WeeklyWatch – A new year upturn for US Stocks
Monday 4th February 2019
Encouraging signs for the US
There was positive news last week as, following a turbulent closing quarter of 2018, US stocks posted their best opening month since 1987, with banks and smaller companies (i.e. the domestic economy) leading the S&P 500 to gains of 7.9% and the Dow Jones Industrial Average to gains of 7.2%. Usually a cliché of failed new year resolutions, it seems that January has this year delivered on its promise of change, at least on markets. What a difference a month makes!
The S&P 500 continued its encouraging new year run last week, boasting several positive corporate earnings announcements, including ExxonMobil, Fiat Chrysler and Chevron. Even Apple sufficiently reassured investors with its unimpressive earnings announcement – its stock rose in response. Yet more important to investors last week were the words of Chair of the Federal Reserve, Jerome Powell, when he indicated a more dovish trajectory for interest rates and confirmed that the Fed is willing to slow its programme of quantitative tightening if needed. This was music to investors’ ears.
Despite this, there is arguably still plenty to worry about, from the impact of the recent longest-ever US government shutdown to ongoing trade disputes to bouts of extreme weather, with Hell actually freezing over (the Michigan town of Hell, that is!)
US-China trade talks swiftly continued – one apparent sign of reconciliation was Beijing’s stated willingness to reduce its US trade surplus over the coming six years. In contrast, the Trump administration announced a series of criminal charges against Chinese technology giant, Huawei Technologies, accusing them of stealing trade secrets and of violating US laws, Iran sanctions and international business practices.
Investors like hard data and, on Friday, they were not disappointed. The US non-farm payrolls report showed 304,000 new jobs in January – the largest increase in almost a year and far above projections. Average hourly earnings rose just 0.1% and the jobless rate edged up to 4%, but that remains low, especially considering the impact of the recent shutdown. It’s the number of new jobs that matters most on markets, and 100 straight months of job creation is nothing short of impressive.
The Venezuelan crisis escalates
One country that has omitted to report unemployment figures (presumably not for reasons of modesty) is Venezuela. With the country facing a severe hyperinflation crisis, extreme shortages of basic items such as food and the prospect of civil war looming, pressure is mounting on President Nicolás Maduro to step down. Last week, the UK, France, Germany, Spain and other European countries officially recognised opposition leader Juan Guaidó as interim president of Venezuela, after President Maduro defiantly rejected the EU’s Sunday deadline to call snap elections.
There were more concrete measures from the US, too – as described by Anthony Kettle of BlueBay Asset Management: “The US has now materially escalated the situation by sanctioning the Venezuelan state oil company PDVSA, effectively blocking US persons from doing business with the company. Given the US is just about the only paying customer of the company – Russia and China take oil in repayment for pre-existing loans – this cuts off the Maduro regime’s access to the US dollar, and ultimately erodes support for the military. Both Venezuelan and PDVSA unsecured bonds have rallied almost 50% this month in anticipation of regime change but Treasury Department blocks on purchases have left trading at a standstill. We would expect the financial effects of any crisis to largely be contained to the country itself.”
Problems in China felt worldwide
Unlike Venezuela, the effects of the crisis in China are far from contained, with any signs of worsening financial conditions being quickly felt on worldwide markets. There were disappointing Chinese data releases last week: manufacturing is at a three-year low; aggregate finance to the economy slowing; foreign investment falling; and, most worryingly for the long term, the birth rate dipped to little more than 15 million in 2018. Yet news of Fed softening helped Asian markets too. The Shanghai Composite index and Japan’s TOPIX both ended the week marginally higher, despite growth worries and last week’s disappointing Japanese inflation and trade data releases.
A mixed bag in Europe
One country feeling the full force of China’s slowing growth is Germany, which has previously benefited from China’s enormous post-crisis infrastructure investment programme and rising car purchases. Last week, Germany slashed its growth outlook for 2019, citing Brexit and trade problems. Economic growth figures showed growth in France still positive in the final quarter of 2018, but Italy now in recession for the third time in a decade. Still, it was notable that government bond sales by Spain, Portugal and Greece all met with record demand; Greece even introduced its first minimum wage increase (of 11%) in more than a decade.
In the UK, Theresa May finally rallied her party around an amendment to her own Brexit deal; one that she had, until recently, said was impossible, and which, at time of writing, the EU says still is. The FTSE 100 merrily rose in line with global markets. But what will happen next remains to be seen.
Increasing uncertainty surrounding Brexit – particularly the potential ramifications of a no-deal exit from the EU – is causing UK cash savers to be more cautious when investing their money. In fact, a report by UK Finance shows that more and more savers are opting to keep their money readily accessible, rather than tying it up in fixed-term accounts. The report showed that nearly 77% of all the cash held in high street banks is now in lower-paying easy-access accounts – an increase of 2.4% over the last year, against a fall of 5.9% in the amount held in notice accounts and bonds.¹
Despite the fact there are no easy-access accounts that are keeping pace with inflation, losing money in real terms appears to be a risk that savers are willing to accept when faced with uncertainty. According to HMRC, nearly £40 billion was deposited into Cash ISAs last tax year.2 With the 5 April deadline for using this year’s allowance looming, and the average easy access Cash ISA rate just 0.94%, only time will tell if savers will look through the current uncertainty and invest their ISA allowance for the long term.3
Moreover, continued confusion over tax-free savings options was exposed last week, in new research by Leeds Building Society. The report showed that one in four savers are still unaware of the Personal Savings Allowance (PSA), which provides tax-free interest of £1,000 for basic rate taxpayers (£500 for higher rate taxpayers) from standard savings accounts – something to mull over for those considering this year’s ISA allowance.
¹ UK Finance Household Finance Update, January 2019
² HMRC, Individual Savings Accounts (ISA) statistics, September 2018
³ Moneyfacts, January 2019
The Last Word
“Fifteen hundred private jets have flown in here to hear Sir David Attenborough speak about, you know, how we’re wrecking the planet.”
– Rutger Bregman, Dutch historian, speaking at the World Economic Forum in Davos last week.
The information contained is correct as at the date of the article.
BlueBay Asset Management is a fund manager for St. James’s Place.
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