A selection of articles looking back through the markets last month.
Global Market Review
Parliament’s suspension creates controversy
The prospect of a no-deal Brexit crept closer during August as Prime Minister Boris Johnson announced that Parliament would be suspended shortly after MPs return from their summer break until the Queen’s Speech on 14 October. The controversial decision triggered accusations that the Prime Minister was trying to limit opportunities for MPs to prevent a no-deal Brexit ahead of the deadline on 31 October. The pound slid against the US dollar and the euro as investors faced the increasingly remote likelihood that a deal will be reached before the end of October.
“Relations between the US and China continued to deteriorate”
Elsewhere, the UK economy unexpectedly shrank by 0.2% during the second quarter of 2019, posting its first contraction since 2012. The FTSE 100 Index endured a choppy month, dropping sharply at the start of August and ending the month down by 5%.
Relations between the US and China continued to deteriorate during August as US President Donald Trump ramped up trade tensions between the two countries. President Trump increased tariffs on a further US$300 billion-worth of Chinese imports from 10% to 15%; in response, China announced that it would impose additional levies on US$75 billion-worth of US imports into China. China’s currency weakened against the US dollar to its lowest level in over a decade, prompting President Trump to accuse China of manipulating the renminbi in a bid to alleviate the impact of higher US tariffs on Chinese imports – an accusation denied by China’s authorities. The Dow Jones Industrial Average Index fell by 1.7% during August.
In Europe, investor sentiment was undermined by disappointing data from Germany. The German economy shrank during the three months to June, contracting on a quarter-by-quarter basis by 0.1%. Growth was dented by a slowdown in export activity. On an annualised basis, Germany’s economy grew by 0.4%, but exports declined by 0.8%, posting their largest drop in the last six years. Over August as a whole, the Dax Index fell by 2%.
Japan’s economy posted its third consecutive quarter of positive growth during the three months to June, expanding at an annualised rate of 1.8%, relieving some of the pressure on the Bank of Japan to introduce further monetary easing measures. Nevertheless, the Nikkei 225 Index fell by 3.8% over the month as nervous investors stoked demand for the yen, leading to concerns over the outlook for Japanese exporters.
Asia & Japan Market Review
What next for Japan’s monetary policy?
Japan achieved its third straight quarter of economic growth during the three months to June, growing at an annualised rate of 1.8% and easing pressure on the Bank of Japan (BoJ) to implement further monetary easing. In comparison, the country’s economy grew at a rate of 2.8% year on year over the first three months of 2019, and by 1.6% in the final quarter of 2018, having shrunk by 1.9% in the previous quarter.
“There were signs of division amongst policymakers at Japan’s central bank”
Japanese share prices generally fell during August as a stronger yen – boosted by demand from jittery investors – dampened the outlook for exporters. Over the month as a whole, the Nikkei Index fell by 3.8% while the broader-based Topix Index declined by 3.4%. Medium-sized companies – represented by the TSE Second Section Index – fell by 5.5%.
There were signs of division amongst policymakers at Japan’s central bank during the month. BoJ Deputy Governor Masayoshi Amamiya said that the BoJ remains ready to implement additional easing if necessary to avoid derailing the momentum towards price stability. He also highlighted concerns over ongoing uncertainties relating to trade tensions, Brexit and the slowdown in China’s economic growth.
In contrast, however, BoJ official Hitoshi Suzuki cautioned against the possible side-effects that could be created if the BoJ intensifies its monetary stimulus. He warned that negative bank deposit rates could harm the economy by stifling consumer sentiment, and that any destabilisation of Japan’s financial system would make it hard to achieve price stability. His words undermined the BoJ’s pledge to loosen policy “without hesitation” in order to shore up economic recovery.
In Hong Kong, pro-democracy protestors continued to demonstrate their opposition to a controversial extradition bill and the Hang Seng Index fell by 7.4% over the month. Elsewhere in the region, having implemented rate cuts in June and July in a bid to boost economic growth, policymakers at the Reserve Bank of Australia (RBA) held its key interest rate steady at 1% in August. The ASX All Ordinaries Index fell by 2.9% during the month.
