Markets took flight overnight on Wednesday 15 August, as recessionary fears took centre stage again, following weak economic data from Europe and an escalation in the US/China trade war. The US markets fell by over 3%, following falls in value seen across the Asian markets. This however, is only what we have been predicting across the summer, in that an increase in volatility will occur as tensions between China and USA increase. An increase in volatility is not an absolute pre-curser of a recession. Our stance all year has been that there will undoubtedly be a recession, just not yet! A major current factor is negative interest yields across Europe, and Sweden’s bond market joined that not so exclusive market overnight. Again, negative interest rates are not a guarantee of a recession. The world can be rescued by a global fiscal stimulus, led from within Europe by Germany, who have room for deep tax cuts and the wherewithal to place incentives for economic expansion. So do not despair, we have seen this before and we now need policy makers in Europe and the USA to respond with policies to strengthen the Dollar and the economies. That’s what works long term.
Blog – There will be a deal Markets continue to recover from the trials and tribulations of December, with the FTSE 100 Index trading again above the 7000 level. We have stated many times in our comments that there will be a deal by 29 March, and the UK will leave the EU on that date. As aficionados of the BBC 2 programme ‘Inside Europe’ will know, the EU leaves everything to the last seconds to negotiate, and they have plenty of previous in this area. Witness Maastricht, The Greek Crisis, The Collapse of the Euro Crisis, Spain, Portugal Et Al, over the last 20 years. There are clear signs that the EU is cracking. Last week after the votes in the commons, the EU negotiators got a repost out within 6 mins of the Graham Brady Amendment being passed. This suggests a level of potential insecurity. Secondly, the oft touted (by EU officials) of an extension to Article 50, would appear to be politico code for, the EU do not want a ‘No Deal Brexit’, as they would lose not only the 49 Billion Euro divorce payment, but also any ongoing 17 Billion Euro per annum payments that may come out of a ‘Backstop’ agreement. The most significant game changer came from Germany’s IFO Institute for Economic Research, which has challenged the EU’s hard line stance against the UK, warning that it is highly unlikely the UK will capitulate before 29 March. IFO states that the EU have mishandled Brexit negotiations in an attempt to ‘punish’ the UK for daring to hold a referendum, against EU advices. Since 2000 the UK have paid 76 Billion Euros into the EU Coffers, second only to Germany, as the EU’s second largest economy. This provides the Prime Minister with the kind of fire power she has been seeking. So with that backing, rip up the current agreement, negotiate a free trade agreement which represents the wishes of both the UK and the EU, and have the courage to Walk. The EU desperately needs the 49 Billion Euros, and we need a deal that protects 80% of our economy, i.e. our service industries. Sounds simple – and it is. Does our leader have what it takes to hammer this out in time? A good deal will undoubtedly be better than a bad deal, so Theresa, go and make it happen, please. Until next time
If we thought October was bad for equity markets, last week took volatility and down turns to a whole new level. Since the beginning of December the S+P 500 Index in the US has fallen by 4.6%, and if that index stays at or near current levels, it will mark the worst December performance since 2003. Note – way before the 2008 financial meltdown. However, Octobers sell off was largely down to trade fears, and the prediction of rising interest rates in America. This has largely been assuaged by the statement from Federal Reserve Chairman, Jerome Powell, who said interest rates are now ‘just below normal’, so anxiety over higher interest rates is no longer justified. One problem down. The UK has been given a ‘Get out of Jail’ card by the European Court of Justice, so problem number 2 down. Whilst the Prime Minister will probably lose tomorrow’s vote, there is now another option on the table. The arrest of Huawei’s finance chief, Meng Wanzhou, sparking fresh concerns about US China relations, is a more difficult one to calculate. But surely this is a legal, and not a geo-political matter. So, things have not been good, and have started badly again this morning. If you have not seen our latest newsletter explaining market volatility, read it here on our app, or contact the office for a copy. It is worth reminding ourselves that we have seen all this before.
So we now have a Brexit deal – or do we? Whilst we do not know the details of this agreement, and even if we did Theresa May has to get it through Parliament. The one thing we do know is that the current market volatility will continue. We will shortly be issuing a newsletter confirming why we continue to back a ‘Buy and Hold’ stance for investments, even in the light of uncertainty over Brexit, and market volatility. If you do not normally receive our newsletters either by email or post, please contact the office to confirm your requirements.
The selloff in global equity markets continued overnight with markets in Asia down between 3% and 4%, and in America the S+P 500 Index down 3.09%. These falls in values mean that essentially the gains built up within markets during the year have now been given back, but we do not believe we have entered a long term Bear Market. Technically, Japan is now in a Bear Market, having fallen over 20% from its 2018 highs, and having registered the markets worse month since 2008. The problems are stemming from rising interest rates, a higher oil price and an unexpected slowdown in US corporate earnings, which have not been as strong as expected for the third quarter. This week’s volatility only serves to amplify what has already been a very unsettling month for global equity prices. However, longer term US economic fundamentals remain robust. Strong job creation and better wages growth is very supportive of household incomes, whilst the fiscal stimulus from the US tax cuts remain strongly supportive of the economy. We believe that markets are underpinned by genuine economic fundamentals, and that, as we have experienced in October’s past, this market shake out will be short lived, and short term, but this volatility may have a few weeks to go yet.
