A selection of articles looking back through the markets last month.
Global Market Review
October saw the UK plunge into election fever as progress on Brexit once again ground to a halt. Although Prime Minister Boris Johnson managed to reach a new Brexit Withdrawal Agreement with the EU , he failed to win Parliament’s support for his timetable deal, and was forced to approach Brussels to request a second extension. The Brexit deadline was subsequently extended until 31 January and a General Election was called for 12 December . Over October as a whole, the FTSE 100 Index fell by 2.2% over October.
“The rate of economic growth in the US has moderated”
In the US, the Federal Reserve (Fed) reduced its key federal funds rate once again, cutting it by 0.25 percentage points to a range of 1.5% to 1.75%. Looking ahead, however, Fed Chair Jerome Powell indicated that the central bank has come to the end of its current loosening cycle, stating: “We see the current stance of policy as likely to remain appropriate”. The rate of economic growth in the US has moderated, dampened by the impact of the drawn-out trade conflict between the US and China, and inflation remains subdued. The Dow Jones Industrial Average Index rose by 0.5% during October.
At his final monetary policy press conference before he leaves his role as President of the European Central Bank (ECB), Mario Draghi warned that the eurozone’s economy faces a period of “protracted weakness”, exacerbated by a deteriorating global backdrop and Brexit-related uncertainty. Mr Draghi will be replaced as ECB President in November by Christine Lagarde, the former Managing Director of the International Monetary Fund (IMF). Germany’s benchmark Dax Index rose by 3.5% over the month.
As expected, Japan implemented its long-planned increase in sales tax on 1 October, raising its rate of consumption tax from 8% to 10%. The consumption tax was previously increased in April 2014 . The government has put in place measures to mitigate the higher tax’s impact on spending, including a reduced tax rate of 8% on certain purchases. Over October, the Nikkei 225 Index rose by 5.4%.
Hong Kong slipped into recession during the third quarter of 2019 as months of unrest undermined the territory’s economic activity. Having contracted at an annualised rate of 0.4% in the second quarter, Hong Kong’s economy shrank by 2.9% during the third quarter. The Hang Seng Index experienced a bumpy month , but ended October 3.1% higher.
Asia & Japan Market Review
Japan raises consumption tax
Japan’s much-anticipated rise in consumption tax finally took place on 1 October. The sales tax increased from 8% to 10%, and followed a previous increase in April 2014. Retail sales grew strongly in Japan during September ahead of the tax increase, rising at an annualised rate of 9.1% as consumers hurried to secure big-ticket merchandise. The surge in activity compounded concerns that spending could stage a sharp drop as the rise starts to take effect, thereby holding back economic growth. In a move designed to dampen any adverse impact from the tax increase upon activity, Japan’s Government implemented a variety of measures, including a lower tax rate of 8% on certain purchases, such as food, drink and newspaper subscriptions. The Nikkei 225 Index rose by 5.4% during October, while the Topix Index climbed by 5% and the TSE Second Section Index rose by 6.2%.
“Following months of unrest and disorder, Hong Kong slid into recession”
Following months of unrest and disorder, Hong Kong slid into recession over the third quarter. The territory’s economy contracted by 2.9% during the period, having previously shrunk at an annualised rate of 0.4% in the second quarter. Despite the disorder that continued to undermine activity, the Hang Seng Index rose by 3.1% over October as a whole.
The Reserve Bank of Australia (RBA) cut its key interest rate by 25 basis points to a new all-time low of 0.75% during the month, following reductions in July and June. RBA policymakers are trying to boost inflation towards its target rate of 2-3% and to provide support for the country’s labour market and wage growth. Looking ahead, the RBA appears ready to continue with its monetary easing strategy. RBA Governor Philip Lowe warned that the outlook for consumption remained the “main domestic uncertainty” and said it would be “reasonable to expect that an extended period of low interest rates will be required”. The ASX All Ordinaries Index fell by 0.4% during October.
South Korea’s economy expanded at an annualised rate of 2% during the third quarter of 2019. Compared with the second quarter, however, the pace of growth slowed from 1.0% to 0.4%. The Bank of Korea (BoK) cut its key interest rate during the month by 0.25 percentage points to 1.25%, having previously implemented a cut in July. The Kospi Index ended October 1% higher.
Emerging Markets Review
China’s slowdown continues
The pace of economic growth in China continued to slow during the third quarter, dampened by the ongoing trade conflict with the US. On an annualised basis, China’s economy expanded by 6% over the three months to the end of September, compared with growth of 6.2% in the second quarter and 6.4% in the first. News of a tentative trade agreement between China and the US was generally welcomed by investors, but the International Monetary Fund (IMF) urged both countries to make further progress in de-escalating trade tensions and to move from a “trade truce to a trade peace”. The Shanghai Composite Index rose by 0.8% over October.
