Market Bulletin – Cutting Edges – Monday 10th December 2018

Stocks around the world fell as trade tensions reached a new high, driven by technology fears. Meanwhile, Theresa May delays a key parliament vote on her Brexit deal.

China boasts ownership of a number of the world’s most noteworthy inventions, for example: paper, gunpowder, the compass and printing. However, China’s relationship with technological innovation is more controversial at present – and this could be clearly seen on markets this week. Donald Trump’s “I am a Tariff Man” tweet – plus his appointment of a renowned China hawk to head the US team in trade negotiations – instantly put paid to any positive stock indices movements following the trade truce.

These troubles were not helped by the arrest of the Chief Financial Officer of Huawei, the world’s largest telecoms equipment manufacturer and second-largest smartphone manufacturer, during a layover in Canada. Meng Wanzhou is accused of helping Huawei dodge US sanctions on Iran, and now faces an extradition hearing over whether she should be handed over to US. Chinese and US stocks plummeted as a result.

Technology stocks in the eye of the storm

A fortnight ago, we explored how concerns about the pressures facing the tech industry were dominating US stock markets. The sector is vulnerable to worries over consumer privacy protection and intellectual property, but also to trade tensions and competition between the great powers. The US, New Zealand and Australia have all banned Huawei from their future 5G networks.

Moreover, China’s technology big hitters are showing more signs of state control in some of their financial decisions, such as acquisition policy. The most prominent of those is internet giant Alibaba, which boasts better operating margins than Amazon, and saw the same choppy trading last week as other tech stocks. Glen Finegan of Janus Henderson Investors, Manager of the St. James’s Place Global Emerging Markets fund, said: “Jack Ma has been hugely successful in building Alibaba but has now stepped back from running it, as the company’s priorities have changed. In China, monopolies are used [by Beijing] to fund government projects. We prefer family businesses where the processes and aims are aligned with those of shareholders. There’s a reason that Gazprom and Lukoil in Russia trade at such low multiples.”

Western technology majors are facing their own similar pressures. Google will be grilled by the US Congress this week. One likely question is why the company is working on a censored search engine for China. Last week, a UK parliamentary committee released documents showing that Facebook had considered offering fuller consumer data access to companies that advertise on its platform.

Rate-fed

In the US, there was a fleeting market leap following reports that the Federal Reserve is softening its rate-rise outlook for 2019. Some of that relaxing relates to concerns over the outlook for the US economy. Last week, the US yield curve edged still closer to inversion: in an inverted yield curve, short-term bond yields are higher than long-term bond yields. Historically, an inversion has augured recession, albeit with a 21-month average time lag.

It was not all bad. The ISM non-manufacturing index for the US came in very strong; IHS Markit’s services sector index was also positive; and the US jobs market is now the best it has ever been for American workers who lack a high school degree. Moreover, profit margins for S&P 500 companies remain sharply up in 2018. The US trade deficit rose too, but this actually represents the positive state of the US economy – the dollar is rising and US consumers are in spending mode.

“We expect global GDP to slow quite sharply over the next year or so,” said a Capital Economics report released last week. “There has been a slowdown in the eurozone already and the US is likely to lose steam as monetary tightening starts to bite and the fiscal boost fades. The slowdown in the US should prompt the Fed to end its tightening cycle in mid-2019 and begin cutting rates in 2020.”

If markets are sensitive to rate policy, they may be more vulnerable to quantitative tightening (QT), as central banks sell back bonds they previously bought up. QT only began on an aggregate global scale this year but is set to continue through next year.

Political discord in Europe

Disappointing growth and feverish politics across several EU economies gave the European Central Bank its own reasons to stall on QT for a while longer.

France was almost forced to declare a state of emergency after a series of street protests. Last week the government responded by cancelling a fuel tax increase and placing its October wealth tax cut under review. Meanwhile, Germany posted negative growth in the third quarter, with both manufacturing and banking facing significant headwinds. Last week, the head of Volkswagen warned that 2019 would be the “most difficult year ever”, with court cases over emissions cheating in 50 countries worldwide. In neighbouring Belgium, the government lost its parliamentary majority over a UN migration pact. The EURO STOXX 50 fell significantly over the five-day period.

In more positive news, eurozone finance ministers agreed measures to improve the eurozone’s crisis-fighting capacity: notably a stronger banking union and moves towards ensuring bondholders aren’t so easily bailed out in future downturns. Moreover, Rome hinted at softening its budgetary plans: the yield on Italian 10-year debt hovered around 3%, which isn’t crisis territory.

May cancels critical Brexit vote

Meanwhile, in the UK, the political turbulence was unrelenting, as Theresa May lost three parliamentary votes in a day. Her government also became the first one to be deemed in contempt of UK parliament for failing to publish the full Brexit legal advice – an accolade May could have done without.

At the time of writing it has been reported that May has called off Tuesday’s key vote on her Brexit deal, but hasn’t yet set out her reasons why. This move appears to show the Prime Minister does not believe she can get the unpopular agreement through the Commons. News of the delay has reportedly caused the pound to plunge to its lowest level in 18 months.

Need for retirement care acknowledged

Despite the ongoing Brexit turmoil, government business continued as normal last week. It was announced that a forthcoming Department of Health green paper will look at the idea of introducing automatic enrolment for later-life care costs, reflecting the stark reality that people in the UK are living much longer after retirement. The population is ageing, making it harder for the state to provide financial backing, and, on top of this, the cost of care is rising.

The issue of retirement planning became more pertinent for anyone born after 5 December 1953 last week, as their State Pension age rose as part of reforms which aim to reduce the burden on the state to fund retirement. This again reinforces Wellesley’s view that personal retirement planning is essential – contact us today to discuss a bespoke plan for your later life.

Janus Henderson Investors is a fund manager for St. James’s Place.

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