A selection of articles looking back through the markets last month.
Global market review
Possibility of “no deal” moves closer
Boris Johnson beat Jeremy Hunt during July to become the new leader of the Conservative Party and the UK’s new Prime Minister. The new Government’s harder-line approach to Brexit – and the increased prospect of no deal – sent the pound plummeting against the US dollar and the euro during July. Michael Gove, who is tasked with preparing for a no-deal Brexit, warned that the prospect of no deal is now “very real”.
In an article in the Sunday Times, Mr Gove insisted: “No ifs. No buts … Brexit is happening” and, although the Government still hopes the EU will be prepared to reopen discussions, Mr Gove said they must “operate on the assumption that they will not”. Despite the uncertainty, the FTSE 100 Index rose by 2.2% during July.
No ifs. No buts … Brexit is happening (Michael Gove)
As expected, the Federal Reserve (Fed) implemented its first cut in interest rates since December 2008, reducing its key federal funds rate by one-quarter of a percentage point to a range of 2-2.5%. In its statement, the central bank cited uncertainties to the outlook, including the impact of “muted” inflation pressures alongside the implications of broader global developments. Economic growth in the US lost traction during the second quarter of 2019, as trade conflict between the US and China took its toll on export growth. The economy expanded at an annualised rate of 2.1% during the period, compared with first-quarter growth of 3.1%. The Dow Jones Industrial Average Index rose by 1% over July as a whole.
Prospects for growth in the eurozone have continued to deteriorate, according to President of the European Central Bank (ECB) Mario Draghi, who said that fiscal policy would be “of the essence” if the outlook continued to worsen. His words stoked expectations for further monetary easing, perhaps as early as September. During July, Germany’s benchmark Dax Index declined by 1.7%.
Sentiment amongst large Japanese manufacturers has continued to worsen, according to the Bank of Japan’s (BoJ’s) latest quarterly Tankan survey. Corporate confidence has been undermined by the impact of the trade conflict between the US and China, and by broader concerns about a slowing global economy. The Nikkei 225 Index rose by 1.2% over July. Meanwhile, unrest continued in Hong Kong over the controversial extradition bill, and the Hang Seng Index fell by 2.7% during the month.
Asia & Japan markets review
Australia and South Korea cut interest rates
Confidence amongst large Japanese manufacturers continued to deteriorate, according to the Bank of Japan’s (BoJ’s) quarterly Tankan survey. Sentiment – particularly amongst exporters – continued to be hampered by concerns over the global economic slowdown and by the trade war between the US and China.
Japan’s exports continued their decline
BoJ policymakers left monetary policy unchanged at their July meeting and intend to maintain interest rates at their “current extremely low levels” until at least spring 2020. However, the BoJ adjusted its monetary policy statement to include a pledge to expand its monetary stimulus without hesitation if necessary.
Japan’s exports continued their decline during June, posting their seventh consecutive month of year-on-year falls. Exports dropped at an annualised rate of 6.6% in June, while imports declined by 5.2%. Shipments to China fell by 10.1% during the month. The Nikkei 225 Index rose by 1.2% over July; the Topix Index climbed by 0.9%, and the TSE Second Section Index rose by 2.1%.
Having cut interest rates for the first time since 2016 during June, the Reserve Bank of Australia (RBA) implemented a second cut in July, reducing its key interest rate by 0.25 percentage points to 1%. Although the country’s economy expanded at a “below-trend” rate of only 1.8% year on year during the first quarter of 2019, RBA Governor Philip Lowe remains relatively sanguine about Australia’s prospects, underpinned by an increase in infrastructure investment and a rebound in activity in the resources sector. The outlook for consumption remains the principal domestic uncertainty, curbed by a “protracted” period of weak income growth and falling house prices. The ASX All Ordinaries Index rose by 2.9%.
