Looking back at the markets through April

stock market view

Brextension

Having delayed Brexit from 29 March to 12 April, Prime Minister Theresa May agreed a new Brexit deadline of 31 October with EU leaders. As well as drawing out the uncertainty that has intensified over the last few months, this decision also means that the UK will have to take part in European Parliamentary elections in late May. European Council (EC) President Donald Tusk urged the UK to make the most of the extension, saying: “During this time, the course of action will be entirely in the UK’s hands”.

President Donald Tusk urged the UK to make the most of the extension

Mrs May’s Brexit deal has already been rejected by UK MPs three times, and a variety of votes designed to break the impasse were all defeated in the House of Commons. The Government and Labour have held talks to try and reach a consensus about Brexit, but a no-deal Brexit remains on the table if MPs are unable to reach agreement. The FTSE 100 Index rose by 1.9% over April.

The US economy expanded at an annualised rate of 3.2% during the first three months of 2018, compared with the rate of 2.2% achieved in the fourth quarter of 2018. Growth was fuelled by export activity and inventory-building and the data helped to allay immediate concerns of an intensifying economic slowdown. The Dow Jones Industrial Average Index rose by 2.6% during April, and the S&P 500 Index and the technology-rich Nasdaq Index hit new highs over the month.

Having previously stated that it would maintain its ultra-low interest rate for an “extended period”, the Bank of Japan (BoJ) provided fresh detail during April, stating that it did not intend to raise interest rates until “at least through around spring 2020”. The BoJ also trimmed its forecasts for economic growth in 2019 from 0.9% to 0.6%, and in 2020 from 0.9% to 0.8%. The Nikkei 225 Index rose by 5% over the month.

Investors were cheered by the news that quarterly economic growth in the eurozone had rallied during the first three months of 2019, picking up to 0.4%, compared with expansion of only 0.2% in the final quarter of 2018. Export activity helped Italy to move out of recession during the period. Elsewhere, the rate of unemployment in the euro area eased from 7.8% to 7.7% in March. During April, the Dax Index rose by 7.1%.

Bank of Japan provides additional guidance

Japan’s interest rates will remain unchanged until the beginning of 2020 at the earliest, according to the Bank of Japan’s (BoJ’s) updated guidance. For some time, the BoJ has maintained that its ultra-loose monetary policy would remain unchanged for an “extended period”; however, in April, BoJ policymakers provided additional detail, announcing that they do not intend to increase interest rates until “at least through around spring 2020”. At the same time, the central bank trimmed its growth predictions for the domestic economy, cutting its forecast from 0.9% to 0.6% for this year, and from 0.9% to 0.8% next year.

Australia is one of only ten countries to hold an “AAA” rating with all three major ratings agencies

Retail sales rallied in March, rising by 1% year on year, and the rate of unemployment edged slightly higher in March, climbing from 2.3% to 2.5%. Core inflation picked up during April to reach 1.3% year on year. However, industrial output dropped unexpectedly during March, falling at an annualised rate of 4.6%. The Nikkei 225 Index rose by 5% during April, and the Topix Index increased by 1.7%. Meanwhile, the TSE Second Section Index rose by 2%.

South Korea’s economy contracted during the first quarter of 2019, shrinking by 0.3% quarter on quarter. On an annualised basis, the country’s economy grew by 1.8%. The surprise contraction raised speculation that the country’s central bank might be forced to consider a cut in interest rates. Elsewhere, having fallen by 1.5% in the final quarter of 2018, exports posted a quarter-on-quarter decline of 2.6% in the first three months of 2019. The International Monetary Fund (IMF) expects South Korea’s economy to expand by 2.6% this year and 2.8% next year. South Korea’s rate of consumer price inflation slowed in March from 0.5% year on year in February to 0.4%. The Kospi Index rose by 2.9% over the month.

