29th November 2018

Rathbones: Safe harbours

Equities took another battering last week, with oil and technology stocks hit hardest.

The S&P 500 was off 3.8% in dollar terms, while Chinese stocks were down roughly the same amount in renminbi. Hopefully that’s not an ill augur for Sino-American trade talks that are expected to happen at the weekend’s G-20 meeting in Buenos Aires. US tech firms are wobbling as investors try to gauge how fast interest rates will rise from here and if demand is steady, slowing or screeching to a halt. There appears little evidence of the latter, but investors have been extremely flighty anyway.

According to Deutsche Bank research, 90% of worldwide asset classes have lost money in the year to mid-November, the highest percentage recorded since records began in 1901. Last year, virtually none of the 70 asset classes tracked by the bank were down. Maybe that’s what is causing investors’ fear – it’s unnerving when there appears to be no safe harbours. 

The oil price slide continued last week, with Brent Crude slipping below $60 a barrel. It has fallen almost 30% since the end of September. Most commodities have fallen alongside, as has the value of US high yield debt. A good chunk of these riskier borrowers are shale and crude producers whose earnings will be down significantly because of the drop in oil (unless they’ve hedged that is). The US energy high yield spread jumped to almost 550 basis points from below 400bps in mid-October. Still, it’s not exactly tin-hats time yet: if you take a step back, you see that the spread reached 1,972bps when Brent bottomed out a $27 in early 2016.

US President Donald Trump is trying to get black stuff pumping to keep US consumers happy. The US became the world’s largest producer this year, unseating Russia and Saudi Arabia, taking back a crown that was usurped in 1973. The explosion in shale oil and gas has helped American oil production more than double in the last decade. In fact, they could pump even more if a bottleneck in pipelines wasn’t constraining them. Crews are already building more, which should come on stream late next year.

Many investors are focusing on the downsides of the oil price – that demand is falling – rather than the boost it gives to households, most businesses and many countries. Spending less on fuel means people and companies have more cash left over from the day to day that they can spend or invest. That should help many parts of the world that need a bit of stimulus, say India and China. Global GDP growth appears to be ticking along ok, so a heavy drop in the oil price seems a little incongruous with dramatically lessened supply. Instead it could be that a slight drop in demand has coincided with a surplus of crude output. Although, the question is, did other commodities drop simply because oil did or were they driven by some other factor that is a bit more sinister?

US Federal Reserve Chair Jay Powell is speaking at the Economic Club in New York on Wednesday and the minutes from this month’s FOMC meeting will be released the following day. People will be hoping for clarity about future rate rises (read whether the committee will slow down given the market worries) and parsing through both statements for tell-tale changes in language that may presage alterations to the central bank’s path. At the moment, investors are expecting two more hikes of 25bps in 2019; the Fed’s guidance stands at three 

Source: FE Analytics, data sterling total return to 23 November, *to 22 November 

Now for the hard part 

The EU rubberstamped Prime Minister Theresa May’s draft Brexit plan at the weekend. Job done …

If only. Now she has to sell it to Parliament. Mrs May has warned that rejecting the deal would mean going “back to square one”, causing more chaos. Meanwhile, former (and fleeting) Brexit lieutenant Dominic Raab says the draft deal would leave the country worse off than simply staying in the EU. Given the shape of the deal – and the lack of agency it offers – he has a point. According to the Telegraph, a parliamentary vote is planned for 12 December.

Despite all the gloom and confused fog lingering over the UK’s future relationship with the EU, Britons just got on with life in October. UK lenders approved about 39,700 mortgages that month, 2% higher than economists had expected. It’s lower than last October, but is a ray of light considering the political barney that rages in Westminster. With a bit of luck, there could be more good news from the BRC Shop Price Index on Wednesday. A positive number here would mean retailers are able to sneak through price hikes relative to last year – a good portent for shoppers’ mood. A more direct measure of this is due on Friday with the GfK Consumer Confidence Index expected to drop from -10 to -11.

Finally, we’ll be checking up on the UK net consumer credit number on Thursday. British households have been piling on the debt over the past few years and the savings rate has slumped to lows not seen since before the 1980s. Household debt relative to GDP has fallen back from a high of 87% in the second quarter of 2017; it’s way below the 96% it reached in 2010, but still extremely elevated compared with the previous four decades.

Bonds

UK 10-Year yield @ 1.38%
US 10-Year yield @ 3.04%
Germany 10-Year yield @ 0.34%
Italy 10-Year yield @ 3.41% 
Spain 10-Year yield @ 1.63%

Investment Commentary, Investments