WeeklyWatch – Fireworks seen on markets as US celebrates Independence Day
Monday 8th July 2019
Cause for celebration in the US
Skies across the US were ablaze with firework displays commemorating the anniversary of the Declaration of Independence last week. The largest display was in New York, over Manhattan’s East River. Macy’s mammoth 25-minute show featured more than 75,000 individual shells, took 55 crew members 10 days to set up and was estimated to have costed the retailer $6 million.
The Independence Day fireworks were mirrored markets. Echoing the nationalistic enthusiasm, President Donald Trump tweeted: ‘S&P 500 hits new record high. Up 19% for the year. Congratulations! We have the greatest economy anywhere in the world.’
His merriment was far from unfounded, as the US market continued to benefit from ‘ceasefire’ in the US-China trade war, with the S&P 500 registering its best first half of the year since 1997. The US 121-month (beginning in June 2009) economic expansion following the global financial crisis officially made history on Monday as the longest ever. That said, it has also been one of the slowest – the economy has grown 25% cumulatively since the start of the expansion. The unemployment rate now sits at 3.6%, its lowest for 50 years.
But President Trump may live to regret the enthusiastic tweets, as bond markets have not shared the equity market’s mood. The yield on the US 10-year Treasury dropped below 2%, leading to an inversion of the yield curve, historically a precursor to recession.
Trade fears strike Europe
Trade worries were heightened last week, as Trump turned his attentions from China to Europe, signalling that he is likely to expand tariffs against eurozone countries on $4 billion of goods as part of a battle over aviation subsidies.
Bank of England Governor Mark Carney warned: “The more hostile and uncertain trading environment is coinciding with sharp slowdowns in global trade, manufacturing, industrial production and capital goods orders. Across the G7, the growth rate of business investment has almost halved since its peak in late 2017, leaving the global expansion more reliant on consumer spending and reducing its resilience.”
Carney will be leaving his role in January, but suggested he fears the UK economy could be pushed off course by the disputes: “Whether current trade tensions shipwreck the global economy or prove to be a tempest in a teacup will have an important influence on the outlook for growth and inflation in the UK.”
Carney’s warnings prompted 10-year gilt yields to fall below the Bank of England base rate for the first time in a decade, as markets priced in a rate cut by summer next year. Moneyfacts reported that June saw savings account providers cut long-term fixed rates by the biggest amount since November 2016 in anticipation of the move. Across the pond, the US Federal Reserve has suggested it may mirror the dovishness of the Bank of England and ECB and cut interest rates by up to 0.5% to support the US economy.
Christine Lagarde greeted positively on equity markets…
When Carney departs, the job he may have his eye on is to be Head of the International Monetary Fund, as Christine Lagarde is set to be appointed as President of the European Central Bank. Her imminent arrival was greeted positively on equity markets, as hopes rise of a fresh stimulus package and monetary easing for the eurozone economy. The FTSE 100, CAC 40 and DAX 30 all rose, before falling back. Bond markets, meanwhile, saw borrowing rates dip, tipping German 10-year bond yields into negative territory. Italian two-year bond yields did likewise for the first time in over a year. To summarise, investors seem to prefer a guaranteed loss in government bonds to the perceived uncertainties of equities.
…while other EU appointments prove controversial
Late-night summits regarding other top EU appointments outlasted even those concerning the Greek bailout of 2015. Despite not being one of the preferred final three candidates, German Defence Minister Ursula von der Leyen has been nominated to replace Jean-Claude Juncker as President of the European Commission. The Belgian Prime Minister, Charles Michel, will replace Donald Tusk as President of the European Council in December.
The EU’s new top team will be tasked with leading the EU’s policies over the next five years on areas such as climate change, migration and trade. Importantly, they will also have to negotiate with either Jeremy Hunt or Boris Johnson if the Prime Ministerial contenders fail to deliver Brexit by the 31 October deadline. The new PM may face an early setback, as the closely-watched IHS Markit services sector survey suggested the UK economy has suffered its first quarterly contraction in seven years. This is on the back of fears over a no-deal Brexit, paralysis in the previously dominant services sector, and a six-and-a-half-year low in manufacturing.
UK retirees will, on average, outlive their pension savings by a decade according to a stark warning from the World Economic Forum (WEF).¹ In a worrying report about pension shortfalls, WEF stressed that both individuals and policymakers need to find better solutions for accumulating, and withdrawing from, retirement pots. The WEF’s warning has not come out of the blue – in 2017 they estimated that the UK retirement savings gap would grow from £8 trillion in 2015 to £33 trillion by 2050.²
Short-term pressures, such as getting on the property ladder and paying off student loans, are competing with the longer-term financial need to build an adequate retirement pot. Recent research by online investment provider Willis Owen found that 35% of all respondents had stopped paying into a pension plan in the last year.³
For young and middle-aged savers, the risk to them of outliving their savings is far greater than the short-term investment risk that can discourage them from starting, or continuing, to put money away for the future.
Saving enough for retirement is something that many people struggle to do, but there are steps you can do today that will lead to better outcomes in the years to come. Put simply: a comfortable retirement can only be assured if we take the right steps to save enough money. If you have a question about retirement planning or would like more information about our services, please contact your adviser.
¹ WEF, Investing in (and for) Our Future, June 2019
² WEF, We’ll Live to 100 – How Can We Afford It?, May 2017
³ Survey by Willis Owen and Consumer Intelligence, www.retirement-planner.co.uk, June 2019
The Last Word
“Inheritance Tax is often said to be unpopular and raises strong emotions, not least because it affects people only occasionally, in sometimes significant and surprising ways, and at a sensitive time.”
– Office of Tax Simplification in its Inheritance Tax Review – second report, published last week.
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