29 Jan 2019
Every time Theresa May gets trounced in Parliament, delays a vote or a member of her Cabinet lets slip that she won’t really force a no-deal exit from the EU, sterling shoots upward.
That’s why UK investors didn’t partake in the continued recovery for global stock markets last week. After a tough week for the Prime Minister which consisted of all of the above, the pound jumped 2.5% against the dollar and 1.6% against the euro. The FTSE 100 was down 2.3% over the week as a result of the currency change. In local currency, most other major foreign markets were higher last week. It was a bit rocky in-between, however, as concerns about global growth bubbled away. German and Chinese data were decidedly bad, although US companies reporting were pretty good on the whole.
About 20% of the S&P 500 have revealed their numbers so far, with almost three-quarters beating earnings forecasts. The blended growth rate is running just under 11% on a year ago, according to FactSet. The whole index is valued at 15.4x the earnings forecast for the next 12 months. That’s below the five-year average, but higher than the 10-year one. Sectors with the highest happy surprises were consumer discretionary and industrials, while materials undershot expectations significantly.
The US government has been reopened, albeit for just three weeks, after a 35-day shutdown. President Donald Trump ended the longest shutdown in American history after several major airports had to cancel flights because of a lack of air traffic controllers. The critical staff who had been working without pay for more than a month, finally threw in the towel and crippling numbers refused to come in to work last week. As a statement of principle, Mr Trump’s obstinacy started to look pretty tawdry when footage of beggared Coastguard families picking through foodbanks was beamed around the nation.
Another, less human, effect of the shutdown has been a lack of statistics from several important data departments. For more than a month the Federal Reserve (Fed) has been plotting its policy, if not in the dark at least in heavy shadow. The central bank committee is set to meet this Wednesday, and markets overwhelmingly expect it to hold rates where they are. Inflation has fallen swiftly from its mid-2018 high of 2.9% to 1.9% in December. That should take some pressure off the Fed and allow it to move at a pace that causes less terror in markets.
Source: FE Analytics, data sterling total return to 25 January
No, you’re not going mad. This really is another of those weeks that starts exactly the same.
Sino-American trade negotiations are starting up again and investors are pondering the Fed’s policy. Meanwhile, there’s intrigue aplenty in Westminster as Mrs May continues her own personal charge of the light brigade. Long, terrible and seemingly doomed, yet one hell of a spectacle. And through it all, we’ve got a slew of quarterly results to comb through: analysts are a bit cagey about how companies will fare, but so far they have been generally ok.
Chinese economic data have been largely grim over the past few months. There have been arguments about how much the downtick is due to the trade dispute with the US and how much is simply because the nation is stumbling over the pile of debt it created during almost a decade of extreme stimulus. Regardless, you can rest assured that it is slowing. Just how much – and whether it could drag the world into recession – is a harder question. The country is so much larger than it was even 10 years ago, let alone 20 years ago. It has to slow as it expands, simply due to mathematical reality. But the share of global growth China accounts for is punchy – around 30% since 2010 – and outweighs its 20% share of worldwide GDP. That means a slowdown there would be felt disproportionately by the rest of the world if the slack isn’t picked up by other countries growing faster. The Chinese slowdown has also spread to Europe and Japan, two large trading partners, reinforcing these worries.
We believe Chinese leaders, being at the helm of a totalitarian state, have unparalleled control of economic and social levers, putting them in a strong position to navigate the change from a commoditised factory nation to a consumer-led market. They should be able to keep the tanker on course, at least for the foreseeable future.
Some context is always helpful, too. As part of the trade tussle, America has been battering Chinese technology companies: locking up executives and banning sale of their products. The rationale for this being that these phone companies, such as Huawei and ZTE, are a threat to national security because their handsets and chips may be used to spy on customers for the Chinese government. 5G is a particular sticking point for Western nations, who are reluctant to cede control of next-generation technology to a geopolitical rival.
America’s concerns are all true as far as it goes; however, the stance must take more than a pinch of cognitive dissonance from the American intelligence services and Congress. It’s common knowledge that American companies have been working closely with the US authorities to monitor data worldwide for more than a decade. It’s inconsistencies like this that make us think that a deal has to be agreed at some point …