A selection of articles looking back through the markets last month.
Brexit: no further forward
Global market review
The third anniversary of the Brexit referendum came and went in June, and still the issue of Brexit remained up in the air. As the clock ticked towards the extended deadline of 31 October, the Conservative Party focused on the election of a new leader and investors focused on its implications for Brexit. At the annual Mansion House speech, Chancellor of the Exchequer Philip Hammond warned that, although fiscal and monetary interventions could help to smooth the path to a post-no-deal-Brexit economy, the impact would be temporary and could not prevent the economy from being “permanently smaller” than if the UK left the EU with a deal. The UK economy contracted in April, shrinking by 0.4% from March, and the FTSE 100 Index rose by 3.7% over June as a whole.
The ECB is becoming more concerned about risks to the eurozone’s economic growth prospects
Concerns over the US-China trade conflict continued to affect sentiment during June; towards the end of the month, however, President Donald Trump and China’s President Xi Jinping announced at the G20 summit that they had agreed to restart trade negotiations. In the meantime, the US has decided not to impose tariffs on an additional US$325 billion-worth of Chinese goods. Meanwhile, having imposed a rising schedule of tariffs on imports from Mexico in May, President Trump suspended them “indefinitely” as Mexico’s took action to tackle migration. Elsewhere, speculation that the Federal Reserve (Fed) might decide to implement a cut in interest rates gained traction. The central bank warned that uncertainties about the economic outlook had increased and pledged to take action necessary to support US global growth. The Dow Jones Industrial Average Index rose by 7.2% in June.
Policymakers at the European Central Bank (ECB) are considering further monetary stimulus, including a fresh round of asset purchases and additional rate cuts. The ECB is becoming more concerned about risks to the eurozone’s economic growth prospects caused by Brexit-related uncertainties and global trade tensions. The Dax Index rose by 5.7% during June, while the CAC 40 Index climbed by 6.4%.
Despite ongoing trade tensions between the US and China, Japan’s economic growth picked up during the first three months of 2019: the country’s economy expanded at an annualised rate of 2.2%, having grown by 1.8% in the previous quarter. Growth was boosted by an increase in capital spending; however, private consumption declined. Over June, the Nikkei 225 Index rose by 3.3%.
Trade tensions hit growth in Asia
Asia & Japan markets review
Economic growth picked up in Japan during the first quarter of 2019, despite the continuing trade tensions between the US and China. On an annualised basis, Japan’s economy grew by 2.2%, compared with growth of 1.8% in the final quarter of 2018. Although private consumption declined during the period, growth was underpinned by a rise in capital spending. The Nikkei 225 Index rose by 3.3% during June, while the Topix Index climbed by 2.6% and the TSE Second Section Index rose by 0.5%.
Japan’s manufacturing sector experienced its fastest drop in new orders for three years
Exports dropped for a sixth consecutive month during May, falling at an annualised rate of 7.8% compared with April’s 2.2% decline. In comparison, having risen by 6.5% in April, imports posted a 1.5% annualised drop.
Japan’s manufacturing sector experienced its fastest drop in new orders for three years during June, according to IHS Markit. Weakening demand in domestic and international markets contributed to the decline, which was exacerbated by poor demand for automobiles, deteriorating in client confidence, and trade tensions.
Faltering economic growth spurred policymakers at the Reserve Bank of Australia (RBA) to cut its key interest rate by 25 basis points to a new low of 1.25% during June in a bid to support the labour market and achieve its inflation target of 2-3%. The RBA last cut rates in August 2016. Growth has been undermined by a drop in property prices and China’s economic slowdown; RBA Governor Philip Lowe insisted that the economic outlook had not deteriorated and that growth is expected to strengthen later in the year, also stating: “The possibility of lower interest rates remains on the table … (but) monetary policy is not the only option”. Australia’s economy grew at an annualised rate of 1.8% during the first three months of 2019, compared with 2.3% in the final quarter of 2018. The ASX All Ordinaries Index rose by 3.2% during June.
Elsewhere in the region, South Korea’s economy contracted by 0.4% during the first quarter of 2019, dampened by a 3.3% decline in manufacturing that was intensified by the US-China trade conflict. The Kospi Index rose by 4.4% over the month. Meanwhile, share price performance was volatile in Hong Kong during the month amid mounting political unrest as people protested against controversial extradition legislation. Nevertheless, over June as a whole, the Hang Seng Index rose by 6.1%.
Trade negotiations reopen
Emerging markets review
The trade relationship between China and the US continued to dominate investor sentiment during June, following President Donald Trump’s decision in May to increase tariffs on over US$200 billion-worth of imports from China from 10% to 25%. Nevertheless, towards the end of June, President Trump and China’s President Xi Jinping met at the G20 summit in Japan, and agreed to restart trade negotiations. In the meantime, the US postponed additional tariff increases on a further US$325-worth of Chinese imports.