Credit ratings agencies Standard & Poor’s (S&P) maintained its “AAA” rating for Australia, citing the country’s improving budget position, “sound” prospects for economic growth, and improving labour market conditions. The rating could come under pressure if “house prices fall sharply and increase risks to fiscal accounts, real economic growth, and financial sector stability”. Australia is one of only ten countries to hold an “AAA” rating with all three major ratings agencies (S&P, Moody’s, and Fitch). Australia will hold a General Election on 18 May. The ASX All Ordinaries Index rose by 2.5% during April.

Dovish Fed boosts sentiment towards emerging markets

Sentiment towards emerging markets has improved recently, boosted by a more dovish rhetoric from the US Federal Reserve.

The IMF expects economic growth in emerging economies to stabilise at around 5% this year

China’s economy posted better-than-expected growth during the first three months of 2019, expanding at an annualised rate of 6.4% – the same rate as in the final quarter of 2018. At last month’s annual National People’s Congress. China’s leaders set their target for economic growth this year at 6% to 6.5%. Industrial production posted a sharp increase in March, rising at an annualised rate of 8.5%, compared with February’s growth of 5.3%. Retail sales strengthened in March, rising by 8.7% year on year to achieve their highest growth since October 2018. The Shanghai Composite Index fell by 0.4% during April.

Credit ratings agency Fitch affirmed India’s credit rating at “BBB-” with a “stable” outlook. Although India has high levels of public debt, a weak financial sector, and some lagging structural factors. Fitch believes that these factors are offset by an encouraging medium-term growth outlook and strong foreign reserve buffers. Fitch estimates that India’s economic growth has moderated in the fiscal year ending March 2019 from 7.1% to 6.9%; looking ahead, Fitch expects India’s economy to expand by 6.8% in the fiscal year ending March 2020, and 7.1% in fiscal 2021. Nevertheless, General Elections in April and May have created some uncertainty about the next government’s ability to command support for reforms. Elsewhere, the World Bank expects India’s economy to grow by 7.5% in the current fiscal year, underpinned by investment growth, improving export performance, and resilient consumption. During April, the CNX Nifty Index rose by 1.1%.

Investors were encouraged by signs that Brazil’s economy may be gathering strength. Brazil’s services sector experienced a sharp increase in new business during March, according to IHS Markit, boosted by domestic demand. However, employment in the services sector tipped back into contraction. Although manufacturing continued to strengthen, the sector experienced a slight loss of momentum. The Bovespa Index rose by 1% in April.

The International Monetary Fund (IMF) expects economic growth in emerging economies to stabilise at around 5% this year, although there will be considerable variation between countries. The IMF has forecast growth of 4.4% this year and 4.8% next year across emerging and developing economies – substantially more than its predictions for “advanced economies” of 1.8% this year and 1.7% next year.

Eurozone stages a rally

The eurozone’s economy rebounded during the first three months of 2019, posting quarter-on-quarter growth of 0.4% following growth of 0.2% in the previous quarter. On an annualised basis, the eurozone’s economy expanded by 1.2%. Italy emerged from recession: the country’s economy grew at a quarterly rate of 0.2%, supported by export activity. Meanwhile, Spain expanded by 0.7% and France grew by 0.3%. The news helped to ease some of the burden on policymakers at the European Central Bank (ECB): the ECB cut its macroeconomic forecasts for the euro area in March, and ECB President Mario Draghi promised further support for the eurozone if necessary.

Business confidence worsened amongst German companies

Spain’s governing Socialist party won 29% of the vote in the country’s latest General Election, but did not garner sufficient support to command an overall majority. German banks Deutsche Bank and Commerzbank called off merger talks during the month. The Dax Index rose by 7.1% in April, and the CAC 40 Index climbed by 4.4%.

The eurozone’s manufacturing sector suffered its greatest contraction in almost six years during March, according to IHS Markit. Business activity and confidence have been undermined by “concerns over trade wars, tariffs, rising political uncertainty, Brexit, and … deteriorating forecasts for the economic environment both at home and in export markets”.

