August Market Commentary
Where to start this month?
Until July 16th it was an easy decision: the happy, smiling face of German Chancellor Angela Merkel as her boys lifted the World Cup with a 1-0 win over Argentina. A booming stock market, huge trade surplus – and a trophy from Sepp Blatter. What more could a country want?
Then on July 17th Malaysian Airlines flight MH17 was shot down over the Ukraine, killing all 283 passengers and 15 crew. The world was outraged and the finger of blame was quickly pointed at Russia – or at the very least, Russian backed Ukrainian separatists. Sanctions were once again wheeled out and tensions between the US, the EU and Russia were as high as they had been since the end of the Cold War. Add in the continued fighting in Gaza and the world was a depressing place in July.
The UK, in contrast, was one part of the world where the news in July was almost unremittingly good. In particular, the Ernst & Young Item Club predicted that the UK will grow faster in 2014 than any other G7 country, thanks to strong capital investment. Chief economist Mark Gregory commented, “After several false starts, this time the recovery could be different.” The Item Club raised its forecast for growth from 2.9% to 3.1% – contrast this with expected growth of 1.8% in Germany. Official figures confirmed an increase of 0.8% in the first quarter, the fifth consecutive quarter of growth and the best run since the financial crisis.
There was further good news with the forecast that interest rates will not rise until the first quarter of 2015 – although maybe not if you’re in Downing Street, as that will be just in time for the General Election.
There was also promising news for UK manufacturing, which continued to prosper in July. And, of course, there was good news for Yorkshire as an estimated two million visitors flocked to the county for Le Grand Depart – the start of the Tour de France over the weekend of 5th / 6th July. However it was not all roses for the North of England with a report from The RSA City Growth Commission claiming that the region has seen a 5% lower growth each year from 2000 to 2010 because of ‘chronic underinvestment’ outside London. Extra investment is apparently needed in transport, housing and broadband.
There was also bad news for bankers, with the Bank of England unveiling a plan to claw back the bonuses of bankers who ‘make losses or have poor risk management.’
Despite the good news on growth the FTSE-100 index had a lacklustre month, closing down 14 points at 6,730 – taking its cue from the tensions caused by the fate of MH17.
To the dismay of David Cameron it turned out to be ‘business as usual, despite the election results’ as Jean-Claude Juncker was confirmed as European Commission President for the next five years. Once Angela Merkel had thrown her weight behind Juncker, his confirmation was inevitable and he won with 422 out of 751 votes.
The leaders’ summit did fail to find a foreign policy chief – which seems something of an oversight given the events in the Ukraine. There were no recommendations from Germany and a later examination of Angela Merkel’s notepad revealed only the words ‘Mario Goetze’ and a large love heart. Assuming the German Chancellor could tear herself away from replaying the World Cup final she would have found good news on the economic front, with unemployment falling for the first time in three months as Europe’s largest economy started to gather pace. The number of people out of work in Germany dropped by a seasonally adjusted 12,000 to 2.9m.
But all events in Europe were overshadowed by the shooting down of MH17 – despite the disappearance of the plane’s black box, the US and EU had little difficulty in deciding that Russia was the guilty party, and sanctions were swiftly ramped up.
To no-one’s surprise Vladimir Putin was defiant, promising that Russia would localise production and “emerge stronger” – a claim mocked by President Obama, who said that the sanctions would make an “already weak economy even weaker.”
As you might expect, the European stock markets did not respond well to all the uncertainty, with both the German and French stock markets falling by 4% to close the month at 9,407 and 4,246 respectively.
July was a bad month for Apple, with the company being forced to pay consumers £400m for illegal price fixing of electronic books. An Apple spokesperson comfortably won the month’s ‘state the obvious award’ when she said that the company “wasn’t happy.”
Twitter enjoyed a rather better month – or at least the share price did, rising by 26% ahead of the second quarter results as both user numbers and advertising revenues rose significantly. Yes, technically the company did lose $145m in the quarter (up from $42m in the same period last year) but as this Bulletin has pointed out many times, the new economy isn’t too worried about dull stuff like the profit and loss account…
A company which has made a profit is Forbes, documenting the rich and even richer over 97 years. But it’s no longer an American institution, having been sold to Hong Kong based investors. Steve Forbes said it was an opportunity “to continue and strengthen our mission” but it looks like yet another chunk of corporate America is being exported to the Far East.
Meanwhile the overall US economy was adding 209,000 jobs in July, increasing the optimism that the country’s economic recovery was continuing. Unemployment was at 6.2% with the biggest job gains in business services and manufacturing. The Commerce Department confirmed that the US economy grew by a better-than-expected 4% in the April to June period.
Naturally both the Democrats and the Republicans claimed the credit for this. Either way the Dow Jones index was unimpressed, falling by 2% in July to end the month at 16,563 – 14 points lower than the level at which it started the year.
Hardly the most surprising statement to start this section: China’s economic growth picked up. Figures for April to June confirmed that the world’s second largest economy had expanded 7.5% compared to a year ago. Retail sales and factory output also rose in June.
There was also good news on the other side of the Sea of Japan as Japan’s nuclear reactors at the Sendal plant passed the new safety standards introduced after Fukushima and were given the go-ahead to re-start.
Unfortunately the recent rise in sales tax seems to have given anything but the go-ahead to the Japanese economy, with factory output falling by 3.3% in the May to June period – the biggest decline in output since the 2011 earthquake and tsunami. There have been concerns that the rise in sales tax – from 5% to 8% – would see consumers cut back on consumption and that seems to be what’s happening. The latest figures showed that retail sales were down 0.6% on the previous twelve months.
Like China, the South Korean economy continued its relentless advance, up 3.6% on the same period in 2013 and the stock market responded with a 4% rise in July to close at 2,076.
The Hong Kong market enjoyed a particularly good month, finishing up 7% at 24,757 and it was a stellar month for China’s Shanghai Composite index, which rose nearly 8% to 2,202 – the highest level since December 2012. Even the Japanese Nikkei Dow was caught up in the euphoria, shrugging off the bad news at home to rise 3% to 15,621.
Perhaps the most significant news in Emerging Markets was the creation of a new $100bn development bank and emergency reserve fund by the BRICS countries – Brazil, Russia, India, China and South Africa. The BRICS nations are often seen as competitors rather than friends, but the new bank may be a sign of increasing co-operation as it aims to protect the countries – and other emerging economies – from ‘short term liquidity pressures.’
Sadly the new bank appears to have been formed too late to help Argentina which has technically defaulted on loan repayments to a hedge fund – how this will affect the country and the wider South American economy remains to be seen.
On the stock markets India was up another 2% in July to 25,895 and is now up 22% for the year, whilst Brazil’s stock market shrugged off the country’s ignominious exit from the Word Cup with a 5% rise to 55,829. Not surprisingly the Russian market went in exactly the opposite direction with a 6% fall to 1,380 thanks to the threat of increased sanctions.
Staying with Russia, the country’s billionaires are apparently up in arms over Vladimir Putin’s actions in the Ukraine, fearing that increased sanctions will impact adversely on their lifestyle and ability to acquire football clubs and fast cars.
As we reported the other month, many of them are also struggling to get fast internet access in the middle of Knightsbridge so life can barely be worth living.