The Bank of Korea (BoK) announced a surprise reduction in its key interest rate during July. The cut reduced base rate by 0.25 percentage points to 1.5%. The decision was prompted by a weaker domestic backdrop, slower export activity, and a broader slowdown in global economic growth that has been exacerbated by trade tensions. Looking ahead, policymakers believe that global growth and global financial markets will continue to be affected by protectionism and by factors such as evolving monetary policy in leading nations. Meanwhile, relations between South Korea and Japan deteriorated during the month as the two countries clashed over Japan’s plans to impose trade restrictions on South Korea’s technological goods. The Kospi Index fell by 5% over July.
Emerging markets review
China’s slowdown continues
China’s economy continued its slowdown during the second quarter of 2019, expanding at an annualised rate of 6.2%. The country’s economy grew by 6.4% during the first quarter. According to the National Bureau of Statistics (NBS), the data reflected a “complex” domestic and overseas environment as China’s economy faces fresh downward pressure. During the month, the International Monetary Fund (IMF) cut its economic growth forecasts for China from 6.3% to 6.2% in 2019, and from 6.1% to 6.0% in 2020.
US President Donald Trump was quick to attribute China’s continued slowdown to its role in the trade dispute between the two countries, tweeting: “China’s 2nd Quarter growth is the slowest it has been in more than 27 years. The US Tariffs are having a major effect on companies wanting to leave China for non-tariffed countries … This is why China wants to make a deal”.
China’s economy faces fresh downward pressure
On a more encouraging note, China’s industrial production picked up in June, rising at an annualised rate of 6.3%, compared with May’s rise of 5%. Growth in retail sales also appreciated, climbing at an annualised rate of 9.8%. The Shanghai Composite Index fell by 1.6% during July.
The Asian Development Bank (ADB) downgraded its inflation forecasts for India from 4.3% to 4.1% in fiscal 2019, and from 4.6% to 4.4% in fiscal 2020, citing a strengthening rupee and slowing economic growth. The ADB reduced its prediction for economic growth in fiscal 2019 from 7.2% to 7%, highlighting 2018’s unexpectedly weak fiscal outturn. The ADB regards the trade war between the US and China as the main risk to the region’s economic prospects.
India’s rate of consumer price inflation edged higher during June, climbing from 3.05% in May to 3.18%. Inflationary pressures have been dampened recently by subdued food-price inflation. The Reserve Bank of India (RBI) has an inflation target of 4%, within a range of 2-6%. The CNX Nifty Index fell by 5.7% over July.
South Africa’s central bank cut its key interest rate by 0.25 percentage points to 6.5% during July in a bid to boost flagging economic growth. Turkey also cut its interest rate from 24.50% to 19.75% – a record reduction of 4.75%. Elsewhere, Brazil’s central bank cut its Selic rate by half a percentage point to 6%. The IMF slashed its forecast for Brazil’s economic growth this year from 2.1% to 0.8%.
Europe market review
Deteriorating outlook for Europe
The outlook for economic growth in the eurozone has continued to weaken, according to President of the European Central Bank (ECB) Mario Draghi, who cited trade wars, geopolitical tensions, and the possibility of a hard Brexit. The ECB believes that fiscal policy is likely to be “of the essence” if the outlook continues to deteriorate; policymakers expect to take a “highly accommodative” monetary policy stance for a “prolonged period”, stoking speculation over the possibility of a fresh wave of monetary easing as soon as September.
The European Commission (EC) downgraded its economic growth forecast for the eurozone in 2020 from 1.5% to 1.4%, highlighting trade tensions and policy uncertainty, but left its 2019 forecast unchanged at 1.2%. The EC trimmed its prediction for inflation this year from 1.4% to 1.3%, compared with the ECB’s target inflation rate of “below, but close to, 2% over the medium term”.
Confidence amongst German consumers continued to decline
Mr Draghi will stand down as ECB President at the end of October, to be replaced by the Managing Director of the International Monetary Fund (IMF), Christine Lagarde. According to S&P Dow Jones Indices, Christine Lagarde is regarded as “dovish” and likely to carry on with Mr Draghi’s policies. Italy’s David-Maria Sassoli was chosen to become the new President of the European Parliament, and Germany’s Ursula von der Leyen was selected to be President of the European Commission. Elsewhere, Greece elected a new centre-right Government under New Democracy’s Kyriakos Mitsotakis.
