Market Bulletin – Dancing Queen – Monday 8th October 2018

This week saw stocks across several markets stumble, whilst at the Conservative Party Conference, it was Theresa May’s dance moves that made the headlines. In this week’s round-up, we also look at the movers and shakers in the global market.

Awkward manoeuvring

One of the main talking points this week was the Conservative Party Conference, held in Birmingham. Theresa May’s opener to her speech was a self-deprecating jig to Abba’s famous hit, perhaps a foreboding of the awkward political manoeuvring in which she is currently involved. The task ahead of her – trying to find a Chequers deal that everyone is happy with, and that won’t create a hard border in Ireland or down the Irish Sea – is not an enviable one; it’s not just her own party she needs to convince, but 27 EU parliaments, too. In fact, the proverbial elephant in the room of Brexit overshadowed any other potential headline-makers from the Conference, including Boris Johnson comparing the EU to the USSR…

However, it might not all be bad news, as Jean-Claude Juncker commented on Saturday that a deal had drawn significantly nearer in the past few days. But this more positive message became mixed again on Sunday when Nicola Sturgeon claimed that the 35 SNP MPs in Westminster were likely to vote against any deal that meant leaving the customs union and single market, and would vote in favour of holding a second Brexit referendum. Moreover, a poll published at the weekend showed that half of Scots would vote for Scottish independence if Brexit went ahead.

Budget speculation and the UK market

With the Budget having been brought forward to 29th October, coverage has unsurprisingly intensified this week. There has been growing speculation that the Chancellor, desperate to find cash after the Prime Minister’s pledge to quickly end austerity, might be tempted to dip into pension tax relief to make savings. A cut in the annual allowance looks the most likely, but the tax relief rate itself could be targeted, followed by Inheritance Tax and Capital Gains Tax. Here at Wellesley we will be keeping a close eye on potential changes to pensions, and what it could mean for our clients.

Elsewhere in the UK market, last week the FTSE 100 slipped and data has shown that UK business investment in the first half of the year had suffered two consecutive quarterly declines. In more positive news for London, consumer goods giant Unilever lost a shareholder vote to move to a single headquarters in Amsterdam, and will therefore retain its dual headquarters, staying in London too.

The new North America deal and the tariff war

Despite the ongoing tensions with China, the White House could point to a trade victory last week, as Canada signed up to the successor of the North American Free Trade Agreement (NAFTA), to be known as the United States–Mexico–Canada Agreement (USMCA). The most significant changes were the slackening of the rules governing the trade in dairy products and a tightening of the rules governing the trade in cars and trucks. The deal largely enables manufacturers to stick with long-established supply chains and was welcomed by investors. Congress must now vote it through – look out for updates on this in future Wellesley bulletins.

Some analysts indicate the successful completion of a North America deal will enable the US to put greater pressure on Beijing. One US central banker warned that China and the US are now at risk of a 10- or 20-year trade war. The trade tariffs imposed between the USA and China have had an undeniable domino effect. Since July, the US’s largest export to China exports, soya beans (now subject to a 25% tariff as they enter China), have fallen by 90%. That, in turn, has boosted the price of Brazilian soya beans, and this has raised prices for Japanese food producers, who usesoya beans in tofu production. Whether China will allow a similar devaluation to take place when tariffs rise to 25% remains to be seen.

The effect on the global economy

Signs in the global economy look decidedly mixed as to whether a major trade fallout will occur. In a report released last week, Capital Economics argued that, following a slowdown in recent months, the global economy is liable to slow further over the coming year. It argued that the recent slide in world trade growth was due primarily to a fall in global demand, rather than a rise in tariffs – although the latter may yet escalate of course.

In the shorter term, however, good economic news in the US had the effect of pushing up Treasury yields and pushing down stock prices. On Friday, the US payrolls report showed the slowest increase in job creation for a year, but, significantly: unemployment struck its lowest level since December 1969 and average hourly earnings rose by eight cents.

“The biggest headwinds for the portfolio at the moment are high valuations and increasing interest rates,” said Stefan Marcionetti of Magellan Asset Management, manager of the St. James’s Place International Equity fund. “The risk of US inflation is also significant, as the labour market tightens and wage growth returns – the Fed will be walking a fine line as it unwinds quantitative easing.”

Minimum wage pressure

Last week, Bernie Sanders won a political victory as Amazon reportedly gave in to ongoing pressure by raising the minimum wages paid to its workers in both the US and UK (although it later transpired that workers would accordingly lose their monthly bonuses and stock awards). In line with the S&P 500, Amazon lost some ground on markets last week, but losses need to be seen in context; the S&P 500 opened the fourth quarter close to record highs, and technology stocks have led the way.

Magellan Asset Management is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley.

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