The UK and China launched the London-Shanghai Stock Connect
Despite the ongoing trade war between China and the US, China’s exports posted a surprise increase during May, rising at an annualised rate of 1.1% following April’s decline of 2.7%. In contrast, imports fell by 8.5%. Elsewhere, industrial production continued to weaken: output fell from an annualised rate of 5.4% in April to 5% in May. The Shanghai Composite Index rose by 2.8% during June.
The UK and China launched the London-Shanghai Stock Connect during the month. The new link will enable companies to trade shares through dual listings on the Shanghai and London Stock Exchanges using depositary receipts. This is the first time that foreign companies have been able to list in mainland China. According to the UK Treasury, over 260 of the 1,500 companies listed in Shanghai are potentially eligible to list in London through Stock Connect.
The Reserve Bank of India (RBI) cut its key interest rate from 6% to 5.75% in June, and modified its monetary policy stance from “neutral” to “accommodative”. RBI policymakers also cut the central bank’s forecast for economic growth for the fiscal year 2019-20 from 7.2% to 7%, and raised its inflationary forecast to 3-3.1% in the first half of the fiscal year and 3.4-3.7% in the second half. The RBI has already cut rates twice in 2019, reflecting intensifying concerns over the outlook for India’s economic growth. Over June, the CNX Nifty Index fell by 1.1%.
Brazil’s monthly rate of inflation fell from 0.57% in April to 0.13% in May, driven down by deflation of 0.56% in the price of food and beverages to reach its lowest May rate since 2006. On an annualised basis, the rate of inflation moderated to 4.66% in May, compared with April’s rate of 4.9%. Brazil’s central bank maintained its key interest rate at 6.5% during June. The benchmark Bovespa Index rose by 4.1% over the month.
Further stimulus to come?
Europe market review
Following the extension to the Brexit deadline, the European Commission (EC) urged companies to ‘take advantage of the extra time” to make their preparations, warning that a “no deal” scenario remains “very much … a possible, although undesirable outcome”, and reiterating that no deal means no transition period. European Council President Donald Tusk reminded the UK that the EU remains ready to discuss the Political Declaration, but the Withdrawal Agreement is not open to renegotiation.
No deal means no transition period
Business sentiment in Germany continued to deteriorate in June according to the IFO Institute’s Business Climate Index. The Index reached its lowest level since November 2014, and IFO warned that “the Germany economy is heading for the doldrums”. The Dax Index rose by 5.7% during June, while the CAC 40 Index climbed by 6.4%.
European Central Bank (ECB) President Mario Draghi indicated that ECB policymakers are considering further monetary stimulus, including the possibility of another cut in interest rates and another round of quantitative easing. Mr Draghi went on to highlight increased risks to the outlook, including geopolitical factors, rising protectionism, and “vulnerabilities” in emerging markets, stating: “In the absence of improvement … additional stimulus will be required”. President Donald Trump complained via Twitter: “Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete with the USA”.
The EC warned that Italy’s debt levels are set to rise to 135% of GDP in 2019 and 2020, citing the damage inflicted by recent policy choices. Italy’s leaders appear to be somewhat divided on the issue, according to credit ratings agency Fitch, which reported that, while the Prime Minister and Finance Minister were keen to avoid the imposition of an Excessive Deficit Procedure (EDP), Italy’s Deputy Prime Minister did not support “cuts, sanctions and austerity”.
A move to begin the further enlargement of the EU was put on hold during June as plans to initiate discussions on the accession of Albania and North Macedonia into the bloc were postponed, perhaps until as late as October. Elsewhere, after protracted negotiations, the EU reached a trade agreement with Mercosur, a trading bloc formed of Argentina, Brazil, Paraguay and Uruguay. The deal – the EU’s largest to date – covers 780 million people and will save Europe €4 billion-worth of duties.
Central banks start to ease
Global bond market review
Bond yields continued their decline into June and prices rose as several central banks loosened their monetary policy stance. The Reserve Bank of Australia (RBA) and the Reserve Bank of India (RBI) both cut their key interest rates during the month. Meanwhile, the benchmark US Treasury bond yield dipped below 2% for the first time since 2016 amid mounting speculation that the Federal Reserve (Fed) could be contemplating a cut in interest rates as early as July. The Fed warned that downside risks to economic growth had intensified and, having inverted for the first time since March during May, the US yield curve remained inverted for the whole of June, compounding speculation that US economic strength might be wavering. Over June as a whole, the yield on the US ten-year Treasury bond dropped from 2.22% to 1.99%, having begun 2019 at 2.72%.