Consumer sentiment in South Korea dropped sharply during August, according to the Bank of Korea (BoK). Confidence has been dented by the ongoing trade conflict between the US and China, South Korea’s worsening trade relationship with Japan, falling equity prices, and a decline in export activity. Over the month, the Kospi Index fell by 2.8%.
Emerging Markets Review
Renminbi falls to lowest level since 2008
China’s renminbi fell to its lowest level against the US dollar for 11 years during August. The drop provoked US President Donald Trump into claiming that China was manipulating its currency, describing the renminbi’s devaluation as a “major violation” and suggesting that China was deliberately trying to soften the impact of higher US tariffs. A weaker renminbi reduces the cost of China’s exports, making them more attractive to overseas customers. The People’s Bank of China (PBoC) rejected the accusation, however, insisting that its currency was “at an appropriate level” with China’s economic fundamentals and with market supply and demand. China warned that it would take “necessary countermeasures” against the US tariff increases and, as the US increased levies on Chinese imports to the US, China announced that it intended to raise tariffs on US$75 billion-worth of US imports to China.
“China’s exports posted an unexpected increase in July”
China was supplanted as the US’s principal trading partner by Mexico and Canada during the first half of 2019. Nevertheless, China’s exports posted an unexpected increase in July, rising at an annualised rate of 3.3% during the month while imports dropped by 5.6%. Meanwhile, annualised growth in China’s industrial production slowed sharply in July, falling from 6.3% in June to 4.8%. The Shanghai Composite Index fell by 1.6% over August as a whole.
In a move designed to kick-start lacklustre economic growth, the Reserve Bank of India (RBI) cut its key interest rate by 35 basis points from 5.75% to 5.40% during August. This was the central bank’s fourth consecutive cut this year, and its largest move for some time; the previous three cuts were of 25 basis points each. The RBI also trimmed its forecast for India’s economic growth in the current fiscal year from 7% to 6.9%. The benchmark CNX Nifty Index fell by 0.9% during August.
Having contracted in the first three months of 2019, Brazil’s economy managed to avoid recession in the second quarter, posting quarter-on-quarter growth of 0.4%. Industrial production rallied during the period, and construction and fixed investment also provided a positive contribution. On an annualised basis, the country’s economy expanded by 1%. The Bovespa Index ended August 0.7% lower.
Elsewhere in Latin America, amid mounting concerns over Argentina’s liquidity position and the possibility of default, credit ratings agencies Standard & Poor’s (S&P) and Fitch subsequently downgraded their ratings for the country’s debt.
Europe Market Review
Storm clouds gathering over Germany
Confidence over the outlook for Europe’s economy continued to deteriorate during August amid mounting concerns over Germany’s prospects. The country’s economy contracted during the three months to June, shrinking on a quarterly basis by 0.1%. Growth was dented by a slowdown in export activity. Although Germany’s economy expanded by 0.4% year on year, exports dropped by 0.8%, registering their largest decline for six years.
“Germany is still a “two-speed economy” (IHS Markit)
Business confidence in Germany fell to its lowest level since November 2012 during August, according to the Ifo Institute, which warned of “ever more indications” of a possible recession in Europe’s largest economy. Industrial companies have not exhibited such high levels of pessimism since the “crisis year” of 2009; meanwhile, the business climate in the services sector has also weakened.
