WeeklyWatch – Indices buoyed by positive growth

Monday 8th April 2019

Stock Take

In times such as these, do we really need April Fool’s Day? Last week a handbag-shaped gallery called ‘The Shed’ opened in New York at a cost of half a billion dollars, Jeff Bezos’s wife was reportedly ‘happy’ with her $36 billion divorce settlement, Burger King introduced a burger called the ‘Impossible Whopper’, and the ceiling of the House of Commons began to leak onto the bemused lawmakers beneath.

Bemused, not least because Brexit continues to be a headache in parliament. Hell hath no fury like a Tory Party civil war, and last week Theresa May fanned the flames by attempting to work with Jeremy Corbyn to find a way out of the current impasse. Last-ditch talks with Labour continue, but Corbyn’s demand for a customs union has proven to be a big stumbling block. This is why Donald Tusk has proposed a ‘flextension’ – a year-long extension to Article 50 with the option of leaving the EU earlier once the withdrawal agreement has been voted through.

All this came as Goldman Sachs reported that, the ‘B word’ has already cost the economy an average of £600 million per week in terms of lost growth, since the referendum. The IHS Markit/CIPS UK Manufacturing PMI showed the largest jump in inventories in the survey’s 27-year history, as companies stockpiled goods and components ahead of Brexit.

Global sentiment boosted

Despite this, if we set Brexit aside for a moment, it was generally a happier week on the markets. Leading indices in the UK, Continental Europe, the US, Japan and China all rose, buoyed in part by positive growth, manufacturing and trade news for the world’s two leading national economies. Energy and commodities also played a role in driving sentiment upwards.

Iron ore prices soared last week following a cut in production forecasts. A barrel of Brent crude, meanwhile, ended Friday last week at nearly $70 (up from $55 at the start of the year), thanks to production cuts by Saudi Arabia, the world’s leading oil producer. The Gulf state also sent waves across markets as Saudi Aramco, its state oil company, prepared to make its first bond issuance. The accompanying literature has already begun to open the lid on the company’s finances, revealing that 2018 profits were no less than $111 billion – almost twice that of the world’s largest listed company, Apple.

US investors cheered by first-quarter GDP figures

In the US, although automobile sales dipped, investors took positives from first-quarter GDP figures, which received a boost from public construction spending and inventory building, despite a slump in private demand. A sharp rise on the ISM Manufacturing Index was particularly good news for recession-watchers, as the index has a strong track record of forecasting inflation – and had suffered a bad few months. This week’s rise quelled fears. Employment figures also bounced back after a lacklustre February, comfortably beating expectations.

US-China conciliation?

Significantly for markets, the direction of trade talks between the US and China appeared to be towards conciliation, with a deal now all but agreed. Just two sticking points remain, according to reports: what happens to existing US levies on Chinese imports, and how would the enforcement mechanism insisted on by Washington actually operate? US soya bean futures jumped in price in response to a large order from China, perhaps a sign of a trade rapprochement to come.

Latest figures quell worries over China’s growth sustainability

As for China, positive manufacturing figures at the start of the week helped to supress persistent doubts over the sustainability of current growth levels. The CSI 300, an index of the largest companies in China, has now risen more than 30% since its low in January, although investors should also note the relatively high volatility of Chinese stocks. Last week, Bloomberg also included Chinese bonds and ‘policy bank securities’ in its Bloomberg Barclays Global Aggregate Bond Index for the first time, which should attract more than $100 billion dollars in inflows.

The past decade has seen exports decline as a share of Chinese GDP, making the current trade spat less damaging than it might have been in years past. The eurozone, however, has seen exports rise as a share of its GDP – from around 40% in 2008 to 48% today. That has made the eurozone all the more susceptible to any downward turn in German manufacturing and exports, such as the country is experiencing now. Last week’s data detailed a German manufacturing slump in February, threatening Europe’s manufacturing hub. What remains to be seen is whether this export dip feeds into lacklustre domestic demand too.

And at the time of writing, UK parliament’s roof is yet to be mended…

Wealth Check

It would appear that the so-called ‘Brexit handbrake’ has also stopped house prices in their tracks. At the end of March, figures from Nationwide showed that England recorded its first annual price fall since 2012, with prices in the first quarter down 0.7% from the same period last year. This is set to be a huge talking point, although it is likely that prices will resume their upward trajectory once Brexit has been settled.

The positive news from last week, i.e. the start of the new tax year, is that more of our property wealth can now stay in the family. Inherited property allowance – known as the ‘residence nil-rate band’ – has risen to £150,000. Combined with the standard Inheritance Tax allowance of £325,000, the increase means you can now pass on as much as £475,000 tax-free. For married couples and civil partners that figure is £950,000. The allowance is set to rise again next year, at which point couples could avoid paying tax on a joint estate of up to £1 million.

However, the devil is in the detail regarding the residence nil-rate band. Now might be a good time to review what this means for your own estate-planning arrangements, and what other steps you can take in the new tax year. Contact your Wellesley adviser for guidance.

In The Picture

There’s long term – and then there’s long term! This snapshot of 500 years of European economic history, from 1300 to 1800, hints at the economic significance of the Italian Renaissance, the Dutch Golden Age and the beginning of the Industrial Revolution. These centuries also saw the establishment of new global companies, some of which are still here today, notably: Löwenbräu (founded in 1383), Swiss clock-makers Gallet & Co. (1466), Grolsch (1615), Lloyds of London (1688), Twinings (1706) and Douwe Egberts (1753).

When looking in general at the companies that have survived and thrived over the centuries in Europe, breweries are rather prevalent…take from that what you will!

The Last Word

“When you enter into a negotiation like this to find a compromise way forward, both parties have to give something up. There is going to be pain on both sides.”

Philip Hammond, speaking last week

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.

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