The benchmark US Treasury bond yield dipped below 2% for the first time since 2016
During June, European Central Bank (ECB) President Mario Draghi said that policymakers stand ready to cut interest rates or introduce fresh quantitative easing measures in order to shore up the region’s economic growth. The French, German, Swedish, Finnish, and Danish benchmark government bond yields ended the month in negative territory. In particular, the yield on German benchmark government bond remained mired in negative territory for the whole of June, falling from -0.27% to -0.40%, while the benchmark French government bond yield dropped from 0.12% to -0.39%.
The global economic outlook is weakening, according to the World Bank, which cut its forecast for global growth in 2019 from 2.9% to 2.6%, before edging up to 2.7% in 2020. The World Bank attributes this deterioration in prospects to factors such as rising trade barriers, accumulating government debt, and worse-than-expected slowdowns in several major economies.
Demand for fixed income funds remained robust during May, according to the Investment Association (IA), and the asset class retained its top-selling positon. The best-selling IA bond sector during the month was £ Strategic Bond, which was surpassed only by the Global equity sector. Investors’ appetite for funds in the UK Gilts sector and £ Corporate Bond sector also proved strong, and all three sectors appeared in the top ten best-selling sectors. In contrast, demand for funds in the Global Bonds sector dropped off sharply during May, and the £ High Yield sector also fell from favour.
Gradual tightening strategy remains intact
UK bond market review
UK government bond yields fell over the first six months of 2019, boosted by rising demand for gilts driven by political uncertainty. Over June, the yield on the benchmark UK government bond fell from 0.87% to 0.79%, having begun 2019 at 1.26%. The yield on the short-dated gilt eased from 0.62% to 0.60%, having started the year at 0.76%.
This is a moment when a stitch in time, interest-rate wise, could save nine
In the annual Mansion House speech, Chancellor of the Exchequer Philip Hammond warned that “a damaging “no-deal” Brexit would cause short-term disruption to our economy, soaking up all the fiscal headroom we have built and more”. He set out a choice between “no deal” and the preservation of the UK’s future fiscal space, warning: “we cannot do both”.
The UK economy shrank at a month-on-month rate of 0.4% in April; over the three months to the end of April, the economy grew by 0.3%, compared with 0.5% over the three months to the end of March. Activity was undermined by a “dramatic” decline in car production and a moderation in manufacturers’ stockpiling activity following the extension to the Brexit deadline from the end of March to the end of October.
The UK’s manufacturing sector shrank during May, posting its first contraction since July 2016, according to IHS Markit/CIPS, as stockpiling activity dwindled in the wake of the original Brexit deadline. Manufacturing firms reported problems persuading clients to commit to new contracts, and new business volumes fell for the first time in seven months. Brexit-related uncertainties appear to have affected the sector, and some clients have diverted their supply chains away from the UK.
Despite signs of increasing dovishness amongst central bankers in the US and Europe, the BoE is still expected to tighten interest rates gradually over the next two years. During the month, Monetary Policy Committee member Michael Saunders said that “further monetary tightening is likely to be required over time”, although he reiterated that any tightening could be “limited and gradual”. Meanwhile, in an article published during June, BoE Chief Economist Andy Haldane said: “For me personally, the time is nearing when a small rise in rates would be prudent to nip any inflationary risks in the bud … this is a moment when a stitch in time, interest-rate wise, could save nine”. UK base rate has remained at 0.75% since August 2018.
UK equity market review
Three years on from the Brexit referendum – and three months after the Brexit deadline was extended – the issue of Brexit remained unresolved. June was taken up with speculation over the identity – and attitude towards Brexit – of the Conservative Party’s new leader and the UK’s new Prime Minister. By the end of June, a series of votes had whittled down the contenders to the final two – Boris Johnson and Jeremy Hunt – and the eventual winner will be declared on 23 July.
The perceived likelihood of a no-deal Brexit has risen
Consumer confidence continued to deteriorate during May, according to GfK. Concerns over political instability and the possibility of a no-deal Brexit led UK households to become less optimistic about the economic outlook and their personal financial situation. Elsewhere, retail sales volumes fell at their fastest pace since March 2009 in the twelve months to June, according to the Confederation of British Industry (CBI), which cited “relatively cooler weather” and “challenging” conditions on the high street.
Beleaguered fashion retailer Bonmarché issued a trading update in which it warned that losses could be even greater than previously expected. Moreover, having previously opposed a takeover bid from Dubai-based Spectre Holdings, the company abandoned its opposition to the offer. Fashion retailer Ted Baker issued a profit warning, citing an “extremely difficult” environment.
Construction firm Kier issued a profit warning and revealed that its net debt position was likely to be higher than previously expected. Following its profit warning, Kier fell out of the FTSE 250 Index in the quarterly review of FTSE UK index constituents. Meanwhile, budget airline easyJet and Hikma Pharmaceuticals left the FTSE 100 Index and joined the FTSE 250 Index, having been dislodged by technology company Aveva and sports fashion retailer JD Sports who entered the FTSE 100 Index. Over June as a whole, the FTSE 100 Index rose by 3.7%, while the FTSE 250 Index climbed by 2.6%.