The backdrop in Germany – Europe’s largest economy – continued to deteriorate, according to IHS Markit, which found that the country’s manufacturing sector had continued to struggle in July, posting its worst performance for seven years. Meanwhile, job creation in the manufacturing sector decelerated to its slowest pace in more than four years. Sentiment in Germany’s manufacturing sector is “in freefall”, according to the Ifo Institute, which warned that the German economy is “navigating troubled waters”.
Confidence amongst German consumers continued to decline. GfK reported that fears of recession were being fuelled by trade tensions, Brexit-related uncertainties, and the broader global economic slowdown. The biggest threat to confidence, however, is consumers’ fear of job losses. The Dax Index fell by 1.7% during July, dampened by profit warnings from car manufacturer Daimler and chemicals company BASF, while France’s CAC 40 Index declined by 0.4%.
Global bond market review
Central banks around the world cut rates
Investors saw a raft of interest-rate cuts during July, as central banks – led by the US Federal Reserve (Fed) – sought to address slowing economic growth and subdued inflationary pressures. The Fed cut its key federal funds rate for the first time in over a decade during the month, reducing it by 0.25 percentage points to a range of 2% to 2.5%. Other central banks that cut interest rates included Australia, South Korea, Brazil, South Africa, and Turkey.
While the European Central Bank (ECB) and the Bank of Japan (BoJ) did not implement monetary easing measures in July, policymakers at both central banks made it quite clear that they were ready to do so when necessary.
The IMF urged world leaders to reduce tensions relating to trade and technology
Over July as a whole, the benchmark US Treasury bond yield remained broadly flat, edging from 1.99% to 2.03%. Meanwhile, the benchmark German Government bond yield fell from -0.40% to -0.52% during the month, and the French benchmark bond yield declined from -0.39% to -0.51%.
Ratings momentum for western European sovereign debt has stabilised this year, according to according to credit ratings agency Fitch, which has Austria, Finland, and Portugal on a “positive” outlook, and Italy and San Marino on a “negative” outlook. Although the economic outlook for the eurozone remains weak, Fitch believes the region will avoid recession; low interest rates and further quantitative easing measures will provide support for highly indebted sovereigns.
Credit ratings agency Standard & Poor’s (S&P) believes that this shift to a “more relaxed” monetary stance will continue to provide support for sovereign creditworthiness. Over the first half of 2019, S&P has found that positive ratings actions and outlook revisions have outnumbered negative actions in Europe and Asia Pacific. In the US, the news that the White House had agreed a deal with Congress over a two-year Budget and debt ceiling helped to reduce short-term political uncertainties. Over the second half of the year, S&P regards geopolitical and trade disputes as the principal risks to global sovereign ratings, alongside domestic political dynamics and rising levels of populism that could undermine political cohesion and policy. Elsewhere, the International Monetary Fund (IMF) downgraded its forecast for global economic growth from 3.3% to 3.2% in 2019, and from 3.6% to 3.5% in 2020, and urged world leaders to reduce tensions relating to trade and technology.
UK bond market review
No-deal plans drive down gilt yields
Mounting fears that the UK will leave the EU without a deal on 31 October drove down the value of the pound against the US dollar and the euro during July. UK Government bond yields also continued to slide as investors digested the news that, having won the contest to become Conservative Party leader – and thus Prime Minister – Boris Johnson was accelerating preparations for a no-deal Brexit. Over July, the yield on the benchmark UK government bond fell from 0.79% to 0.60%, and the yield on the short-dated gilt dropped from 0.60% to 0.45%.