THE INVESTMENT MARKETS A Correction – or a Bear Market? The spirit of Octobers past continues to sit heavily over the World Stock markets, as the shakeout in share prices continues, but you know the mantra by now; “In the face of market volatility, keep calm and stay the course”. Unnerving though markets may be at the moment, it should be remembered that despite recent falls in value, US Equities are still up over 10% year to date. Trade fears are responsible for the current equity markets, malaise with an added dose of Brexit uncertainty overshadowing the UK. Over the last year equity markets as a whole have not made much progress, and we will comment on this in our market special investment commentary, which will follow this blog, with a more comprehensive review of the current situation. We predicted more equity market volatility at the beginning of the year, and we are certainly getting that. So whilst October again proves to be a ‘witching’ month for markets; economies remain strong, and this fact is what investors will refer back to, once markets calm down. In the meantime, tin hats on!
The summertime nearly always brings with it a stock market wobble or two, and we were largely expecting the antics of President Trump to be the instigator of such movements. As it happens it’s the instability of Turkey, and it’s currency that is the catalyst of the current market ills. The Turkish Lira dropped to a fresh low today, following a sharp fall last week, down about 6%. The Lira’s weakness is setting off a chain reaction through other emerging countries’ currencies, as the Turkish authorities have made no announcements regarding any defensive actions they may take. The possibility of an interest rate hike and capital controls could be on the way though. This is however very local to Turkey, and should in theory not be a problem for the major developed markets of the world. The contagion risks centre upon the Spanish, Italian and French banks exposed to Turkish foreign currency debt. With no positive approach from the Turkish Central Bank, further wobbles are possible. This smells like the Greek currency crisis all over again, and by the time full employment, after the holidays, returns to the city, matters should be resolved. Could be stormy in the meantime though!
The year is shaping up to be a very challenging one for stock markets, as trade wars and calls for the ending of the current economic growth cycle continue to weigh heavily on equity market performance. Our overall outlook that the cycle has a little longer to go has not fundamentally changed, but the sounds of caution are growing a little louder. Whilst we do not believe at all that recession is just around the corner – even though global politicians are attempting every day to drive us there – we have noted a modest deterioration in the global economic picture generally. So whilst it is premature to call the beginnings of a bear market, we are going to continue to see an increase in market volatility as geopolitics continue to provide the drivers of current sentiment. For now, the global economic picture remains supportive of risk assets such as stocks and shares, but like our own weather after a glorious summer, the clouds on the horizon are begging to show. You may not need an umbrella for a good while yet, but you better get it out of the cupboard just in case.
More Tit For Tat The ongoing trade disputes continue to dominate current markets, with the hostile rhetoric showing little sign of easing off. As a result, market volatility continues. The near daily skirmishing has not been helped by President Trump stating he did not start this (?) but merely reacted to a situation that was already there (??). China exports 4.0% of its GDP to the USA; whereas America exports a mere 0.70% of its GDP the other way. So you can see where the problem lies. End of month valuations on portfolios will therefore be lower because of recent market volatility, but overall, the economic picture remains positive, with last weeks reported purchasing manager index figures for the major nations beating expectations. So all is not lost. Most markets are now trading in the middle of their 12 month range, but as the sun continues to beat down, more volatility to follow. Enjoy the weather instead!
In markets very reminiscent of the January declines, President Trumps latest broadside on China’s trade balances with the USA, has again unsettled global markets, where we are now into 5 straight days of market declines. As the threat of sanctions and tariffs between the world’s largest two economies deepen, overnight the Shanghai Index closed down 4%, and all European markets are weaker this morning. So if the world’s top economies are hell bent on a global trade war, what happens now? There is certainly a risk that this could escalate, but as we have pointed out before, Trump is long on Rhetoric, but short on action, and as Shakespeare once said ‘full of sound and fury, signifying nothing’. This is what happened in January, when Trump began his volleys toward China, but markets recovered. Right now it is tit – for – tat, with little actual outcome or impact. A full blown trade war however will involve much greater and wider tariffs, which would hurt corporate earnings, which in turn could be inflationary, which will cause Central Banks to raise interest rates, which will end this current long economic growth phase. However, market expectations will get to the stage where they have factored in the bad news, and there will be opportunities for investors, it just depends upon where we get to regarding the above. Protectionism doesn’t work. Look at the EU, the biggest protectionism racket on the planet, and that is bust. The Soviet Union, again a protectionist regime, did not work. So we wait to see if President Trump wants to be added to that long list of failures.