below where it began; it was constrained by a rising dollar, but also by industrial and materials stocks. Facebook, despite recent pressure around private data leakage, announced stellar returns for the first quarter. Amazon, meanwhile, saw its earnings more than double, putting its share price within spitting distance of a new record. Some companies, however, were on the acquisition warpath last week, most notably Comcast, which put in a rival bid for Sky, upsetting 21st Century Fox’s plans to acquire a controlling stake in the broadcaster. Comcast valued Sky at $4 billion more than Rupert Murdoch’s Fox – a timely cliffhanger that opens the way for an absorbing second series of bids. Sky’s share price rose by more than 4% in response.
Yet the most significant market moment of the week came in bonds, not equities, as the yield on the 10-year Treasury finally crested above 3% for the first time in several years, while two-year debt – which is more policy-sensitive – struck a ten-year high. “In and of itself, it doesn’t represent anything significant apart from something psychological; but for me it’s the difference between the yield on the 10-year Treasuries and the yield on the US equity market that matters,” said Chris Ralph, CIO of St. James’s Place. “You’re now getting 1% more on Treasuries than you are on equities and so, if you’ve got a choice, you might be thinking that US Treasuries look more attractive at the current time. That’s very different from other markets around the world.”
Investors and savers in the UK might do better to focus on asset price inflation, however, given last week’s HMRC figures, which showed that Inheritance Tax receipts struck a record £5.2 billion in the last tax year – despite George Osborne’s supportive measures. The rapid rise in UK property prices, especially in the South-East, is thought to lie behind the hike in receipts, which are up 8% against the previous tax year. All the signs are that families are failing to take advantage of the opportunities that exist to minimise the death tax burden with a bit of expert advance planning.
Last week was also the third anniversary of pension freedoms, and figures released by the Association of British Insurers showed that £17.5 billion has been withdrawn from pensions in that time. The report highlights that people in the UK are still delaying making proper plans for retirement until too late in life. That can make it all the more difficult to afford the retirement you expect – let alone that Grand Tour you’ve always dreamed of.
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