Germany’s industrial production dropped sharply in June, falling at a monthly rate of 1.5%. Germany is still a “two-speed economy” in which service growth is just managing to offset sustained manufacturing weakness, according to IHS Markit, which considers a third-quarter contraction in the country’s economy to be a possibility. During August, the benchmark Dax Index fell by 2%, while France’s CAC 40 Index declined by 0.7%
Minutes from July’s meeting of European Central Bank (ECB) policymakers reported that a discussion between central bank officials about the possibility of redefining the ECB’s longstanding inflation target of “below but close to 2% in the medium term”. Policymakers had considered extending the target to encompass both the lower and upper sides of 2%. The eurozone’s rate of inflation has remained stubbornly low and remained unchanged at 1% during August, according to early estimates. The ECB is widely expected to loosen monetary policy further in coming months in order to address deflationary pressures in the region.
Economic growth in the eurozone continued to weaken during July as a solid contribution from the services sector proved insufficient to offset a marked drop in manufacturing production during July. Activity picked up slightly in August but remained generally subdued, dampened by a weak manufacturing sector.
Italy’s coalition government collapsed during August, resulting in a new coalition being formed between Democratic Party and the Five Star Movement – formerly longstanding rivals from different sides of the political spectrum. Prime Minister Giuseppe Conte resigned in August, but will now return to the role with the new coalition.
Global Bond Market Review
Bond yields plunge in August
Bond yields slid during August as nervous investors headed for perceived “safe-haven” assets such as government bonds and gold. Confidence is being undermined by concerns over prospects for the global economy, by the intensifying trade conflict between the US and China, and by the continuing saga of Brexit.
“CRAZY INVERTED YIELD CURVE!” (President Donald Trump)
During August, the yield on the benchmark US Treasury bond dropped from 2.03% to 1.50%. The yield on the 30-year US Treasury Bond fell below 2% for the first time in history during August, and the US yield curve remained inverted during the whole of August, fuelling concerns over the economic outlook. Meanwhile, the benchmark German Government bond yield plunged from -0.52% to -0.92% during the month, and the 30-year German Government bond traded negatively for the first time ever.
Following a raft of interest-rate cuts last month – involving the US, Australia, South Korea, Brazil, South Africa and Turkey – central banks in India, Thailand and New Zealand reduced their key interest rates in August.
Economic data from Germany continued to weaken, compounding fears over the prospects of Europe’s largest economy. Germany’s economy contracted by 0.1% during the second quarter of 2019, and business confidence fell to its lowest level for almost seven years.
The rift between the White House and the US central bank continued to widen during August. President Donald Trump continued to heap criticism on the Federal Reserve (Fed), tweeting: “Our problem is a Federal Reserve that is too proud to admit their mistake of acting too fast and tightening too fast (and that I was right!). They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW.” Later in the month, President Trump described Fed Chair Jerome Powell as “clueless”, tweeting: “Our problem is with the Fed. Raised too much & too fast. Now too slow to cut … other countries say THANK YOU to clueless Jay Powell … CRAZY INVERTED YIELD CURVE! … the Fed is holding us back!”
Fixed income was the best-selling asset class for a fifth consecutive month during July, according to the Investment Association (IA), which cited investors’ concerns over trade and the global economic outlook. The best-selling IA sector during the month was £ Strategic Bond. Global Bonds, £ Corporate Bond, UK Index-Linked Gilts, and UK Gilts also figured in the top ten highest-selling sectors.
UK Bond Market Review
Gilt yields plummet in August
Gilt yields plunged during August as nervous investors sought the perceived safety of government bonds and gold. Over the month as a whole, the yield on the benchmark UK government bond plummeted from 0.60% to 0.32%. While investors remained concerned about the deteriorating outlook for the global economy – particularly in the light of further escalations in the trade conflict between the US and China – UK investors were preoccupied by the increasing possibility of a no-deal Brexit, following the news that Parliament would be suspended from early September until 14 October.
“The Bank of England downgraded its growth forecast for the UK economy”
The UK economy posted an unexpected contraction during the second three months of 2019, shrinking at a quarterly rate of 0.2% as output in manufacturing and construction weakened and concerns about a no-deal Brexit intensified. The economy had expanded by 0.5% in the first quarter, boosted by a flurry of pre-Brexit stockpiling in the manufacturing sector ahead of the original 29 March deadline. This was the UK’s economy’s first contraction since 2012, according to the Office for National Statistics (ONS). The British Chambers of Commerce (BCC) warned that – unless “decisive” action was taken – the factors that led to the second-quarter contraction would continue to weigh on the UK’s short-term growth trajectory.
