Equities rally on prospect of cheaper money
* At the beginning of this year equity markets were reeling from a sell-off driven by fears over global growth and rising US interest rates.
* It’s been a different story in the last half of 2019. Equity markets have soared with the MSCI global equity index up 14% so far this year and the US S&P 500 index hitting an all-time high last month.
* Equities in most countries have risen in value with richer developed economies generally outperforming emerging markets.
* In the UK the FTSE 100 of more international stocks has returned 10% in the last six months. Technology stocks such as Micro Focus and Aveva Group have done well as have mining stocks. Banks underperformed the broad market in the UK as in most other countries partly on the prospect of interest rate cuts and on growing competition from tech challengers.
* So why, after a pretty awful performance in 2018, have equities have done well so far this year?
* It’s certainly not because prospects for growth have improved – on the contrary, forecasts for global growth are lower today than at the start of the year. The decoupling of growth prospects from equity markets is most obvious in Italy, where equites have risen 16% this year despite growth almost grinding to a halt.
* What has boosted equities is that the threat of higher interest rates has been lifted. Last autumn the Federal Reserve was poised to continue its three-year campaign of rate rises into 2019 and the European Central Bank had called time on its programme of quantitative easing. As growth faltered both institutions performed U-turns. The Fed now looks likely to cut US interest rates by 50bps this year and the ECB is talking of easing policy again.
* The reversal of the direction of monetary policy has been a godsend for equity prices. They reflect the current value of future dividend income. Lower interest rates reduce the discount rate used in this calculation, raising equity values. For equity investors the good news on lower interest rates has more than offset the bad news on global trade and activity.
* Sentiment about prospects for a trade deal has fluctuated. Hopes that the US and China would strike a deal buoyed equities in March and April. That optimism dissipated in May hitting US equities and helping push the price of gold, which represents a hedge against uncertainty, up by 12%. The latest news from G20 meeting in South Korea is positive, with President Trump declaring that he is ready to restart trade talks with China. However, with Mr Trump tweeting that “the quality of the transaction is far more important to me than speed…I am in no hurry” a trade deal is not a done deal.
* Equity investors have had a great few months but they are becoming increasingly cautious. According to the BAML Global Fund Manager Survey money managers are cutting their holdings of equities and investor sentiment is at its most pessimistic since 2008.
* Commodities have also tracked global growth fears, rebounding early this year before falling on worries over protectionism and global growth. Recent tensions between the US and Iran and supply outages elsewhere have caused oil to reach $67 a barrel, up 21% so far this year.
* Many of the worries investors had in late 2018 have not gone away. The outlook for trade remains hugely uncertain and worries about global growth have mounted. UBS thinks global equities could fall by some 20% if there is no breakthrough between Beijing and Washington on trade.
* What has changed is the mood music coming from central banks. Investors are hoping that, should things turn nasty, central banks will slash interest rates and save the day for equity prices.
* Alan Greenspan, a previous chairman of the US Fed, has been heavily criticised for his policy of cutting interest rates in a market downturn – the so-called ‘Greenspan put’. Some believe this policy made investors blasé about underlying risks and paved the way to the financial crisis.
* As central banks mull further interest rate cuts that dilemma remains as acute today as it was 20 years ago.
PS: The UN lowered its global population estimate for 2100 by 3% to 10.9 billion as birth rates fall faster than expected in developing countries. This is despite a recorded fall in global mortality rates due in part to better treatment of HIV in sub-Saharan Africa. Mortality in America has bucked the trend with the opioid epidemic taking a heavy toll.
PPS: The revolutions brought about by electricity and the internal combustion engine required huge investment in supporting infrastructure. The challenges of decarbonising the economy requires a similar wave of new investment in infrastructure such as renewable energy, electric vehicles and carbon capture and storage. Our colleagues have produced a report on the infrastructure needed to charge electric vehicles. If ambitious government targets of 60% of all new cars sold in 2030 being electric are to be met, they estimate the UK will need to build 28,000 public charging points at a cost of around £1.6 billion. Other countries are far ahead. In Norway, 31% of new vehicles sold in 2018 were all-electric. China is set to complete a network of 120,000 public charging points next year.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 0.2% at 7,425.