“News of a tentative trade agreement between China and the US was generally welcomed”
Credit ratings agency Standard & Poor’s (S&P) affirmed its “A+” long-term rating and “stable” outlook for China during October. S&P highlighted China’s prospects for above-average headline GDP growth and improved fiscal performance over the next three to four years. Although risks remain to China’s economic and financial stability – notably trade tensions with the US and a slowdown in the country’s rate of economic growth – S&P believes that policy changes have helped to curb credit growth and diluted the economy’s reliance on public investment.
The IMF cut its economic growth forecast for India from 7% to 6.1% in 2019 and from 7.2% to 7% in 2020, citing a weaker-than-expected outlook for domestic demand. India’s economic growth is being held back by a squeeze in credit availability, according to ratings agency Fitch, which found that total new lending in the current fiscal year will drop to 6.6% of GDP, compared with 9.5% last year. India’s economy slowed for a fifth consecutive quarter during the second quarter, posting annualised growth of 5% compared with 8% in the same period a year earlier. Retail price inflation rose from 3.21% in August to 3.99% in September, moving closer to the Reserve Bank of India’s 4% target. In particular, food price inflation surged from 2.99% to 5.11%. During October, the CNX Nifty Index rose by 3.5%.
In response to signs of a slowdown in the global economy, Brazil’s central bank cut its key Selic rate by one-half of a percentage point to 5% and signalled the possibility that another cut might be in the pipeline. The move followed Congress’s approval of pension reforms. The Bovespa Index rose by 2.4% over October.
Europe Market Review
Waiting for Brexit
Although the UK and EU managed to reach a new Brexit Withdrawal Agreement, UK Prime Minister Boris Johnson failed to secure MPs’ support for his timetable. As a result, the Brexit deadline was shifted once again, this time from 31 October this year to 31 January 2020. European Council President Donald Tusk tweeted: “To my British friends, The EU27 has formally adopted the extension. It may be the last one. Please make the best use of this time”.
“M. Barnier stressed that stability in Ireland is crucial and the single market’s integrity remains non-negotiable”
The EU’s chief Brexit negotiator Michel Barnier called for a close post-Brexit relationship between the UK and EU, based on economic exchange and co-operation in the areas of security and defence. M. Barnier stressed that stability in Ireland is crucial and the single market’s integrity remains non-negotiable. During October, the Dax Index rose by 3.5% while the CAC 40 Index increased by 0.9%.
Third-quarter growth in the eurozone proved to be slightly better than expected: the region’s economy expanded at a quarterly rate of 0.2%, following second-quarter growth also of 0.2%. On an annualised basis, the eurozone’s growth continued to lose momentum: the region expanded by 1.1% during the third quarter, following growth of 1.2% in the second quarter and 1.3% in the first. Germany’s economy shrank by quarter-on-quarter rate of 0.1% during the second quarter of 2019; a contraction in the third quarter would push the country into a technical recession, but investors will have to wait until the middle of November for the data.
President of the European Central Bank (ECB) Mario Draghi warned that the eurozone’s economy will face a period of “protracted weakness” caused by a broader global slowdown and Brexit-related uncertainty. Mr Draghi will be succeeded in his role in November by Christine Lagarde, the former Managing Director of the International Monetary Fund (IMF).
The eurozone’s manufacturing sector declined to its lowest level since October 2012, according to IHS Markit, which predicted a “grim” outlook for the sector and for the wider European economy. German manufacturers suffered particularly badly, falling to its lowest level since August 2009, and downturns in Italy and Spain also appear to be deepening. The rate of inflation in the euro area eased from 0.8% in September to 0.7% in October, dampened by lower energy prices. Meanwhile, the unemployment rate remained steady at 7.5%.
Global Bond Market Review
Fed cuts rates once again
Following a raft of interest-rate cuts in the third quarter of 2019, the loosening monetary trend continued into the fourth quarter as central banks – including the US, Australia, South Korea, Brazil, Ukraine and Turkey – reduced their key rates. During October, however, the International Monetary Fund (IMF) warned that the current environment of low interest rates is encouraging investors “to take more chances in a quest for higher returns, so risks to financial stability and growth remain high in the medium term”.
“We see the current stance of policy as likely to remain appropriate” (Fed Chair Jerome Powell)
The US Federal Reserve (Fed) reduced its key federal funds rate for a third time this year at the end of October, following earlier reductions in July and September. Fed Chair Jerome Powell indicated that policymakers are not considering further loosening in the current cycle, stating: “We see the current stance of policy as likely to remain appropriate”. However, President Donald Trump – who has made no secret of his low opinion of the Fed’s strategy – tweeted: “The Fed doesn’t have a clue! We have unlimited potential, only held back by the Federal Reserve”. Over October as a whole, the yield on the benchmark US Treasury bond remained broadly unchanged at 1.66%, but rose as high as 1.85% and fell as low as 1.52% during the month.
