Market Bulletin – Drop Shop – Monday 22nd October 2018

After last week’s volatility, the global markets proved far more restrained this week. In the UK, attention has turned to the Budget, and what might be targeted as the Chancellor seeks to raise money for the NHS.

Amend and pretend?

Across European markets, concerns were primarily centred on Italy and the UK last week, with both countries looking to be merely delaying future troubles. Judging by the budget Italy has just submitted to Brussels, presenting plans to spend far more than Brussels allows for, the country will likely find itself facing a massive increase in debt maturity in the next two years. As a result of this new budget, the president of the European Central Bank, Mario Draghi, cautioned that Italy should not expect help if it encountered debt troubles. The yields on Italian debt also continued to rise during the week.

When looking at how to roll over their debt, Italy might wish to take a leaf out of Theresa May’s book, as she appeared to employ an ‘amend & extend’ strategy in last week’s round of Brexit negotiations. Often referred to as ‘amend and pretend’ by traders, ‘amend & extend’ is a common technique for bond issuers struggling to roll over their debt on markets, by using contracts to soften the terms by extending the maturity date of the debt.

As last week’s European Council summit passed without any tangible progress on Brexit, the Prime Minister voiced her openness to the EU’s suggestion of extending the transition period by another year. This drew immediate criticism from both sides of the Brexit support spectrum in the UK. The success of this tactic will remain to be seen – perhaps ‘amend and pretend’ will prove to be a more relevant title after all…

Elsewhere, despite some midweek fluctuations, it ended up as a positive five-day period for the FTSE 100. The key exceptions were supermarkets, with pressure from Aldi and Lidl pushing Tesco to bottom spot in the FTSE 100. Sainsbury’s also saw its market share fall from 15.8% to 15.4% in the 12 weeks to 7 October. The FTSE 250, which is more sensitive to domestic developments, fell during the week.

Budget concerns

Brexit deferral aside, attention in the UK has now turned firmly to the upcoming Budget. Last week’s figures indicate that borrowing in this fiscal year stands at £19.9 billion – £10.7 billion less than in the same period last year. But this extra leeway might not protect the tax breaks enjoyed by pensioners, as the Chancellor aims to raise money for extra funding of the NHS. The government has confirmed that the State Pension triple lock will remain at least until the end of this parliament, and has indicated that the reforming of pensions tax relief is unlikely; however, notably, it has not committed to maintaining the current pension savings allowances.

One area which may be targeted is the Lifetime Allowance – the limit on the amount anyone can take from their pension schemes without triggering an extra tax charge. This is expected to jump from £1,030,000 to £1,054,720 from April 2019. However, Royal London argues that a reduction in the Annual Allowance is more likely: falling from today’s £40,000 to £35,000 or even £30,000. This would translate into more than 100,000 higher earners losing up to £4,000 in tax relief.

More worryingly, according to the latest research carried out on behalf of the Association of British Insurers (ABI), 1.6 million lost pensions pots worth nearly £20 billion could remain unclaimed. Dr Yvonne Braun, ABI’s Director of Long-Term Savings and Protection, said that the findings highlight the “jaw-dropping” scale of the lost pensions problem in the UK. The situation could be alleviated by the pensions dashboard, which will enable anyone to see all their pension savings in one place online. This is due to launch in 2019, but it hasn’t been guaranteed that it will be delivered on time.

 The fall of Sears

Last week, iconic US department store chain Sears filed for bankruptcy. Sears, Roebuck and Company was founded in 1892, and was the world’s largest retailer in the 1960s. It was undoubtedly the Amazon of its day, selling everything from sewing machines to groceries by mail order. Although the convenience of ordering from home may have influenced popular modern e-commerce retailers such as Amazon, this might also be the major reason behind its demise. E-commerce, meanwhile, continues to go from strength to strength; the latest figures from the United States Department of Labor report that some 1.4 million Americans are employed in fields related to e-commerce.

The US retakes the crown

In contrast to Sears’ fall, the US economy has soared. A report published last week by the World Economic Forum saw the US take back its crown as the most competitive economy in the world, having dropped from the top spot during the financial crisis. This was supported by an outstanding amount of positive quarterly earnings announced last week, including for Netflix, Goldman Sachs and Morgan Stanley. The S&P 500 finished up for the week.

Nevertheless, some of the good news has come at a cost. Precisely, the cost of a 17% rise in the government deficit during the last US fiscal year, which ended in September. This is atypical for an economy that is growing so quickly. The deficit, at $779 billion (3.9% of GDP), is forecast to reach $1 trillion by October 2019.

The effect of the tariff wars

There is also a political side to shopping, as shown in the recent US-China tariff wars. The wars finally showed up in data last week, as Chinese GDP growth fell to 6.5% (annualised) in the third quarter – its lowest level since the global financial crisis. Industrial output slowed in unison with the headline figure, as did consumption growth – car sales in China hit a seven-year low. Moreover, the Shanghai Composite index struck its lowest point since 2014, before staging a recovery on Friday (which continues at time of writing).

The information contained is correct as at the date of the article.

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