Market Bulletin - Quarterly signals
Gilt prices fell sharply after strong post-referendum growth data made further Bank of England easing look unlikely.
Last week came the release of the first round of headline UK economic growth data since the referendum vote – and it made for happy reading. Growth in the third quarter reached 0.5%. Dour IMF and Treasury economic forecasts for the aftermath of the referendum vote have not come to pass – at least, not yet.
Such forecasts had, of course, assumed that Article 50 would be triggered immediately, and had not factored in the strong supportive action taken by the Bank of England in August. Yet even accounting for the trigger delay and rate cut, the figures still provided grounds for optimism. The most immediate response came from gilt markets, where yields (which move inversely to prices) rose rapidly, as expectations of further rate cuts reduced.
Moreover, there was heartening economic news in the US and Continental Europe, although the FTSEurofirst 300 dropped 0.96% over the week, partly on banking woes. Figures released last week showed France returning to (marginal) growth in the third quarter, Spain growing by an impressive 0.7%, and industrial production and corporate confidence on the rise in the US. The US enjoyed its 86th consecutive week of ‘initial jobless claims’ below 300,000, the longest such run since 1970.
Yet the prospect of stronger growth, and the gradual withdrawal of central bank stimulus, did not lead to a surge in equity markets. The FTSE 100 slipped by 0.34% and the S&P 500 by a mere 0.09% last week. Third-quarter growth in the US beat expectations, reaching its fastest pace in two years; but corporate earnings season provided mixed messages on whether American companies are truly emerging from the earnings recession of the first half of the year. Perhaps the most significant US corporate news last week came in the form of confirmation of AT&T’s plans to buy Time Warner (TWX) for $85 billion.
“We believe the planned merger makes sense on a number of fronts,” said Jim Henderson of Aristotle. “In its essence, this is a merger between a business, AT&T, and one of its customers, TWX. AT&T delivers media content to consumers while TWX ‘manufactures’ that content. One doesn’t have to look very hard to see multiple synergies in the combination: advertising clout increases, media delivery – especially to mobile devices – becomes more seamless, and margins are enhanced.
“Why then the scepticism? Why is TWX’s share price well below the offer price? In short – politics. Whenever a traditional media business undergoes a corporate action, eyebrows are raised, anti-competiveness concerns abound and the regulators get busy. We are very early in this process and are continuing to monitor the situation.”
Although Apple saw quarterly earnings rise, the company clocked its first ever full fiscal year of falling iPhone sales. Alphabet (Google’s parent), Amazon and Caterpillar all posted disappointing quarterly earnings, while Ford saw net income slip more than 50%.
Across Europe, banks were a particular concern, although two of the more troubled major lenders, Barclays and Deutsche Bank, reported positive quarterly results. Lloyds saw a marginal slip in profits but, much more significantly, said that the extra £1 billion that it has set aside for PPI mis-selling restitution would be the final allocation the bank makes; Barclays set aside a further £600 million. The scandal may have cost the UK banking sector as much as £35 billion, according to PPI Claims and Advice. RBS reported £469 million in losses for the third quarter, due to legal costs and restructuring bills, even as it remained under government ownership.
“RBS has had to downsize its operations very significantly after receiving a taxpayer bailout during the financial crisis [and] it has now come a long way in its journey,” said Nick Purves of RWC Partners. “RBS now has the capital strength to survive [a severe economic slowdown] without further recourse to its shareholders. The management’s aim has always been to wind down or sell off the parts of the bank where it feels that it can’t compete… Once this process is complete, then it is likely that investors will be able to look forward and not backwards and re-rate the company’s shares accordingly. The shares are very modestly priced and don’t reflect the potential value of what can become a smaller but much more profitable company.”
Banks were just one of the focuses last week as jockeying continued over plans for the UK’s exit from the EU. Michael Noonan, Irish finance minister, began lobbying for the European Banking Authority to be moved to Dublin, since it will have to relocate out of London when the UK departs. Mark Garnier, the UK’s trade minister, warned last week that UK-based banks would “probably” lose their EU passporting rights in the forthcoming exit negotiations.
Nissan, the UK’s second-largest carmaker, last week committed itself to producing both its Qashqai and X-Trail SUVs at its Sunderland plant. There was also fresh hope for the future of the UK’s largest steelworks at Port Talbot as the cuts-prone chairman of Tata Steel was sacked.
Theresa May made a first trip to Brussels as prime minister, perhaps happy to escape public opposition from senior Tory MPs over her decision to build a third runway at Heathrow – the decision led Zac Goldsmith MP to stand down from his parliamentary seat and trigger a by-election.
There were also pension jitters in the UK last week, as figures for the third quarter alone showed that 15,000 companies were issued with warnings for failing to sign up staff into workplace pension schemes, an increase of 344%, and that 3,000 businesses had been issued with fines.
Quarterly figures also showed a rise in the number of people withdrawing funds from their pension pots since the introduction of pension freedoms. Savers took £1.5 billion from their pension pots in the last three months, although average withdrawal amounts are now close to £10,000, down from almost £20,000 in 2015. However, concerns persist that the reforms to make pensions more flexible and attractive have not yet translated into people saving more for retirement.
Hot air Walloons?
As major stock indices in Europe and the US fell marginally, a weak yen and stronger Japanese growth figures helped push the Nikkei 225 up by 1.5%. Investors exposed to China benefited from last week’s good economic growth numbers and a cheaper yuan. Meanwhile, recent sentiment turnarounds in Brazil and Argentina have provided extra boosts for emerging markets, illustrating again to investors the benefits of geographical diversification.
As ever, global politics loomed large on markets, with the most obvious challenges to financial stability and growth coming from the West. After a seven-year negotiation process, Canada and the EU were on the cusp of signing CETA, a landmark trade deal, when it was vetoed by a regional Belgian vote. The Parliament of Wallonia represents the interests of 3.5 million people in a trade bloc of 500 million. But an 11th-hour reversal on Friday saw the local legislature reverse its decision in a second vote. CETA was signed, after all.
In the US, Hillary Clinton initially continued to enjoy a strong lead in the polls, offering reassurance to markets that some of Donald Trump’s more protectionist measures on trade and immigration were even less likely than before. On Friday, however, the FBI announced it would launch a new investigation of her use of a private email server. Polls tightened in response. However, at the time of writing, Clinton remains the frontrunner.
Aristotle Capital Management and RWC Partners are fund managers for St. James’s Place.
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