Germany’s government cut its 2019 economic growth forecast from 1% to 0.5%, citing the negative effects of trade conflicts upon the global economy, and of the ongoing Brexit process. Economic Affairs Minister Peter Altmaier advised: “the current sluggishness in the German economy must serve as a warning”. Germany’s economy continued to “lose steam”, and business confidence worsened amongst German companies, according to the Ifo Institute’s Business Climate Index, which reported an “evaporation” of March’s “gentle optimism”.

Credit ratings agency Fitch confirmed that the EU’s “AAA” rating and “stable” outlook would not be affected by a no-deal Brexit. Fitch believes the short-term risks to the EU’s budget are “manageable”, although the gap in the EU’s budget contributions caused by the EU’s departure could pose a medium-term risk to the EU’s rating.

The unemployment rate in the eurozone edged down from 7.8% to 7.7% in March. Unemployment remained in the double digits in Greece, Spain and Italy; nevertheless, over the 12 months to March, unemployment rates fell in every eurozone member state apart from Denmark and Sweden.

Europe weakens

Demand for government bonds generally rose during April, against a backdrop of intensifying concerns over the global economic outlook. Although economic growth rallied in the eurozone during the first quarter – the euro area’s economy expanded at a quarterly rate of 0.4% following growth of 0.2% in the final quarter of 2018 – Europe’s manufacturing sector continues to exhibit signs of pressure. According to IHS Markit, the eurozone’s manufacturing sector contracted at its most dramatic rate for almost six years in March, undermined by concerns over trade, political uncertainties – including Brexit – and a weaker economic outlook. In particular, Germany – Europe’s largest economy – is showing evidence of softening and the country’s government has cut its forecast for economic growth this year from 1% to 0.5%. Although the yield on the German benchmark government bond rose during April, it remained in negative territory. Over the month as a whole, it climbed from -0.17% to -0.10%. Meanwhile the benchmark French government bond yield increased from 0.19% to 0.24%.

Demand for fixed income funds jumped during March as Brexit-related uncertainties intensified

Refinancing-related high yield bond issuance in the “BB” category rose in Europe during the first three months of 2019, according to Fitch Ratings, supported by shifts in US and European monetary policy. Looking ahead, ongoing momentum is likely to support “CCC” issuance in the second quarter.

The current expansion of the US economy is the second-longest ever, according to S&P Global Ratings. However, its momentum could be curbed by trade conflicts, ongoing geopolitical concerns, and mounting risk aversion amongst investors. S&P believes that the key risks to credit conditions include trade issues and tightening financing conditions. Looking ahead, S&P expects the US economy to expand by 2.2% this year as the impact of President Donald Trump’s tax cuts diminishes and cumulative tightening of monetary policy takes effect. The yield on the US ten-year Treasury bond rose from 2.39% to 2.53% during April

Demand for fixed income funds jumped during March as Brexit-related uncertainties intensified, and fixed income experienced its strongest month since January 2018, enjoying net retail sales totalling £810 million. According to the Investment Association (IA), Global was the best-selling IA sector during the month, followed by £ Strategic Bond and Global Bonds. UK Gilts and Global Emerging Markets Bond also experienced positive demand. In contrast, investors’ appetite for funds in the £ Corporate Bond sector remained negative.

Brextension eases demand for gilts

Demand for UK government bonds slipped during April: prices fell and yields rose as a six-month extension to Brexit allayed investors’ immediate concerns over the prospect of a disorderly no-deal scenario. The Confederation of British Industry (CBI) urged politicians to use the extension as a “fresh start”, warning: “more of the same will just mean more chaos this autumn”.

The CBI urged politicians to use the extension as a “fresh start”

Over April as a whole, the yield on the benchmark UK government bond climbed from 0.97% to 1.12%, but rose as high as 1.25% during the month. In comparison, the yield on the short-dated gilt – which matures in 2021 – increased from 0.66% to 0.74% during April.

