Market Bulletin - Crossing the line
Markets prove resilient as Donald Trump’s show of military strength in response to the suspected Syrian chemical attack heightens geopolitical risks.
Actions speak louder than words. President Trump’s sabre-rattling rhetoric over North Korea dominated the build-up to last week’s summit meeting with his Chinese counterpart, Xi Jinping. But it was his decision to launch a surprise missile attack on a Syrian airbase that overshadowed events at Trump’s Florida hotel resort and shared the headlines with news of another tragic terrorist attack, this time in Stockholm.
Tellingly, while quick to condemn the US action, Russia didn’t even activate its Syrian-based air defence missiles which could have intercepted the attack, reflecting perhaps a sense of realism and a recognition that, ultimately, it needs a deal with the US over Syria.
If Trump’s threats against North Korea seemed irrational, the attack demonstrated to Russia, China and the rest of the world an unpredictability in his foreign policy approach, while sending out a message that he is ready to act when his red lines are crossed. Geopolitical risks remain very much to the fore for investors.
The mood on Wall Street earlier in the week was cautious ahead of the US–China summit, and remained so after the release on Wednesday of the minutes of the Federal Reserve’s March policy meeting. Despite the disappointing jobs news that came later in the week, a US interest rate rise in June remains likely, and the central bank also signalled that it could begin to reduce the huge size of its balance sheet later this year.
Adding to the market wobbles on Friday in the aftermath of the missile strike was news that just 98,000 new jobs had been created in the US last month – well down on expectations and the fewest since last May. But the report also confirmed the US jobless rate had fallen to a 10-year low of 4.5%, signalling that the US economy is moving closer to full employment. However, by the end of the week’s trading, investors had digested the events in Syria and the disappointing jobs news; the S&P 500 finished down just 0.29% over the period.
Figures from Eurostat, the statistical office of the European Union, added to evidence that the economic recovery is gathering pace across the eurozone bloc. More than one million people were lifted out of unemployment during the past year, as the jobless rate dropped to an eight-year low of 9.5% in February. At the height of the financial crisis, unemployment in the eurozone peaked at 12.1%. The unemployment figures do though continue to show wide variance, ranging from 3.4% in the Czech Republic to 23.1% in Greece.
The stubbornly high Greek unemployment rate is defying the broader recovery across the eurozone; and, at a meeting in Malta last week, the president of the Eurogroup of finance ministers, Jeroen Dijsselbloem, acknowledged that Greece’s economic recovery is “slipping away from us”. Greece did though thrash out a deal on economic reforms centring on tax and pensions changes; a vital breakthrough after months of gridlock over the next stages of the country’s aid programme. It is hoped the reform package will help bring the International Monetary Fund into the bailout as a financial partner – something Germany is insisting on in order for further aid to be provided. Athens faces debt repayments of €6 billion in July.
Markit’s purchasing managers’ data showed that factories in the eurozone enjoyed their highest levels of activity since 2011. Italian manufacturing, which accounts for 15% of the country’s economy, also showed its strongest reading since the eurozone debt crisis. Encouragement for the eurozone’s third-largest economy also came from the unemployment numbers showing a fall to 11.5% from 11.6% in January.
Despite the good news, debt markets preferred to focus on political weakness ahead of the French poll, and concerns over whether Italy will be able to deliver a stable pro-European government after the next general election, likely to be held within 12 months. A fall in Italian government bond prices early in the week caused the spread between Italian and the benchmark German bond to hit its widest level for more than three years.
The Eurofirst 300 ended the week unchanged. Elsewhere, Japan’s Nikkei 225 index suffered its fourth consecutive weekly loss.
The Markit data also confirmed that the UK manufacturing sector expanded in March for the eighth consecutive month, but at its slowest rate for four months. The slowdown was mainly in areas that make consumer goods, suggesting that shoppers are cutting back in the face of rising prices. Whilst not setting off alarm bells at this stage, the consumer has been one of the big props of UK growth in recent years.
Figures released on Wednesday confirmed that activity in the UK’s dominant services sector – which accounts for three-quarters of the UK economy – rose at a faster-than-expected pace in March. However, the easing of growth in the manufacturing and construction sectors suggests the economy will have slowed in the first quarter to a rate of 0.4%, down from the 0.7% registered in the final quarter of 2016.
Deloitte’s latest quarterly survey of the UK’s chief financial officers (CFOs) showed them to be increasingly chipper about their companies’ and the economy’s prospects, despite uncertainty over Britain’s future trading relations following the Brexit vote. Nearly a third were more optimistic about prospects for their companies than three months ago, compared to just 3% in the immediate aftermath of the June referendum. However, Britain’s departure from the EU still topped their risk list, and appears to be behind a continued lack of appetite for taking risk on to balance sheets. Overall, 60% of CFOs said the business environment would be worse when the UK leaves the EU, down from two thirds in the previous quarter.
During a trip to Jordan last week, Theresa May appeared to concede that a new trade deal with the EU can only be struck after the UK leaves in 2019 – a position more in line with the EU’s Brexit negotiating draft, which says the two-year talks might only include a “framework for the future relationship”. This suggests that transitional arrangements will be needed before a deal is agreed and ratified by the 27 EU, and some regional, parliaments. The next key date appears to be 29 April, when the EU’s negotiating guidelines will be debated and approved at an EU summit.
Despite the prime minister appearing to have softened her stance in relation to Brexit, markets have pushed back their expectations for a first hike in interest rates to the middle of 2019. The FTSE 100 was barely changed over the week, rising 0.36%.
Meanwhile, chancellor Philip Hammond arrived in New Delhi just days after India let lapse a bilateral investment treaty, one of many such deals that have recently been scrapped by the Indian government. Trade experts suggested India’s move illustrates how hard it will be for a post-Brexit UK to use its Commonwealth ties to promote international trade.
New year resolution
The new tax year has ushered in a number of changes to taxation and savings, ranging from new limits on tax relief on mortgage interest for buy-to-let landlords to increased personal allowances and higher rate tax thresholds. Those already accessing their pension flexibly need to be mindful that the amount they can still contribute to a pension each year has reduced from £10,000 to £4,000, despite widespread opposition to the government’s move from the pensions industry.
More generously, the annual ISA allowance has increased to £20,000; a notably bigger opportunity and one it makes sense to take advantage of sooner rather than later, allowing money to be invested - and put out of the taxman’s reach - for longer.
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