Economics and business
* US President Donald Trump and Chinese president Xi Jinping met at the G20 summit in Osaka and agreed to resume trade talks. Mr Trump agreed to hold off imposing any further tariffs while talks continue
* The head of the Bank for International Settlements, a key figure in the global monetary system, suggested that Facebook’s plan for a digital currency could spur central banks to introduce their own digital currencies
* US Federal Reserve chair Jerome Powell expressed concern about the slowing of the global economy. Markets anticipate a rate cut next month
* US President Donald Trump called the Fed’s monetary policy “insane” for not cutting interest rates, and said the ECB president Mario Draghi should take over
* Mr Trump strongly criticised both Europe and India for the tariffs they impose on US imports
* The US imposed further sanctions on Iran. Iran responded by saying that it sees this as the end of diplomacy with the US
* Chinese president Xi Jinping said developed countries are “destroying” the global trade system by engaging in protectionist policies
* The race to be the US Democratic presidential candidate for 2020 heated up with California senator Kamala Harris seen by analysts as the winner of a televised debate. The senator criticised favourite and former vice-president Joe Biden over his willingness to cooperate with segregationist colleagues. Another candidate urged 76-year-old Joe Biden to “pass the torch to a younger generation”
* UK households spent more than they received in income in the first quarter, marking the longest stretch (ten quarters) of net borrowing since records began in 1987
* The FT reports that UK chancellor Philip Hammond plans to leave the appointment of the new Bank of England governor to his successor
* Bank of England governor Mark Carney called for a change in regulation so that funds investing in illiquid assets do not promise instant withdrawals
* Euro area wages increased by 2.5% on an annual basis in the first quarter, the strongest pace of growth in a decade
* Carmaker Ford is cutting 12,000 jobs in Europe in a sign of the difficulties facing the automotive sector
* US durable goods orders fell for a second month in a row in May adding to fears that the country’s manufacturing sector is slowing
* A re-run of the Istanbul mayoral election resulted in another loss for president Erdogan’s favoured candidate
* Nike has withdrawn a line of trainers from China after its Japanese designer expressed sympathy for protests in Hong Kong
* The UK challenger bank Monzo has doubled its valuation to in excess of £2 billion, in a sign of the strength of fintech businesses
* Boeing discovered an additional problem with the flight control system of the troubled Boeing 737 MAX. This is expected to further delay its return to service
* Apple’s chief design officer Jony Ive, is to leave the company. The news wiped billions off Apple’s market capitalisation
* The Economic Community of West African States is discussing creating a single currency for its 15 members
* San Francisco has banned the sale of e-cigarettes citing concerns over their use by young people
* A group of US billionaires, including investor George Soros, have endorsed a wealth tax on the ultra-rich to tackle inequality and climate change
* A reference to the Paris climate accords was included in the G20 summit joint statement after French president Emmanuel Macron threatened not to sign if they were omitted
* Boots is to close 200 stores across the UK over the next 18 months due to tough trading conditions on the high street
Brexit and European politics
* Boris Johnson, the front-runner to succeed Theresa May as prime minister, has promised additional tax cuts and increased public spending in a reversal of the policy of fiscal prudence seen since 2010
* UK defence minister Tobias Ellwood warned that a minority of Conservative MPs would back a no-confidence vote to avoid a no-deal Brexit
* Japanese foreign minister Taro Kono has warned the UK against no-deal Brexit saying it would be “very negative” for Japanese firms in the UK
* PSA, owner of the Vauxhall plant in Ellesmere Port, has said the future of the site is conditional on the UK’s future relationship with the EU
* The FT reported that Jaguar Land Rover plans to invest heavily in its Castle Bromwich plant as a centre for building the new wave of electric cars
* London exchanges may be required to delist Swiss stocks if a disagreement between the EU and Switzerland is not resolved
* Over 100 Labour MPs signed a letter urging Jeremy Corbyn to reconsider allowing Chris Williamson back to the party, after he was suspended for saying Labour had “given too much ground” in the face of criticism over anti-Semitism in the Party
And finally… a four-year-old boy in the US secretly drove his great-grandpa’s car to the local petrol station to buy sweets. Sebastian Swenson jumped into the Hyundai SUV and drove more than a mile in at rush-hour traffic to a petrol station in the hope of finding something sweet to eat – sugar rush