Market Bulletin - Seasonal slips
George Osborne’s Autumn Statement marked a retreat from summer expectations, but he has largely deferred his plans.
So much for turning over a new leaf. The Chancellor's 2015 Autumn Statement was initially expected to herald unprecedented cuts to both the welfare state and pension tax breaks. In the event, it did neither.
Among those taking part in the collective sigh of relief are civil servants (although even the reduced cuts will hit staff numbers hard), welfare claimants, and (for now) higher-earning pension savers.
They cannot rest easy for long, however, as the Chancellor also recommitted himself to turning the current budget deficit into a £10 billion surplus by 2020. The UK’s third-quarter budget figures had been a disappointment to Osborne. How, then, can he have managed to postpone cuts without giving up on his much-cherished surplus schedule?
There were two immediate answers to this: tax, and the Office for Budget Responsibility. The Chancellor introduced major levies on apprenticeship schemes and second or buy-to-let properties, as well as upping council tax – some measures were even taken from the policies of the last Labour shadow cabinet. The Office for Budget Responsibility, meanwhile, surmised that its previous forecasts had been too pessimistic and duly raised its growth outlook for the UK economy, buying the Chancellor a bit of slack in the process.
Despite his initial intentions, the Chancellor ended up sparing welfare support the knife. He will struggle to reintroduce his planned £4.4 billion in welfare cuts, after the policy was voted down in the House of Lords and opposed by many in his own party.
But pension savers cannot necessarily rest so easy. Since pension freedoms were introduced, higher-earning pension savers have been able to enjoy greater choice and a continuation of generous tax breaks. In 2016, life may not be so breezy.
“By any standards, this Autumn Statement was spectacularly uneventful but we expect significant pension announcements next year,” said Tony Müdd, divisional director at St. James’s Place. “Those announcements could hit the current generous tax reliefs. Given the recent increases in pension freedoms, it seems likely the changes are not going to help higher earners saving for retirement. Now really is as good as it gets.”
On Friday, UK growth figures suggested Osborne’s softening was fortuitous, as second-estimate figures showed UK economic growth to be exactly as sluggish as first thought. The economy grew a mere 0.5% in the third quarter, held back by a decline in manufacturing but aided by growth in services. The confirmed third-quarter growth figure was down from second-quarter growth of 0.7%. The biggest shift came in net trade, which saw its weakest quarter since 1997. The trade deficit came in a little more than double the second-quarter level.
The FTSE 100 enjoyed a mildly positive week, rising 0.64% following early declines, as the City largely welcomed the Autumn Statement’s small-c conservatism. London stocks were helped midweek by a surprise rise in metals prices, yet such gains had been largely forfeited by the end of the week. Commodities are not out of the woods yet.
A Bloomberg report on Thursday claimed China was investigating “malicious” short selling on local Chinese metals exchanges, indicating that some apparently artificial price pressures may yet be alleviated. The possible investigation follows a complaint lodged by the China Nonferrous Metals Industry Association. Metals have had an exceptionally bad year on markets, with supply strongly exceeding global demand for the most important metals.
Chinese stocks had a bad week, knocked down 5.5% on Friday on news of investigations into securities brokerages. Citic Securities, the country’s largest brokerage, was shown to have overstated its derivatives business by $166 billion earlier this year. Its shares closed down 10 per cent on Friday. Guosen Securities and Hong Kong-listed Haitong Securities are also under investigation.
The US had a noticeably quiet week on markets in the run-up to Thanksgiving, as the S&P 500 rose a slight 0.05% and trading volumes were exceptionally thin. The more important mover of the week was the dollar, which rose 0.3% against a basket of its peers, on expectations of a Federal Reserve rate hike in December. Initial jobless claims were down by 12,000 in the calendar week ending 21 November, while consumer spending rose slightly.
European stocks remained buoyed through the week on hopes that the European Central Bank (ECB) in Frankfurt will increase easing measures and possibly lower rates at its meeting this week – indeed, few central bank intentions have ever been more strongly signalled in advance to markets. Easing will offer a timely boost to the eurozone’s most heavily-indebted countries – Italy, Greece and Portugal are the three eurozone countries with a debt-to-GDP ratio above 100%, but Italy’s scale and stronger economic connections to other eurozone states make its debt outlook by far the most important.
Eurozone investors therefore received double encouragement during the week, as various pieces of economic data gave encouraging indications of the currency union’s growth trajectory, without apparently being good enough to dissuade the ECB from supportive December action. Despite a 1.26% Tuesday dip on Turkey’s downing of a Russian jet, the FTSEurofirst 300 rose 0.48% over the course of the week.
Major indicators did not offer unalloyed good news last week, but the broad picture was positive. Perhaps the most concerning statistics were in France, where consumer spending dropped 0.7% in October and a November reading for services jobs showed them being shed at an increased rate against the previous month. The Markit Purchasing Managers’ Index (PMI) for employment fell from 49.9 to 49.2 in October (50.0 indicates no change.) Manufacturing employment in France offered better news, registering a healthy rise. Private sector activity in France increased for the tenth straight month in an advanced reading for November, albeit at a much lower level than the previous reading.
In Germany, third quarter GDP was an unremarkable 0.3%, the same for the eurozone as a whole, although in Germany’s case it was heartening to see domestic consumption providing the momentum. PMI results for both services and manufacturing beat expectations – services in Germany were a particular highlight. That helped to boost the wider eurozone reading to a four-year high that beat expectations. Retail sales were flat versus the previous month, although still far up on 2014 levels, while two major business confidence indicators rose significantly.
More encouragement came with the publication of the European Banking Authority’s ‘transparency exercise’ results, which showed that banks’ capacity to absorb losses (by holding more spare capital) has increased significantly. The recapitalisation of Europe’s banks will aid both credit growth and economic growth more broadly, while the increased scrutiny will aid long-term sustainability.
Working, not buying
In Japan, the Nikkei 225 ended flat after its four-day week, up just 0.02%. There was some bad news to swallow earlier in the week, as core consumer prices and household spending both fell, adding some detail to the previous week’s headline news that Japan had entered technical recession.
Silver lining came in the fact that the consumer price drop was largely driven by energy prices, not domestic fundamentals, while the jobless rate actually dropped from 3.4% in September to 3.1% in October. Nevertheless, with the broader picture far from positive, expectation is growing that the Bank of Japan may introduce easing measures in January.
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