Monday 14th January 2019
Wall Street backs the Federal Reserve
Global stocks hit an upwards stride last week, with Wall Street leading from the front. Three issues stood out as likely drivers of this momentum: the direction of Federal Reserve policy, the US government shutdown and US-China trade talks. When it came to Fed policy, investors wary of rate rises were reassured by comments made this week by several senior officials that, essentially, the Fed was data-dependent, was not merely following a pre-set course on rate rises, and was even willing to factor market reactions into its thinking.
Another prevalent issue for Wall Street last week was the longest government shutdown in US history. Donald Trump’s failure to broker a deal to end the shutdown is partly down to his proposed Mexico border wall. The shutdown has a number of less obvious knock-on effects, including a reported lack of data on which traders might base buy and sell decisions. Sentiment was more positive over US-China trade talks and there was news on Friday that a senior Chinese official would visit Washington later this month. The S&P 500 ended the week up; the FTSE 100, TOPIX and EURO STOXX 50 all followed suit.
The UK automotive industry hits reverse
In the UK this week, GDP growth struck a six-month low and car manufacturing took a step backwards, with Jaguar Land Rover announcing job cuts of 4,500 jobs, and Ford expected to follow suit. Ominously, both companies warned of deeper cuts in the event of a no-deal Brexit. KPMG and British Retail Consortium figures showed the high street suffered its worst Christmas since the financial crisis, a trend confirmed by negative news last week on John Lewis, M&S and Debenhams. Morrisons and Tesco, however, bucked the trend.
Nick Purves of RWC Partners commented: “Whilst the UK food retail market continues to be extremely tough and is certainly not being helped by the uncertainties surrounding Brexit, both Tesco and Morrisons seem to have navigated the Christmas trading period with some success”. Chris Field of Majedie agreed: “Tesco has been the winner of the ‘Big Four’ supermarkets over the festive period and, importantly, customers’ perception of the supermarket’s offer went up by its biggest single increase in five years. This augurs well for the future.”
May’s Brexit woes continue
The UK government had other worries, of course, becoming the first UK government since 1978 to lose the parliamentary vote on its Finance Bill, only to suffer a second defeat the following day; one that will oblige it to publish an alternative Brexit plan within three days should it lose Tuesday’s vote on Theresa May’s deal. It is indeed expected to lose that vote, and reports suggested it was already planning to change the Brexit timetable in response. Bookies’ expectations of the UK leaving the EU on 29 March had fallen below 35% by the end of the week. Sterling and the FTSE 100 remained relatively controlled over trading period, although politics may be strongly felt on markets in the week ahead.
“Even if we could predict the outcome of Tuesday’s vote, we would never want to base an investment strategy on a single event,” said Tom Beal, Deputy CIO at St. James’s Place. “However, if the outcome does take markets by surprise, then what we have seen in recent months is that our fund managers, who take a long-term view, have been taking advantage of the opportunities presented by market movements to actively reposition their portfolios.”
Hyperinflation continues to spiral in Venezuela
“There is no subtler, no surer means of overturning the basis of society than to debauch the currency.” When pondering this stark warning by arguably the greatest economist of the 20th century, John Maynard Keynes, spare a thought for the people of Venezuela. A cup of coffee was typically priced at a quarter of a bolívar at the dawn of 2018, it has since skyrocketed to over 600 bolívars. Last week, President Nicolás Maduro won another six-year term, in an election dogged by boycotts and accusations of vote-rigging.
Venezuela is an extreme example in a relatively undeveloped country, but it does provide helpful context for some of the recent volatility on developed markets. Thus, volatility has spiked on developed markets even as growth has persisted and inflation has remained contained. The S&P 500, for example, recently suffered its worst December since 1931, despite fourth quarter US growth that is forecast to clock in at – a frankly healthy – 2.7% annualised.