Germany’s benchmark Government bond yield reached its highest level for three months during October. Investors were cheered by mounting hopes of a resolution to the trade conflict between the US and China, and by the news that another Brexit extension had been agreed. Nevertheless, there are still broader concerns surrounding the economic outlook for the eurozone – and for Germany in particular – against a backdrop of slowing economy growth and a manufacturing downturn. The benchmark German Government bond yield remained in negative territory during October, but strengthened from -0.78% to -0.63% over the month.
UK Bond Market Review
Teetering on the edge
Having surged earlier in the month, amid rising hopes of a Brexit deal, gilt yields subsequently dipped later in October when it became clear that Brexit remained unresolved. As Parliament rejected the timetable for Prime Minister Boris Johnson’s new Withdrawal Agreement, the UK was forced to ask the EU for another extension to the deadline, and a General Election was called for 12 December. Over October as a whole, the yield on the benchmark UK government bond increased from 0.39% to 0.57%.
“The UK cannot teeter on the edge of Brexit indefinitely” (British Retail Consortium)
Following the announcement of the General Election, the Confederation of British Industry (CBI) urged politicians to seize the “one-off chance to break the gridlock that has blighted our country for over three years”. Meanwhile, the British Retail Consortium (BRC) commented: “Each repeating cycle of parliamentary impasse and extension is costing retailers hundreds of millions … The UK cannot teeter on the edge of Brexit indefinitely”.
The UK economy posted better-than-expected growth of 0.3% between June and August. Although the economy contracted by 0.1% during the month of August, the Office for National Statistics (ONS) revised up its growth calculation for July from 0.3% to 0.4%. However, productivity posted its fastest annualised decline since 2014 during the second quarter of 2019, dropping by 0.5% year on year after remaining flat for the previous two quarters. Elsewhere, a deterioration in the UK’s services sector, alongside ongoing weakness in the construction and manufacturing sectors, stoked concerns over the economy’s resilience in the face of Brexit-related uncertainties, trade tensions, and wider concerns over the outlook for the global economy. Growth in the UK’s labour market showed signs of cooling: the rate of unemployment edged up from 3.8% in the three months to July to 3.9% in the three months to August as employment growth moderated, and annualised growth in wages (excluding bonuses) eased to 3.8% during the same period.
Credit ratings agency Fitch maintained its “AA” long-term issuer default rate on the UK during October. Fitch also held its “negative” ratings watch, citing the current uncertainty surrounding Brexit. Fitch warned that three years of protracted Brexit negotiations have “strained UK politics and weakened policy cohesion … (paralysing) the policy-making agenda and … having a material negative impact on UK governance indicators”. In particular, Fitch highlighted the economic damage inflicted by a slump in business investment and sentiment.
UK Equity Market Review
Seven months after the first Brexit delay, the Hallowe’en deadline came and went with the UK’s Brexit predicament unresolved. Although Prime Minister Boris Johnson succeeded in negotiating a new Withdrawal Agreement with the EU, he was unable to convince MPs to back his timetable. As a result, he was forced to ask the EU for another extension, and a “flextension” until 31 January 2020 was subsequently granted, allowing the UK to leave the EU sooner if a deal is approved. In the meantime – and after a certain amount of wrangling about a suitable date – a General Election was called to take place on 12 December.
“A General Election was called to take place on 12 December”
The European Parliament’s Brexit co-ordinator Guy Verhofstadt tweeted: “Relieved that finally no one died in a ditch. Whether the UK’s democratic choice is revoke or an orderly withdraw, confirmed or not in a second referendum, the uncertainty of Brexit has gone on for far too long. This extra time must deliver a way forward.” The FTSE 100 Index fell by 2.2% during October, while the FTSE 250 Index edged up by 0.4%.
The UK economy shrank during August, according to the Office for National Statistics (ONS), which reported a contraction of 0.1%. Nevertheless, over the three months to the end of August, the economy expanded more strongly than expected, posting growth of 0.3%.
Having improved in September, UK consumer confidence declined during October against a backdrop of mounting political tension and Brexit-related uncertainties. GfK warned: “People can only feel confident if they believe the external environment is stable, yet consumers are witnessing too many Brexit shifts and surprises … The big black Brexit cloud is refusing to shift”.