The Bank of England (BoE) expects economic growth to stall in the second quarter, downgrading its forecast for from 0.2% to zero. The UK economy grew by 0.5% in the first quarter, fuelled by stockpiling by companies ahead of the original Brexit deadline of 29 March. Policymakers believe that downside risks to growth have increased since their May meeting; global trade tensions have intensified, and the perceived likelihood of a no-deal Brexit has risen.
UK equity funds move back into favour
UK equity income market review
UK share prices rose and equity yields fell in June in the face of ongoing political uncertainty. The unfolding story of Brexit entered a new chapter during the month as the Conservative Party focused on electing their new leader, who will supersede Theresa May as Prime Minister as the UK moves closer to the extended Brexit deadline of 31 October.
Demand for UK equity funds staged a pronounced recovery
During June, the FTSE 100 Index rose by 3.7%, while the FTSE 250 Index climbed by 2.6%. The yield on the FTSE 100 Index declined during June from 4.56% to 4.34%, having started 2019 at 4.68%, while the FTSE 250 Index’s yield fell from 3.25% to 3.17% after beginning the year at 3.39%. During June, the yield on the benchmark UK government bond fell from 0.87% to 0.79%, having begun 2019 at 1.26%.
Over the first six months of 2019, the best-performing FTSE sectors were leisure goods, industrial metals & mining, software & computer services, and electronic & electrical equipment. The worst-performing sectors included fixed-line and mobile telecommunications, oil equipment & services, and automobiles & parts.
In a trading update, hotel operator Whitbread pledged to return to shareholders more of the proceeds of its sale of Costa coffee to Coca-Cola, “subject to prevailing market conditions”. The company intends to return up to £2 billion to shareholders through a tender offer that will represent the second stage in a three-stage return of capital, following a share buyback earlier in the year.
Although fixed income remained the most popular asset class in May with net retail sales of £771 million, demand for UK equity funds staged a pronounced recovery during the month, according to the Investment Association (IA), achieving net retail sales of £532 million. Notwithstanding this reversal of fortune, however, general demand for equity funds remained relatively weak. Despite this, both the UK Equity Income sector and the mainstream UK All Companies sector appeared in the top five best-selling IA sectors; the UK All Companies sector posted positive net retail inflows for the first time in more than a year, and demand for funds in the UK Equity Income sector also showed a sharp improvement. Investors’ appetite for funds in the UK Smaller Companies sector worsened, however, and the sector experienced net retail outflows of almost £50 million during the month.
Rate cut on the horizon
US market review
Trade developments continued to absorb attention during June. Having imposed tariffs on Mexican imports in May – tariffs that were set to continue to rise every month until October – President Donald Trump announced that the tariffs would be suspended “indefinitely” following the news that Mexico would tackle the problems of migration and human trafficking. Meanwhile, at the G20 summit in Japan, President Trump and China’s President Xi Jinping announced that trade negotiations would resume and the US decided not to raise tariffs on a further US$325 billion-worth of Chinese goods.
An ounce of prevention is worth a pound of cure
During June, the Dow Jones Industrial Average Index rose by 7.2%, the S&P 500 Index climbed by 6.9%, and the Nasdaq Index rose by 7.4%. According to S&P Dow Jones Indices, the S&P 500 Index had its best June since 1955, and the Dow Jones Industrial Average Index had its best June since 1938. The best-performing S&P sectors during June were materials, information technology and energy, whereas real estate and utilities performed relatively poorly.
Although the Federal Reserve (Fed) maintained its key federal funds rate at 2.25% to 2.5% during June, speculation that policymakers might move to cut rates continued to mount. Within the Federal Open Market Committee (FOMC), one member voted for a reduction. Pledging to “act as appropriate to sustain the expansion”, the Fed said that uncertainties about the outlook had increased, modifying its previously “patient” stance.
Separately, in a speech during the month, Fed Chair Jerome Powell warned: “The picture has changed … cross-currents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy”. His words – alongside the statement “An ounce of prevention is worth a pound of cure” – compounded speculation that the central bank is contemplating a cut in interest rates.
The relationship between the Fed and the White House continued to sour, as President Trump tweeted: “A Federal Reserve that doesn’t know what it is doing – raised rates far too fast” … “They stick, like a stubborn child, when we need rates cuts & easing, to make up for what other countries are doing against us. Blew it!” Notwithstanding the President’s words, Chair Powell insisted that the Fed remains independent and “insulated from short-term political pressures”. The FOMC’s next meeting will take place at the end of July.
The briefings above were written & supplied by Adviser Hub July 2019