The Bank of England (BoE) downgraded its growth forecast for the UK economy this year and next year, highlighting a “material and broad-based slowdown” in global economic growth since late 2017. The BoE cut its forecast from 1.5% to 1.3% in 2019, and from 1.6% to 1.3% in 2020; however, these predictions assume that the UK leaves the EU with a deal. The BoE predicted that no-deal Brexit would lead to lower economic growth, higher prices, higher levels of volatility, and further weakness in the pound.
Prices rose more rapidly than expected during July: consumer price inflation rose at an annualised rate of 2.1%, compared with June’s rate of 2%, driven higher by increases in prices for games and toys, hotel accommodation, clothing and footwear. Meanwhile, average earnings (excluding bonuses) rose at an annualised rate of 3.9% during the second quarter of 2019. Nevertheless, according to the ONS, earnings in real terms remain lower than before the financial crisis: the average real weekly wage in June 2019 in real terms was £469, compared with a rate of £473 in April 2008.
UK Equity Market Review
Uncertainties drive down share prices
August proved both busy and controversial for UK investors, and share prices remained unsettled throughout the month. Politics remained firmly in focus as the prospect of a no-deal Brexit drew closer, driving down the value of the pound. The FTSE 100 Index fell by 5% during August, while the FTSE 250 Index declined by 1.4%.
“Global dividend growth lost momentum during the second quarter”
Speculation over the likelihood of a no-deal Brexit intensified towards the end of the month following the news that Parliament was to be suspended shortly after reconvening following the summer recess until 14 October. The Brexit deadline is now less than two months away – on 31 October – and Parliament’s suspension would curtail MPs’ scope to prevent a no-deal Brexit.
Consumer spending growth fell to its lowest-ever level for the month of July as retailers remained under pressure. Retail sales rose by only 0.3% during the month. The British Retail Consortium (BRC) warned: “Many high-street brands … must contend with rising import costs, a multitude of public policy costs and ever-higher business rates”. According to the Confederation of British Industry (CBI), confidence amongst UK retailers fell during August to its lowest level since the financial crisis.
General retailers issued more profit warnings than any other FTSE sector during the second quarter of 2019, according to EY. The sector issued a total of ten warnings during the period, followed by chemicals, construction & materials, financial services, and support services, which all issued six warnings. EY highlighted the rising number of profit warnings “coming from industries exposed to increasingly unpredictable consumer, business or investor behaviour”. Almost one in five warnings in the second quarter cited problems relating to Brexit as companies struggle to make plans against a backdrop of uncertainty.
Having previously warned on profits in March, software company and FTSE 100 Index constituent Micro Focus International issued another warning during August, blaming a “deteriorating macro environment”. Elsewhere, shoe retailer and AIM constituent Shoe Zone issued a profit warning, blaming a “challenging environment” for the UK high street.
Assets in the investment company industry surpassed £200 billion for the first time, according to the Association of Investment Companies (AIC), reaching £200.3 billion at the end of July. Assets reached £100 billion in January 2013, and 46% of the growth since then has been attributable to investment companies investing in alternative assets.
UK Equity Income Market Review
Equity income remains out of favour
Although bond yields have continued to fall to record lows, income-seeking investors do not appear to be moving towards UK equity income, daunted by a backdrop of ongoing political and economic uncertainties. While the trade conflict between the US and China continued to deepen, concerns rose over the outlook for the global economy. Meanwhile, closer to home, investors became increasingly preoccupied about the likelihood of a no-deal Brexit against a backdrop of political division.