The UK economy posted month-on-month growth of 0.2% in February, and manufacturing growth rose to its highest level for 13 months during March; however, this was caused primarily by Brexit-related stockpiling that will eventually have to unwind. According to a survey undertaken by IHS Markit/CIPS, there are signs that European companies have started to move away from sourcing inputs from UK companies ahead of Brexit.

In its quarterly economic survey, the British Chambers of Commerce (BCC) found the economic environment was deteriorating for many UK businesses, impaired by a slowing global economy, ongoing Brexit-related uncertainties, and rising business costs. The survey found that the balance of firms reporting improving cashflow had fallen into negative territory for the first time since 2012, exposing companies to the impact of external shocks, including disruptions to supply chains. Optimism about profitability and turnover posted a sharp decline.

Warm weather provided a boost for retail sales in March, according to the Office for National Statistics (ONS); sales increased at an annualised rate of 6.7% during the month to reach their highest level since October 2016. Although sales at food and clothing stores posted an increase, sales at department stores fell by 0.3% year on year.

Meanwhile, average earnings (excluding bonuses) rose at an annualised rate of 3.4% over the three months to February. In real terms, wages increased by 1.5% year on year, representing their highest level since the three months to July 2016. Elsewhere, food price inflation rose from 1.6% year on year in February to 2.5% during March, reaching its highest rate since November 2013. The British Retail Consortium (BRC) warned that a no-deal Brexit would continue to drive up food prices.

Another six months …

The new Brexit deadline of 31 October has given UK MPs an additional six months to reach agreement. Prime Minister Theresa May’s Brexit deal has already been rejected by MPs three times, and a variety of votes designed to break the impasse were all defeated in the House of Commons. The extension forces the UK to take part in European Parliamentary elections in May – otherwise, the UK will be forced to quit the EU on 1 June without a deal.

Negotiations around the Withdrawal Agreement cannot not be reopened

The European Council (EC) stressed that the negotiations around the Withdrawal Agreement cannot not be reopened, but EC President Donald Tusk said: “(The UK) can still ratify the Withdrawal Agreement, in which case the extension can be terminated”.

The British Chambers of Commerce (BCC) welcomed the extension, commenting: “For most businesses … (it) will be preferable to deadlines that are repeatedly moved forward at the last minute”, but called on politicians to avoid playing out “a similar late-night drama” in October. The FTSE 100 Index rose by 1.9% over April, while the FTSE 250 Index climbed by 3.7%.

UK company profit warnings rose to their highest number – 89 – since the global financial crisis in the first quarter of 2019, rising at an annualised rate of 22%. According to EY, profit warnings appear to be spreading beyond consumer-related sectors, and restructuring activity is rising as companies run short of cash. The highest number of profit warnings was issued by the beleaguered general retailers sector: retailers issued a total of 12 warnings during the first three months of 2019, and clothing stores were responsible for half of these warnings. Financial services and travel & leisure also issued a relatively high number of warnings. Meanwhile, over the past 12 months, 44% of companies in the technology and hardware & equipment sectors have issued profit warnings, undermined by lower sales of vehicles and electronics, particularly in China. Although the most common reasons given for a profit warning included falling sales, problems with contracts, and rising costs, 10% of warnings specified Brexit as a contributing factor.

The Competition & Markets Authority (CMA) (blocked) the planned merger between supermarket chains Sainsbury’s and Asda, citing concerns that the deal would lead to higher prices for consumers. Elsewhere in the retailing sector, online fashion retailer ASOS reported an 87% drop in half-year profits during April, having issued a profit warning in December.

UK dividend growth set to continue

Dividend payouts from UK companies reached a new first-quarter record during the first three months of 2019, according to Link Asset Services’ most recent Dividend Monitor, rising at an annualised headline rate of 15.7% to £19.7 billion. Underlying dividend growth was slightly weaker than expected, rising by 5.5% to £17.6 billion. Payouts rose in the mining and tobacco sectors, whereas payouts weakened in the telecommunications and retailing sectors. Mining company BHP paid out a special dividend worth £1.7 billion during the period.

