July Market Commentary

June was a fairly quiet month. Well, apart from the chaotic General Election in the UK. Oh – and the decisive win for Emmanuel Macron in the French parliamentary elections. And the start of the Brexit negotiations. And Italy was forced to bail out two more banks. President Trump pulled out of the Paris climate change agreement – and in Brazil, President Michel Temer was accused of corruption – the first sitting President in Latin America’s largest country to face criminal charges. Anything else? Just another global ransomware attack… In fact, the only things that were quiet in June were the world’s leading stock markets. Of the 11 major markets we cover in this Bulletin, four were up, five were down and two were unchanged – but none of them by very much. If you wanted real excitement in June then you had to head to Greece, where the Athens Composite General, buoyed by EU ministers approving the latest Greek funding deal, was up by 6%.

UK

…But we begin the commentary with matters even more chaotic than the Greek economy: the UK General Election of 8th June. It was all meant to be so simple wasn’t it? Encouraged by a huge lead in the polls, record personal approval ratings and an opposition that appeared to be a shambles, Theresa May called the election as she sought her own mandate. Well, not so much an election, more of a coronation. But writing in the Telegraph in May, Nigel Farage sounded a warning note. “The more people see of Theresa May the less they like her,” he said. And so it proved. The Conservatives remain the largest party in the UK parliament, but have had to strike a deal with Northern Ireland’s Democratic Unionist Party. Meanwhile, the Prime Minister’s popularity continues to slump…

Away from the peace and quiet of politics, what of the UK economy? Figures for the first quarter of 2017, released by the Office for National Statistics, confirmed that UK growth was just 0.2% for the January to March period, putting the country next to Italy as the slowest-growing in the league table of the world’s advanced economies. The ONS also confirmed that inflation for May had risen to 2.9% and – with a figure in excess of 3% forecast for later in the year – most people are now suffering a fall in real wages. Not surprisingly, the ONS also confirmed that the UK savings ratio – the proportion of disposable income which households save – was at a record low, falling to 1.7% in Q1, down from 3.3% in the previous quarter.

So the UK glass is very much half-empty. Or is it? A recent CBI survey showed manufacturers’ order books at a 29 year high, with food, drink, tobacco and chemicals leading the way. The same survey showed export orders at a 22 year high: CBI Chief Economist Rain Newton-Smith said, “Britain’s manufacturers are continuing to see demand for ‘Made in Britain’ goods rising. Total and export order books are at highs not seen for decades, and output growth remains robust.”

This was reinforced when the World Bank upgraded their forecasts for UK growth over the next three years, increasing their estimate for 2017 to 1.7% from the 1.2% they had forecast in January. Growth expectations for 2018 and 2019 are 1.3% and 1.5% respectively.

Meanwhile, Rolls Royce has protected 7,000 engineering jobs in the East Midlands after announcing its biggest investment in the UK for more than a decade. It will be investing £150m in Derby, creating up to 200 extra jobs and safeguarding the other jobs for five years. Simon Hemmings, from the Unite union, said it was “a once in a generation investment and a big commitment to the UK.”

The FT-SE 100 index of leading shares closed the month down 3% at 7,313 as the pound rallied against the dollar, rising to $1.3026. The UK stock market is now up by 2.38% for the year as a whole: not a bad performance given the uncertainty surrounding the political situation and Brexit.

Brexit
The Brexit negotiations formally began on 19th June, 11 days after the General Election. So far – to use Macbeth’s phrase – we have seen plenty of ‘sound and fury’ but little of substance. However, several trade bodies have made their views known: the Engineering Employers Federation, for example, has called for a ‘softer’ Brexit, with access to the single market at the heart of the Brexit negotiations.

Equally, there have been plenty of dark mutterings in the corridors of Westminster: as Theresa May twists in the wind, Chancellor Philip Hammond is supposedly becoming an increasingly pivotal figure – and he is said to prioritise jobs and the economy over control of immigration.

However, it may well be that the real discussions don’t begin until after the summer holidays and the German elections in September. By that time the position of Theresa May should also be much clearer: if she survives the summer, she is likely to survive until the Conservative Party Conference in early October.

Europe
The big news in Europe continues to be French President Emmanuel Macron, who must surely be wondering what all the fuss is about. You decide to form a political party: a year later you are President. A month after that your party wins a majority. Politics, it is too easy…

His En Marche party did indeed win a majority in the parliamentary elections. Perhaps not as large as some of the early projections were forecasting, but En Marche and its allies in the centre took 350 of the 577 seats available. The real story, though, was the turnout, which fell below 50%, reflecting continued disillusionment with politics in France.

Turning to economic matters, the European Central Bank was in a bullish mood, increasing its forecast growth for the Eurozone in 2017 to 1.9% from the 1.8% it forecast in March. Growth is expected to be 1.8% next year and then 1.7% in 2019. ECB President Mario Draghi also forecast that Eurozone inflation will be 1.5% in 2017, down from an earlier forecast of 1.7%.

Also in a bullish mood was the German economy, with the trade surplus for April confirmed at €18bn and employment at the highest level since reunification. An extra 650,000 people were employed in May, taking the total in work to 44.1m.

