Market Bulletin - Divided times
Political and trade disputes loomed large last week, as growth in the eurozone overtook that of the UK and US.
If the populace knew with what idiocy they were ruled, they would revolt; or so said Charlemagne, the eighth century conqueror who united much of Europe under his rule and created the administrative geographies that would evolve into Germany, France and the Low Countries.
Were he alive today, he might find reasons to worry. Last week a UK poll on the EU referendum put the Leave camp ten points ahead. Results of a separate poll conducted by the Pew Research Center on Euroscepticism were published last Tuesday; the survey found that a high proportion of the population in the biggest EU countries have an unfavourable view of the European Union. It perhaps comes as no surprise to read that 48% of Britons have an unfavourable view of the EU, but it is instructive that the proportion was the same in Germany and much higher (61%) in France.
But Europhiles could take heart at some of last week’s growth figures. Annual GDP growth across the eurozone was revised up to 1.7%. In the first three months of 2016, it reached 0.6%, significantly above the UK and US rates of 0.4% and 0.2%, respectively. Germany’s economy grew faster still (0.7%), and the country posted a stronger trade balance too, while France offered encouragements of its own.
“For me, the really positive surprises have come from France recently,” said Stuart Mitchell of S. W. Mitchell Capital. “Most notably, French household confidence rose in May to its highest level since 2007. We have also seen a 14.7% jump in spending on cyclical items by consumers, and industrial investment is up almost 9% on last year. It’s a pretty positive picture in the eurozone just now.”
Markets were somewhat less chipper; the FTSEurofirst 300 finished the week down 2.3% as oil price rises created uncertainty in a number of sectors and the prospect of the UK’s referendum added to concerns. Investors also continued to head for safety – German Bunds reached a record low yield during Friday trading.
Few are more cognisant of the political risks faced by the EU than its leading central banker, Mario Draghi. In a weighty speech last week, the ECB chairman warned that central bank policies were not always being transmitted by financial markets to the real economy. This was one of the reasons that the ECB last week extended its bond-buying programme to buying corporate, rather than just sovereign, debt – utilities, telecoms and insurance were reported to be the chief targets.
In his speech, Draghi also warned that, without more certainty about Europe’s “operating environment”, investors will be reluctant to risk their capital. Lastly, he pointed to the risk posed by Europe’s ageing population, saying that growth could only be maintained if productivity improved. Part of the way to achieve that would be to extend the single market, most notably by addressing the lack of a common market in services.
Given the weighting of services in the UK economy (almost 80% of GDP), his words will come as music to the ears of those in Whitehall, who complain that the single market has worked well for goods but not for services – as it is, some 45% of British exports go to EU countries, according to the Office for National Statistics.
Like Bunds, gilt yields also hit a record low last week as investors headed for safer assets. A rare three-week pause in issuance also began last week, in order to limit financial volatility during the run-up to (and immediate aftermath of) the referendum. Given the crescendo of campaign stories and the tightness of the polls, that may prove to have been a wise move.
Last week, two more pro-Leave poll results caused sterling to fall further before a pro-Remain poll reversed its course. A televised debate between David Cameron and Nigel Farage on the last day of voter registration caused the registration website to crash – and the deadline to be extended. Meanwhile, John Major and Tony Blair, widely viewed as two of the major architects of the Northern Ireland peace process, spoke together at an event in Ulster to argue that a UK exit would put the Good Friday Agreement at risk, since border checks would need to be introduced between Ireland and Northern Ireland. Baron Bamford of Daylesford, one of the Conservative Party’s major donors and the owner of JCB, wrote to his 6,500 UK staff later in the week, advising them to vote for an exit.
Unsurprisingly, the FTSE 100 was down 1.5% last week, but there were good results for exports: British-made goods sent to the EU jumped 10.3% in April compared with a year ago, while non-EU exports rose 1.9%. The Office for National Statistics said that the total trade deficit had fallen to its lowest level since September last year.
Despite the good economic news in both the UK and the eurozone, financial conditions and policies remain far from normal across the continent. Since the ECB currently offers negative interest on deposits, retail banks are beginning to consider unusual practices themselves. Last week Commerzbank threatened to start storing excess deposits as physical cash in vaults rather than passing them on for central bank safe-keeping – banks in Bavaria have had similar discussions.
Before the tragic events that unfolded in Orlando at the weekend, two major arguments last week promised to have a significant impact on the direction of US trade policy, and therefore of global growth – one local, one international. Hillary Clinton secured enough votes to secure the Democratic nomination, meaning that she will face off against Donald Trump for the US presidential election.
In the event, investors on the S&P 500 were focused on other things, and the index dipped 0.38% over the course of the week. It might have risen were it not for oil’s late slip and poor US productivity figures – although rising labour costs do at least indicate some long-awaited upside for worker salaries. After a rough start to 2016, the index is not far off its record high.
The dominant event on markets remained the non-farms payroll data release of the previous Friday, however. In a speech last week, Janet Yellen said that the Federal Reserve intended to sit tight at its forthcoming meeting – and delay a rise in interest rates. She pointed to a number of key reasons, first among them the payroll figures, but also the possibility of a Leave vote in the UK referendum, and slowing Chinese growth.
The other argument of the week came in the midst of the annual U.S.–China Strategic and Economic Dialogue. While the US continued to press China on overproduction and to seek a block on Chinese steel imports, China complained at the international “hype” about Chinese overcapacity. There are signs such arguments would grow more bitter under a Trump presidency.
Across the East China Sea, however, there was positive economic news as Japan’s economy grew more quickly than expected in the first quarter. Among the themes helping markets was the strong showing by commodities, not least oil, which at one point last week came close to $53 a barrel, as inventories shrank. The Nikkei 225 slipped 0.25%, however, in part reflecting a move towards government bonds ahead of central bank meetings this week.
S. W. Mitchell Capital is a fund manager for St. James’s Place.
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