A selection of articles looking back through the markets last month.
Global Market Review
What next for Brexit?
The long-running Brexit saga took a new twist in September as the clock continued to tick towards its Hallowe’en deadline. After being suspended earlier in the month, the UK Parliament was hastily reconvened towards the end of September following a shock ruling by the Supreme Court that Parliament’s prorogation had been unlawful.
During the month, political tensions continued to rise, stoking speculation that a General Election is in the offing. Meanwhile, before Parliament was prorogued, the House of Commons passed the “Benn Act”, which requires the Prime Minister either to request an extension to Article 50 or to obtain MP’s asset to a no-deal Brexit by 19 October. Nevertheless, Prime Minister Boris Johnson continued to insist that the UK will quit the EU on schedule on 31 October, whether or not a deal has been agreed. Despite the ongoing uncertainty, the FTSE 100 Index rose by 2.8% over September.
“Prime Minister Boris Johnson continued to insist that the UK will quit the EU on schedule”
The US Federal Reserve (Fed) cut its key federal funds rate by 25 basis points during September to a range of 1.75% to 2%, having previously implemented a cut in July. The Fed upgraded its forecast for US economic growth in 2019 from 2.1% to 2.2%. President Donald Trump criticised the central bank and its Chair for not cutting rates quickly enough, tweeting: “Jay Powell and the Federal Reserve Fail Again. No “guts”, no sense, no vision!”. The Dow Jones Industrial Average Index climbed by 1.9% over September as a whole.
The European Central Bank (ECB) revealed a fresh programme of economic stimulus aimed at supporting the eurozone’s economy. The ECB will start monthly asset purchases of €20 billion per month, beginning from 1 November, to continue for “as long as necessary”. The ECB downgraded its expectations for economic growth in the euro area in 2019 from 1.2% to 1.1%, and in 2020 from 1.4% to 1.2%. The Dax Index rose by 4.1% during September.
Japan’s second-quarter economic growth proved to be less strong than initially calculated. During September, the country’s economy was reported to have expanded at an annualised rate of 1.3% between April and June, compared with a preliminary estimate of 1.8%. Japan’s population faces an increase in consumption tax from 8% to 10% in October, raising concerns about the outlook for consumer spending. During September, the Nikkei 225 Index increased by 5.1%.
Asia & Japan Market Review
Japan’s economic growth disappoints
Japan’s second-quarter economic growth proved disappointing for investors, as initial calculations of annualised growth of 1.8% were downgraded to a more muted 1.3%. On a quarter-on-quarter basis, the economy grew by 0.3%. Looking ahead, Japanese consumers have to contend with an increase in consumption tax from 8% to 10% from October, and it is feared that the rise could put a brake on economic growth. Although consumer spending has held up well in recent months, this may be because shoppers are bringing forward planned purchases ahead of the sales tax increase.
Japanese exports fell at an annualised rate of 1.8% during July, while imports declined by 1.1%. Shipments to China fell by over 9% over the period. Over September as a whole, the Nikkei 225 Index rose by 5.1%, while the Topix Index climbed by 5%, and the TSE Second Section Index rose by 1.5%
“The Australian economy has reached a “gentle turning point” (RBA Governor Philip Lowe)
Export activity in South Korea continued to decline in September, posting their tenth consecutive monthly drop. Exports fell by 11.7% year on year, dampened by lower semiconductor prices and the ongoing US/China trade conflict. Imports fell by 5.6%. Shipments to China fell at an annualised rate of 21.8%; meanwhile, exports to Japan dropped by 5.9% amid South Korea’s deepening trade spat with Japan. The deteriorating trade relationship between the two countries was intensified during the month by the World Trade Organisation’s (WTO’s) ruling that South Korea was violating international trade regulations with its tariffs on Japanese valves. The decision is likely to put pressure on South Korea valve manufacturers. The Kospi Index rose by 4.8% during September.