“Global dividend growth lost momentum during the second quarter”
During August, the yield on the benchmark UK government bond dropped from 0.60% to only 0.32%; in contrast, the yield on the FTSE 100 Index rose from 4.25% to 4.54% and the FTSE 250 Index’s yield climbed from 3.15% to 3.23%. According to the Investment Association (IA), the UK Equity Income, mainstream UK All Companies, and UK Smaller Companies sectors all remained firmly out of favour in July, whereas fixed-income funds experienced strong inflows.
Over August as a whole, the FTSE 100 Index fell by 5% while the FTSE 250 Index declined by 1.4%. Since the beginning of the year, the best-performing FTSE industry sectors include leisure goods, technology hardware & equipment, personal goods, healthcare equipment & services, and beverages. In comparison, the worst-performing sectors include automobiles & parts, fixed-line telecommunications, oil equipment & services, banks, and chemicals.
Royal Bank of Scotland (RBS) reported robust half-year earnings, but warned it was unlikely to meet next year’s targets, blaming a deteriorating economic backdrop. The company revealed an interim dividend payout of two pence per share and a special dividend worth 12 pence per share, representing a total of £1.7 billion. RBS Chairman Howard Davies warned that the “subdued” interest-rate outlook is affecting all banks and the entire financial sector as institutions struggle with deteriorating economic prospects and intensifying trade tensions.
Global dividend growth lost momentum during the second quarter according to Janus Henderson’s Global Dividend Index, growing at its slowest rate for two years. During the period, total global dividends rose to a record level of US$513.8 billion; nevertheless, the rate of dividend increases is starting to moderate and the number of cuts is also on the rise. UK dividend payouts rose during the second quarter at a headline rate of 8.6% to reach US$35 billion, boosted by US$4.2 billion-worth of special dividend payments from RBS and miner Rio Tinto.
US Market Review
Fresh salvoes in the US/China trade conflict
The trade war between the US and China continued to rage in August. President Trump revealed further tariff increases on Chinese imports to the US; in response, China announced that it would impose additional levies on US$75 billion-worth of US imports into China. President Trump also announced that he intended to order American firms in China to shift their operations back to the US.
“China lost its position as the US’s biggest trading partner”
China’s renminbi fell to its lowest level against the US dollar since 2008, prompting US President Donald Trump to accuse China of manipulating its currency in order to offset the effect of higher US tariffs on Chinese goods, describing the devaluation of the renminbi as a “major violation”. China, however, refuted the claims. Meanwhile, China lost its position as the US’s biggest trading partner in the first half of the year, dropping behind Mexico and Canada.
In a speech at the annual symposium for central bankers at Jackson Hole, Wyoming, Federal Reserve (Fed) Chair Jerome Powell warned that uncertainties over trade policies were weakening global economic growth prospects, and that monetary policy could not provide a “rulebook” to address the impact. In response, President Trump tweeted: “Who is our bigger enemy, Jay Powell or Chairman Xi?”
Minutes from the Federal Open Market Committee’s (FOMC’s) July meeting – at which the FOMC cut its key federal funds rate for the first time since 2008 – showed that policymakers were seeking to counteract “weak global growth and trade policy uncertainty … and promote a faster return of inflation” to the 2% target. Generally, FOMC members regarded the 0.25 percentage-point rise as a “mid-cycle adjustment”, although “a couple” of officials wanted a larger cut of one-half a percentage point. Policymakers expect trade uncertainties to generate “a persistent headwind” for the economic outlook.
US share prices generally fell during August: the Dow Jones Industrial Average Index declined by 1.7% over the month and the S&P 500 Index dropped by 1.8%, while the Nasdaq Index fell by 2.6%. Most S&P US industry sectors ended August in negative territory, according to S&P Dow Jones Indices, with energy and financials particularly badly hit. In comparison, utilities, real estate, and consumer staples performed relatively well, rising over the month.
US manufacturing output contracted for the first time since September 2009 during July, according to Markit, which attributed the slowdown to softening global economic conditions.