According to the CBI’s Distributive Trends survey, retailers’ stock levels in relation to expected sales reached their highest-ever level during October ahead of the Hallowe’en Brexit deadline. Meanwhile, 85,000 UK retailing jobs were lost in the 12 months to the end of September, according to the British Retail Consortium (BRC), which has urged the Government to implement reform to its retail-related policies. The BRC found that the third quarter of 2019 represented the sector’s 15th quarter of year-on-year decline in the retail workforce. During October, fashion retailer Ted Baker reported a half-year loss and issued a profit warning, and clothing chain Bonmarché went into administration during the month.
UK Equity Income Market Review
Underlying dividend growth slows
The FTSE 100 Index fell and its yield rose during October as Brexit uncertainty continued. Although the UK managed to negotiate a fresh Withdrawal Agreement with Brussels, Prime Minister Boris Johnson was unable to secure MPs’ backing for his timetable. As a result, the Brexit deadline was extended once again – this time to 31 January 2020 – and a General Election was called for 12 December.
“Special dividends are helping to conceal a slowdown in dividend growth”
The FTSE 100 Index fell by 2.2% during October, while the FTSE 250 Index rose by 0.4%. Over the month, the yield on the FTSE 100 Index rose from 4.42% to 4.53%, while the FTSE 250 Index’s yield declined from 3.25% to 3.17%. In comparison, the yield on the benchmark UK government bond increased from 0.39% to 0.57%. Oil company BP reported a third-quarter loss as hurricanes and lower oil and gas prices took effect; the company has decided to suspend its scrip dividend option for the third quarter.
Since the beginning of 2019, the best-performing FTSE industry sectors include technology hardware & equipment, leisure goods, construction & materials, and financial services. At the other end of the performance spectrum, the worst-performing sectors include automobiles & parts, oil equipment & services, industrial metals & mining, and fixed-line telecommunications.
Special dividends are helping to conceal a slowdown in dividend growth, according to Link Asset Services’ Dividend Monitor for the third quarter of 2019. During the period, UK dividends posted headline growth of 6.9%, reaching a total of £35.5 billion. Nevertheless, this growth was flattered by “exceptionally large special dividends”; on an underlying basis, dividends actually fell by 0.2% over the quarter, with a total payout of £32.2 billion. The weak pound also had a substantial impact on the bottom line: on a constant currency basis, total dividends fell by 3% during the third quarter, posting their worst quarterly performance for three years. Link commented: “2019 will almost certainly prove a temporary high-water mark for UK dividends”.
Dividends paid by banks rose by 40% during the third quarter, while dividends from the mining sector increased by almost one-third, boosted by special dividends from Rio Tinto and BHP. Within the telecommunications sector, however, dividend payouts fell by 40%, led by Vodafone’s sizeable dividend cut. Elsewhere, payments from the general retailing sector also dropped following cuts from M&S, Dixons Carphone, and Superdry.
US Market Review
Fed cuts rates for a third time this year
Policymakers at the US central bank opted to cut the key federal funds rate by 25 basis points to a range of 1.5% to 1.75% during October. Members of the Federal Open Market Committee (FOMC) voted by eight to two in favour of the cut, which reflected hopes of a possible resolution to the longstanding trade conflict between the US and China. This was the Federal Reserve’s (Fed’s) third rate reduction so far this year, following cuts in September and July, but Fed Chair Jerome Powell signalled the end of the current loosening cycle, saying: “We see the current stance of policy as likely to remain appropriate”.
“Fed Chair Jerome Powell signalled the end of the current loosening cycle”
Nevertheless, President Donald Trump’s attitude towards the Fed remained censorious, tweeting: “People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow … We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage”. Meanwhile, in a move that was roundly condemned by the White House, the House of Representatives voted in favour of a resolution to proceed with the impeachment inquiry against President Trump.
The S&P 500 Index reached a fresh high towards the end of October, boosted by the Fed’s interest-rate cut and by hopes of a possible end to the US-China trade war. The two countries reached a tentative agreement on trade during the month following trade discussions in Washington, but investors are likely to wait for tangible evidence of progress before dropping their guard. Over October as a whole, the S&P 500 Index rose by 2.1%, the Dow Jones Industrial Average Index increased by 0.5% during October, and the Nasdaq Index climbed by 3.7%.
Economic growth in the US slowed to 1.9% year on year during the third quarter, having posted annualised growth of 2% in the second quarter and 3.1% in the first. Although consumer spending proved resilient, business investment and public spending declined, inflationary pressures remain muted, and the impact of President Trump’s tax cuts tailed off.
The labour market remained strong during September: the rate of unemployment fell from 3.7% to 3.5%. The economy added 136,000 new jobs in September, and new jobs in August were revised up from 130,000 to 168,000. However, average earnings growth eased to 2.9%.