Governor of the Reserve Bank of Australia (RBA) Philip Lowe warned that the Australian economy has reached a “gentle turning point”. He confirmed that policymakers are ready to implement a cut if necessary “to support sustainable growth … and achieve the inflation target over time”, warning that the economy has experienced “no growth at all in consumption per person” over the past year. The RBA has already cut its key interest rate twice this year, in June and July, to a record low of 1%. Over September, the ASX All Ordinaries Index rose by 1.5%
Elsewhere in the region, Hong Kong’s benchmark Hang Seng Index endured a stormy month as civil unrest continued. Nevertheless, over the month as a whole, the index ended September 1.4% higher.
Emerging Markets Review
Trade conflict hits China’s exports
The People’s Bank of China (PBC) cut its reserve ratio – the amount of cash that banks have to hold in reserve – during September, releasing liquidity totalling 900 billion yuan in a move designed to support China’s faltering economy. This represented the third cut to the reserve ratio so far this year, following reductions in January and May. China’s economic growth is flagging against a backdrop of deteriorating sentiment exacerbated by its trade conflict with the US.
Export activity posted an unexpected drop during August, dampened by a decline in shipments to the US. Exports fell at an annualised rate of 1% during the month, having risen by 10.3% in July, and imports fell by 5.6%. Shipments to the US fell by 8.9% year on year, and imports from the US dropped by 27.5%. This decline reflects August’s sharp escalation in hostility between the two countries. During September, although both countries made some minor concessions in their ongoing trade dispute, their conflict remained unresolved.
“China’s economic growth is flagging against a backdrop of deteriorating sentiment”
Elsewhere, growth in China’s industrial production continued to lose momentum during August. Output rose at an annualised rate of 4.4% in August, compared with growth of 4.8% in July. Retail sales also softened: sales growth moderated from 7.6% in July to 7.5% in August.
In an interview with Russian news agency TASS, China’s Premier Li Keqiang warned that China’s economy faces “downward pressure” caused not only by slowing global growth, but also by an increase in protectionism and unilateralism. His words stoked speculation that central bank policymakers might ease monetary policy. The Shanghai Composite Index rose by 0.7% during September.
India’s Finance Ministry announced substantial cuts to corporate tax rates during the month. The rate of corporate tax for domestic companies was reduced from 30% to 22%, resulting in an effective tax rate of 25.17 %. Meanwhile, new domestic manufacturing companies will be allowed to pay tax of 15% – and effective tax rate of 17.01%. Share prices jumped following the news and over September as a whole, the CNX Nifty Index rose by 4.1%.
Officials at Brazil’s central bank expect the country’s economy to have expanded “slightly” during the third quarter of 2019. The Copom – the monetary policy committee – cut Brazil’s key Selic interest by one-half of a percentage point to 5.5% during the month. The benchmark Bovespa Index rose by 3.6% over September.
Europe Market Review
ECB restarts QE
During September, the European Central Bank (ECB) announced another programme of economic stimulus measures designed to shore up the eurozone’s faltering economy. The ECB will resume quantitative easing measures from 1 November, implementing asset purchases of €20 billion per month. This programme is set to continue for “as long as necessary” to allow the ECB’s key inflation rate to reach its target of “below, but close to, 2%”. The deposit facility rate – paid by banks on overnight deposits at the ECB – was further reduced from -0.4% to –0.5%.
ECB President Mario Draghi warned that inflation is likely to fall before it starts to rise towards the end of the year, and cautioned that the region is being adversely affected by the “prevailing weakness of international trade in an environment of prolonged global uncertainties”. The ECB downgraded its predictions for economic growth in the eurozone from 1.2% to 1.1% in 2019, and from 1.4% to 1.2% in 2020.
“Mr Draghi warned that the likelihood of a hard Brexit had increased compared with four months ago”
US President Donald Trump tweeted that the ECB was “trying, and succeeding, in depreciating the euro against the VERY strong dollar, hurting US exports”, implying that the ECB was manipulating its currency. However, Mr Draghi responded: “We have a mandate, we pursue price stability and we don’t target exchange rates, period”. During September, the Dax Index rose by 4.1% while the CAC 40 Index climbed by 3.6%.