In an article in the Sunday Times, Michael Gove stated that the prospect of no deal is now “very real”, warning: “The Prime Minister has been crystal clear that … we must prepare to leave the EU without a deal”. Although the Government still hopes the EU will be prepared to reopen discussions, Mr Gove said they must “operate on the assumption that they will not”. Referring to Theresa May’s Withdrawal Agreement, he said: “You can’t just reheat the dish that’s been sent back”, but the EU has reiterated that there is no possibility of further negotiation.
The prospect of no deal is now “very real” (Michael Gove)
In its Financial Stability Report, the Bank of England (BoE) acknowledged that the likelihood of a no-deal Brexit had increased since the beginning of the year but believes that the UK’s banking system remains resilient to the impact of a “worst-case disorderly Brexit”. Nevertheless, it stressed the difference between financial stability and market stability, warning of “significant volatility and asset-price changes” in the event of no deal. Elsewhere, credit ratings agency Moody’s warned that a no-deal Brexit would prove “significantly negative” for UK sovereign and related issuers.
Having contracted at a month-on-month rate of 0.4% in April, UK economic growth picked up May, growing by 0.3%. Activity was boosted by a muted rebound in car production, which declined in April following pre-Brexit shutdowns in March. The International Monetary Fund (IMF) expects the UK economy to grow by 1.3% this year and 1.4% next year; however, this prediction depends on an orderly departure from the EU, and the IMF cited a no-deal Brexit as a principal risk to global economic growth, alongside further trade conflict, warning that they would “sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth”.
UK equity market review
Sterling falls on no-deal speculation
Sterling fell sharply against the US dollar and euro during July as the prospect of a no-deal Brexit began to appear increasingly possible. Despite the uncertainty, UK share prices over the month, driven higher by expectations that the pound’s weakness will flatter the earnings of companies that generate a significant proportion of their earnings overseas. During July, the FTSE 100 Index rose by 2.2% and the FTSE 250 Index – representing medium-sized UK companies – climbed by 1.1%.
The risk of a no-deal Brexit edged closer
The risk of a no-deal Brexit edged closer in July following the news that – as expected – Boris Johnson had defeated Jeremy Hunt to become the new Conservative Party leader, and the UK’s new Prime Minister. Having won the contest, Mr Johnson began to step up preparations for the growing likelihood that the UK might quit the EU on 31 October without a deal in place. Chief Brexit negotiator for the EU Michel Barnier tweeted that he was looking forward to working “constructively” with Mr Johnson “to facilitate the ratification of the withdrawal agreement and achieve an orderly Brexit”. Meanwhile, US President Donald Trump suggested that discussions between the UK and US over a “very substantial” trade deal have already begun, but gave no further details.
In its quarterly Economic Survey, the British Chambers of Commerce (BCC) found that underlying economic conditions in the UK stagnated during the second quarter of 2019, dampened by “relentless” uncertainty over Brexit, rising business costs and tougher global trading conditions. Looking ahead, the BCC urged the UK Government to focus on “avoiding a messy and disorderly exit from the EU”.
The British Retail Consortium (BRC) reported a “summer slump” for retailers in June as footfall fell at an annualised rate of 2.9%. Within the retailing sector, online fashion retailer Asos issued a profit warning during July, having previously warned on profits in December 2018. Elsewhere, having already delayed the release of its full-year earnings earlier in the month, Sports Direct eventually revealed that it was facing a tax charge from Belgium of €674 million, alongside the news that House of Fraser’s financial problems are “nothing short of terminal”. As a result, the company was not in a position to forecast its future financial performance. Supermarket chain Sainsbury’s reported a decline in first-quarter sales that was attributed to a “tough trading environment”.
UK equity income market review
Weak pound boosts share prices in July
UK equity prices generally rose during July as intensifying speculation over the possibility of a no-deal Brexit drove down the pound’s value against the US dollar and the euro. During July, the FTSE 100 Index rose by 2.2% and the FTSE 250 Index climbed by 1.1%. The yield on the FTSE 100 Index dropped over July from 4.34% to 4.25% and the FTSE 250 Index’s yield eased from 3.17% to 3.15%. The yield on the benchmark UK government bond fell from 0.79% to 0.60%.