Link believes that total UK dividend payouts this year will top £100 billion for the first time

Looking ahead, growth in UK dividend payments is expected to continue this year, despite ongoing uncertainties surrounding Brexit and unease about the global economic outlook, and Link believes that total UK dividend payouts this year will top £100 billion for the first time at around £106.1 billion. Link said: “The yield on UK shares is a third higher than its long-run average and suggests equities are still extremely cheap, both in comparison to other countries and to other asset classes”.

The FTSE 100 Index rose by 1.9% during April, while the FTSE 250 Index climbed by 3.7%. Specialist insurer and holiday operator Saga cut its dividend payout by more than 50% from 4p per share to 9p per share, having reported a drop in profits and lower expectations for next year. Meanwhile, supermarket chain Tesco reported a sharp jump in profits and raised its dividend payment from 3p per share to 5.77p per share.

The yield on the FTSE 100 Index eased during April from 4.44% to 4.36%, while the FTSE 250 Index’s yield edged down from 3.19% to 3.15%. In contrast, the benchmark UK government bond yield rose from 0.97% to 1.12%.

The best-performing FTSE sectors over the first four months of the year have been leisure goods, industrial metals & mining, technology hardware & equipment, and food & drug retailers. At the other end of the performance spectrum, the worst-performing sectors included telecommunications and automobiles & parts.

UK funds experienced net retail outflows during March, according to the Investment Association (IA), as nervous investors withdrew their money against an uncertain political backdrop. Investors’ appetite for UK equity funds remained poor during the month: although demand for funds in the UK Smaller Companies sector improved slightly, both the UK Equity Income and UK All Companies sectors experienced substantial outflows.

US share indices hit fresh highs

Economic growth picked up in the US during the first quarter of 2019. Having expanded by 2.2% year on year in the final quarter of 2018, the US economy grew at an annualised rate of 3.2% over the first three months of 2019. Although growth in consumer spending slowed from 2.5% to 1.2% over the period, overall expansion was underpinned by strong export activity and inventory-building. The International Monetary Fund (IMF) cut its forecast for US economic growth in 2019 from 2.5% to 2.3%, but increased its 2020 forecast from 1.8% to 1.9%. President Donald Trump urged the Federal Reserve (Fed) to cut interest rates by 1% and resume quantitative easing measures in order to support growth.

The S&P 500 hit its 93rd closing high since the November 2016 Presidential elections

The Dow Jones Industrial Average Index rose by 2.6% during April, while the S&P 500 Index and the Nasdaq Index climbed by 3.9% and 4.7% respectively. The Nasdaq Index and the S&P 500 Index hit new highs during April; according to S&P Dow Jones Indices, the S&P 500 hit its 93rd closing high since the November 2016 Presidential elections. The best-performing S&P sectors during April were financials, information technology, and communication services; in contrast, health care, real estate, and energy ended the month in negative territory.

The trade conflict between the US and China remained unresolved in April, although President Trump was bullish about the prospect of an eventual deal, saying: “We’re very well along on the deal.  It’s a very complex deal.  It’s a very big deal.  It’s one of the biggest deals ever made.  Maybe the biggest deal ever made”. Nevertheless, the IMF warned that macroeconomic conditions, rather than tariffs, remain the primary drivers behind trade imbalances. Talks between the US and China are set to continue in May.

The US economy added 196,000 new jobs in March, compared with 33,000 in February. However, growth in average annual earnings decelerated from 3.4% in February to 3.2% in March.

Credit ratings agency Fitch affirmed its “AAA” rating and “stable” outlook for the US, citing the country’s “structural strengths”, including the economy’s size, high per-capita income, and dynamic business environment. Fitch also highlighted the US Treasury market’s status as the world’s deepest and most liquid asset market, and the US’s high tolerance to debt, but warned that “rising deficits and debt” could place this tolerance under pressure in the absence of reform.

 


The articles above were written & supplied by Adviser Hub on 14th May 2019