In an interview with the Financial Times, Mr Draghi warned that the likelihood of a hard Brexit had increased compared with four months ago. Mr Draghi will be replaced by former Managing Director of the International Monetary Fund (IMF), Christine Lagarde, on 1 November.
The contraction in Germany’s manufacturing sector accelerated during September, fuelling concerns over prospects for the eurozone’s economic outlook. According to IHS Markit, the region’s economy came “close to stalling” during the month as new orders for goods and services dropped at their fastest rate since June 2013.
Confidence amongst businesses in the eurozone fell to its lowest level four years during September, dragged down by an increasingly pessimistic outlook in the manufacturing sector. Although sentiment amongst services companies is holding up reasonably well, optimism amongst manufacturing firms has been undermined by fears over the outlook for Germany – the eurozone’s largest economy – and wider concerns about the impact of the US/China trade wars and ongoing uncertainty over Brexit.
Global Bond Market Review
Further monetary easing in September
Following interest-rate cuts in India, Thailand and New Zealand in August, central banks in Russia and Brazil cut their key interest rates during September. Bucking the trend, however, was Norway’s central bank, which implemented its fourth increase in interest rates so far this year, raising its key rate from 1.25% to 1.5%. Meanwhile, the US Federal Reserve (Fed) cut its key federal funds rate by 25 basis points during September to a range of 1.75% to 2%.
Although low borrowing costs have helped to alleviate political concerns over rising federal budget deficits and debt, credit ratings agency Fitch believes that US public finances could create a more pressing problem for US policymakers. If borrowing costs rise or the deficit increases, officials might have to cut spending; this could affect credit quality in sectors including US public finance, financial institutions, and industrials. Over September, the yield on the benchmark US Treasury bond rose from 1.50% to 1.66%, climbing as high as 1.90% during the month. The US yield curve remained inverted for the whole of September.
“The US yield curve remained inverted for the whole of September”
Europe’s economic backdrop continued to deteriorate during September as Germany’s manufacturing sector carried on contracting. The European Central Bank (ECB) revealed fresh quantitative easing measures in a bid to support the region’s flagging economic growth. From 1 November – when Christine Lagarde takes over as ECB President from Mario Draghi – the central bank will undertake monthly asset purchases of €20 billion, to continue for “as long as necessary” until inflation converges “robustly” with its inflation target of “below, but close to, 2%”. Having begun the year at 0.17%, the benchmark German Government bond yield remained firmly in negative territory during the month, rising from -0.92% to -0.78%.
Fixed income funds experienced their first month of net retail outflows since December 2018 during August, according to the Investment Association (IA), as the £ Strategic Bond sector went from being the most popular IA sector in both June and July to become the most unpopular in August. Demand for funds in the £ Corporate Bond sector also staged a sharp drop. In contrast, the Global Bonds and Global Emerging Markets Bond sectors were ranked third and fourth out of 36 IA sectors, and investors’ appetite for funds in the £ High Yield sector also picked up.
UK Bond Market Review
Deal or no deal?
Gilts experienced a choppy September as speculation over the likelihood of a Brexit deal ebbed and flowed in response to political developments. Over September as a whole, however, the yield on the benchmark UK government bond rose from 0.32% to 0.39%, having begun 2019 at 1.26%. Meanwhile, the pound climbed as high as US$1.25 against the US dollar, buoyed by hopes that a Brexit deal might be reached, before subsiding to end the month at US$1.23.
As expected, the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) maintained base rate at 0.75% at its September meeting. Although the Bank of England (BoE) does not believe that the UK will slip into recession this year, officials believe that the uncertainties surrounding Brexit will continue to suppress interest rates. Nevertheless, policymakers emphasised that interest rates could move in either direction if the UK leaves the EU without a deal. Later in the month, however, MPC member Martin Saunders said that it was “quite plausible that the next move in Bank Rate would be down rather than up”. Gilt yields fell in response to his comments.