Bakery chain Greggs reported a strong increase in first-half profits, raised its interim dividend, and announced a 35-pence-per-share special dividend worth a total of £35 million. In contrast, gas and electricity supplier Centrica revealed a sharp decline in first-half earnings – which the company attributed in part to the Government’s UK energy price cap – and announced that it was “rebasing” its annual dividend payout from 12 pence per share to five pence per share. Elsewhere, takeaway delivery firm and FTSE 100 Index constituent Just Eat reached an agreement in principle to combine with Dutch competitor Takeaway.com.
The UK’s dividend clothes are starting to look a bit threadbare (Link Asset Services)
The best-performing FTSE industry sectors since the start of the year include leisure goods, industrial metals & mining, software & computer services, and electronic & electrical equipment. At the other end of the performance spectrum, the worst performers included automobiles & parts, telecommunications, and utilities.
Dividend payouts from UK-listed firms are expected to reach record levels this year, according to Link Asset Services’ quarterly Dividend Monitor, which expects total payments of £107 billion. However, forecast headline growth of 7.6% in 2019 has been enhanced by the pound’s weakness and by a series of sizeable special dividend payouts; underlying growth is expected to be substantially lower at 2.9%. Link warned: “Investors are being dazzled by eye-catching specials and exchange-rate trimmings, but the UK’s dividend clothes are starting to look a bit threadbare underneath”.
During the second quarter of 2019, total payments rose by 14.5% to £37.8 billion, led by special dividends from miner Rio Tinto, technology company Micro Focus International, and RBS. The banking sector’s contribution was boosted by RBS, Standard Chartered, and Barclays. Underlying growth, however, was more muted at 5%. Over the next 12 months, Link expects the FTSE 100 Index and the FTSE 250 Index to yield 4.4% and 2.9% respectively, excluding special dividends.
US market review
Fed cuts rates for the first time since 2008
US equity markets reached new closing highs during July, and the S&P 500 Index breached 3,000 points for the first time ever, boosted in part by expectations of an interest-rate cut that materialised at the end of the month. Hopes of an easing in tensions in the long-running trade conflict between the US and China were undermined by tweets from President Donald Trump questioning China’s economic strength and its leaders’ willingness to deliver on their promises. Elsewhere, the White House reached agreement with Congress over a two-year Budget and debt ceiling.
The Dow Jones Industrial Average Index rose by 1% during July, while the S&P 500 Index climbed by 1.3%. The technology-heavy Nasdaq Index rose by 2.1% over the month. The best-performing S&P industry sector during July was information technology, followed by communication services and consumer staples. In comparison, energy, health care, and utilities ended the month in negative territory.
Relations between the central bank and the White House remained frosty
US economic growth lost some of its momentum during the second quarter of 2019, undermined by softer export activity caused by the ongoing trade conflict between the US and China. The economy grew at an annualised rate of 2.1% during the period, compared with first-quarter growth of 3.1%. Looking ahead, the International Monetary Fund (IMF) expects economic growth in the US to decelerate from 2.6% in 2019 to 1.9% in 2020 as the impact of fiscal stimulus unwinds. Relations between the central bank and the White House remained frosty during the month, as President Trump tweeted: “Q2 GDP up 2.1%. Not bad considering we have the very heavy weight of the Federal Reserve wrapped around our neck”.
The Federal Reserve (Fed) imposed its first reduction in interest rates since December 2008, cutting the key federal funds rate by 25 basis points to a range of 2% to 2.5%. Policymakers believe that downside risks to the outlook – including the impact of “muted” inflation pressures and broader global developments – have increased. Fed Chair Powell highlighted “both positive and negative developments”, including slowing global growth, “soft” business investment, and a subdued inflationary backdrop. Chair Powell emphasised that the move was not necessarily the first in a “long series” of cuts, or “just one” cut. In response, President Trump tweeted: “As usual, Powell let us down” and: “The Fed has made all of the wrong moves”.