And now to economies that are faring slightly less well…

Eurozone ministers have struck a deal to unlock the latest tranche of Greece’s bailout cash, releasing €8.5bn to the country. This will avert a debt crisis in July when the latest repayment of €7bn becomes due. So essentially, the EU has released money to Greece to pay back the money that was previously released to it: presumably that makes sense to someone… Meanwhile the Italian government was busy bailing out two Venice banks to the tune of €5.2bn: clearly it is not just the city that is sinking.

Also sinking were Europe’s leading stock markets. The French index was unmoved by the Macron majority and fell back 3% to close the month at 5,121. In Germany, the market was also down, falling 2% to 12,325.

US
As we noted above, Donald Trump – as was widely expected – has pulled out of the Paris climate deal. Many US firms (Facebook, Goldman Sachs, Disney) reacted with horror to this latest demonstration of America First, but the coal industry welcomed the move, saying it would protect jobs and ease regulation. The Dow Jones Index seemed to broadly agree with the coal industry: it rose 0.6% on the news.

The US had added fewer jobs than expected in May, with payrolls increasing by 138,000 against the anticipated 180,000 – but this still resulted in unemployment falling further to 4.3%, the lowest level since 2001.

This perhaps prompted the Federal Reserve to raise interest rates for the second time this year, increasing them by 0.25% to a target range of 1% to 1.25%, the highest level since 2008. Chairman Janet Yellen said, “Our decision reflects the progress the economy has made and is expected to make.”

The IMF remained unimpressed and – citing ‘uncertainty about White House policies’ – trimmed its forecast for US growth to 2.1% for both 2017 and 2018, down from 2.3% and 2.5% respectively and well below the 3% the White House is targeting.

In company news, Facebook reached 2bn users, Amazon dipped into its back pocket and bought Whole Foods for $13.7bn and the EU competition commissioners gave Google a $2.7bn slap across the wrist for promoting its own shopping service.

More impressed than the IMF with White House policies and boosted by the news that US business confidence was at its highest for 3 years, the Dow Jones index closed the month up 2% at 21,350.

Far East
We have written previously in this commentary about the scale of lending by Chinese banks, and many Chinese conglomerates have gone on spending sprees abroad on the back of it (several of them buying UK football clubs). However, President Xi Jinping, concerned about stability in the financial sector, has now launched a crackdown on these ‘financial crocodiles.’ It is generally felt among Western commentators that the Chinese financial sector is over-leveraged and under-regulated and this may possibly see the start of less financial investment overseas by Chinese conglomerates. Where it leaves the manager of your team if you need a new left back only time will tell…

One conglomerate that won’t be going shopping any time soon is Toshiba. Its troubles continued as it admitted that losses for 2016 may be even greater than previously forecast – perhaps up to £7bn from a previous estimate of £6.5bn. No such worries for Japan’s Softbank though, which bought Boston Dynamics, the robot-maker owned by Google’s parent company.

Three of the four major Far Eastern markets rose by 2% in June, with China’s Shanghai Composite Index closing at 3,192: the Japanese market went through the 20,000 barrier to end the month at 20,033 while the South Korean index continued its good recent run, ending June at 2,392. The only exception was Hong Kong, which was virtually unchanged at 25,765.

Emerging Markets
As we noted above, Brazil’s President, Michel Temer, has now been formally accused of corruption, the specific charge being that at some point between March and April of this year the President took a bribe of $150,000 from Joesly Batista, the former chairman of a meat packing company. This is the latest salvo in an increasingly bitter war between the President and officials from the Department of Justice, who seem determined to build a case against him. The case will now go to the lower Chamber of Deputies, who must decide if the case has any merit.

There was some good news, however, as Brazil came out of recession after two years of negative growth during which the economy shrank by 8%. The longest recession in the country’s history was finally ended as growth of 1% was confirmed for the first quarter, with the economy boosted by a record harvest of soybeans, one of Brazil’s main exports.

The Brazilian stock market duly weighed up the good and bad news and decided to do nothing very much in June, ending the month virtually unchanged at 62,900. The other two major emerging markets we cover, India and Russia, were both down by 1% in the month, closing at 30,922 and 1,879 respectively. No – nobody accused that nice Mr. Putin of corruption…

And finally…
Can we find anything cheerful to end the commentary amid June’s doom and gloom? Perhaps not, as it appears that global beer sales are drying up. The International Wine and Spirits Record reported that worldwide beer sales were down by 1.8% last year, with overall alcohol consumption down by 1.3%. This marks a significant acceleration in the average fall of 0.3% seen over the last five years: the only bright spot on the horizon was the continuation of the gin revival. Worldwide sales of the iconic British drink rose 3.7% last year.

And what better to have with your favourite summer tipple than a new snack which is taking California by storm and has been hailed by Los Angeles lifestyle website ‘Hello Giggles’ as “genius.” West coast supermarket Trader Joe’s has been marketing the ‘Puff Dog’ – a beef sausage wrapped in puff pastry. Yes, ladies and gentlemen, the United States has finally invented the sausage roll…