“Interest rates could move in either direction if the UK leaves the EU without a deal”
Elsewhere, BoE Governor Mark Carney told the Treasury Select Committee that a no-deal Brexit was likely to prove slightly less damaging to the UK economy than previously predicted, following an intensification of preparations by companies. A no-deal Brexit is now expected to result in an economic contraction of 5.5%, compared with an earlier forecast of -8%. No deal is also expected to push inflation as high as 5.25% and the rate of unemployment to 7%.
The UK economy expanded more strongly than previously calculated during the first quarter of 2019 as Brexit-related stockpiling activity fuelled growth. The economy posted quarterly growth of 0.6% during the period, compared with an earlier estimate of 0.5%. In the second quarter, however, the UK economy contracted at a quarterly rate of 0.2% as businesses ran down their supplies of stockpiled materials. On an annualised basis, the economy posted growth of 1.3% during the second quarter, having grown by 2.1% over the first three months of 2019. Nevertheless, economic growth picked up during the month of July, posting expansion of 0.3%. Although growth was underpinned by activity in the services sector, the Office for National Statistics (ONS) warned: “The underlying picture shows services growth weakening through 2019”.
UK Equity Market Review
Counting down to Hallowe’en
As Brexit rumbled towards its Halloween deadline, investors’ attention during September was absorbed by a series of political developments. Having been prorogued earlier in the month, Parliament was subsequently recalled towards the end of September following the Supreme Court’s surprise decision that the suspension had been unlawful. During September, MPs passed the “Benn Act”, which will force the Prime Minister to either to request an extension to the 31 October deadline, or to obtain MPs’ agreement to a no-deal Brexit, by 19 October. Despite this, Prime Minister Boris Johnson repeated his assertion that UK will leave the EU on 31 October as planned, whether or not a deal has been agreed. With less than a month to go, speculation over the likelihood of a General Election continued to gain traction. The FTSE 100 Index and the FTSE 250 Index both rose by 2.8% over September.
According to the British Chambers of Commerce (BCC), 41% of UK companies have not undertaken a Brexit risk assessment. The BCC warned: “With just weeks until a potential no-deal exit, there is still a large proportion of firms that aren’t in a position to prepare for the impact”.
“Speculation over the likelihood of a General Election continued to gain traction”
The UK’s retail sector remained under pressure during September. High-street retailer M&S lost its place in the FTSE 100 Index for the first time since the blue-chip index was launched in 1984. Meanwhile, furniture retailer DFS warned that sales are being hampered by weak consumer confidence and a lacklustre housing market against a backdrop of political and economic uncertainty. Elsewhere, research from PwC and the Local Data Company found that an average of 16 stores closed every day in the UK over the first six months of 2019. Fashion retailers were the hardest hit, although restaurants, estate agents and pubs also suffered.
Manufacturing activity fell at the most rapid rate for over seven years during August, according to IHS Markit/CIPS. The sector was dragged down by Brexit-related uncertainties and wider concerns about the global economy. New orders posted their steepest decline since mid-2012 and business confidence also fell to its lowest level since 2012.
Inflation dipped sharply in August, driven down by weak clothing prices and a steep drop in prices for computer games. The UK’s annualised rate of consumer price inflation fell from 2.1% in July to 1.7% – its lowest rate since late 2016.
UK Equity Income Market Review
Politics dominate in September
UK investors’ attention was largely absorbed by Brexit during September. As the clock counted down towards the 31 October deadline, speculation over the likelihood of a no-deal Brexit was partially allayed by the passing of the “Benn Act”, which will force the Prime Minister to seek an extension to Article 50 or to gain MPs’ agreement to no deal, by 19 October. However, investor sentiment was subsequently shaken by Parliament’s prorogation and its later recall, following the Supreme Court’s ruling that its suspension had been unlawful. Despite the continued uncertainty surrounding Brexit, the FTSE 100 Index and the FTSE 250 Index both rose by 2.8% over September.
Motor retailer Pendragon cancelled its dividend during September and issued a profit warning, citing “challenging” economic and market conditions, and warning that Brexit-related uncertainties were undermining consumer confidence. Over September, the yield on the FTSE 100 Index rose from 4.54% to 4.42%, compared with the yield of 4.68% with which it began 2019. The FTSE 250 Index’s yield climbed from 3.23% to 3.25% during the month, having begun the year at 3.39%. In comparison, the yield on the benchmark UK government bond rose from 0.32% to 0.39% during September, having begun 2019 at 1.26%.
“UK equity funds remained firmly out of favour”
Since the start of the year, the best-performing FTSE industry sectors include leisure goods, technology hardware & equipment, and financial services. At the other end of the performance spectrum, the worst-performing sectors include automobiles & parts, fixed-line telecommunications, and oil equipment & services.
Equities suffered a third consecutive month of outflows in August, according to the latest data from the Investment Association (IA). Although UK equity funds remained firmly out of favour, outflows moderated slightly for the UK Equity Income sector and the mainstream UK All Companies sector, whereas outflows from the UK Smaller Companies sector increased over the month.
According to Janus Henderson’s Global Dividend Monitor, almost three-quarters of the companies in its UK index increased their dividend payouts year on year during the second quarter of 2019. In particular, strengthening profits and robust capital ratios have helped the banks to return more cash to shareholders. Nevertheless, the second quarter saw some dividend cuts and cancellations, including cuts from Anglo-American, Antofagasta, and Smith & Nephew. Looking ahead, Janus Henderson expects headline dividend growth of 4.2% and underlying growth of 5.5% for full-year 2019.
US Market Review
Fed cuts rates in September
As expected, the US central bank implemented its second cut in interest rates since 2008 during September. Having previously reduced its key federal funds rate in July, the Federal Reserve (Fed) announced a cut of 0.25 percentage points to a range of 1.75% to 2%. Within the Federal Open Market Committee (FOMC), seven members voted to cut rates by 25 basis points, two members voted to leave rates unchanged, and one member voted for a larger reduction.
In their statement, Fed policymakers cited “uncertainties” about the outlook for economic growth against a backdrop of faltering global growth and trade disputes. Nevertheless, the Fed slightly upgraded its forecast for US economic growth in 2019 from 2.1% to 2.2%.
“Where did I find this guy Jerome?” (President Donald Trump)
President Donald Trump continued to heap criticism on the Fed and its Chair, Jerome Powell, for easing monetary policy too slowly, tweeting: “Jay Powell and the Federal Reserve Fail Again. No “guts”, no sense, no vision!”, and “Where did I find this guy Jerome?” However, during the press conference following the announcement of the rate cut, Chair Powell emphasised that the possibility of negative interest rates was “not at the top of the list”.
Over September, the Dow Jones Industrial Average Index rose by 1.9%, the S&P 500 Index climbed by 1.7%, and the Nasdaq Index rose by 0.5%. According to S&P Dow Jones Indices, the best-performing S&P industry sectors during the month were financials, utilities, and energy. Health care was the worst performer, followed by communications services and real estate. A formal impeachment inquiry was launched against President Trump by the Democrat-controlled House of Representatives over his dealings with Ukraine.
The US economy added 130,000 jobs during August, compared with a 12-month average of 158,000 per month. The rate of unemployment remained steady at 3.7% and average hourly earnings rose at an annualised rate of 3.2%.
Although the trade conflict between the US and China ended September without a resolution, China announced that some of its planned tariff increases on US goods would be delayed until September 2020. Meanwhile, the US announced that it would postpone tariff increases scheduled to take place on 1 October by two weeks as a “goodwill gesture” . Elsewhere, the US and Japan reached an initial trade agreement that will remove or cut tariffs on a range of products.