July Market Commentary

Introduction

Many of you will know the old stock market adage: ‘Sell in May and go away, and come on back on St. Leger’s Day.’ 

The theory was that with everyone out of London for the summer season there was little business to be done and the stock market drifted lower. These days, of course, we live in a very different, very connected world where the London stock market is affected far more by relations between the US and China than it is by deals done at Royal Ascot and Henley. And if you had ‘sold in May and gone away’ then you’d have missed out on an excellent month: with just one exception, all the world’s leading stock markets rose in June, some of them by significant amounts. 

This was despite June being another month where the US/China trade tensions continued to simmer, where Chinese industrial output fell to a 17-year low and where India also faced tariffs from the US President – and inevitably responded in kind. Although there was a glimmer of light at the G20 summit at the end of the month, as the US and China agreed to a pause in hostilities, with talks on solving the trade dispute set to resume.

Stock markets also overcame gloomy news from the World Bank, which had opened the month by suggesting that the global economy was weakening. It was now predicting global growth of just 2.6% in 2019, and a very slight increase to 2.7% in 2020. Inevitably ‘international trade tensions’ were to blame. 

There was also a bleak long term forecast on jobs. Oxford Economics forecast that up to 20m manufacturing jobs around the world could be lost to robots and automation by 2030, with the people replaced by the robots finding that comparable roles in the service sector had also been squeezed by AI. 

One job up for grabs is, of course, that of the UK Prime Minister. The battle to succeed Theresa May has been fought down to two – Boris Johnson and Jeremy Hunt. We will have a decision by the end of July: whether the winner will be able to command a working majority in Parliament will be a different matter.

UK

For a change, the UK section of these notes is not awash with ‘retail gloom.’ No doubt that will return, for now let’s start with the good news…

Despite all the uncertainty, UK consumer confidence hit an eight month high in May, with unemployment continuing at a record low level and wages growing faster than expected in the three months from February to April. 

Wage growth for the period was 3.4% with official figures confirming wage growth of 1.4% after inflation had been taken into account. Despite this, though, many people continue to need more than one job to make ends meet, with estimates from the TUC released at the end of the month suggesting 1-in-3 people are now working in the ‘gig economy.’ 

…And if you like your glass half-empty, the rest of the month’s news would have been just what you were looking for. 

UK house prices slipped in May in a subdued market and – not helped by car plant shutdowns – figures showed that the UK economy had contracted by 0.4% in April. Car manufacturing fell by 24% in that month, with the Society of Motor Manufacturers and Traders saying that production is now 45% down on a year ago. 

With the continued uncertainty over Brexit and the ongoing global trade tensions, audit firm KPMG forecast that UK GDP growth will be 1.4% in 2019, falling to 1.3% in 2020, with both figures 0.2% down on the firm’s forecasts in March. 

Hand in hand with the race to succeed Theresa May – covered below – went the ongoing debate on the future of HS2. Boris Johnson has admitted to ‘serious doubts’ but leading business groups (including the CBI and the IoD) have urged the Government to commit to the project, arguing it is vital for the UK’s infrastructure. 

By the end of the month the gloom-mongers had won the battle, with the consumer confidence that had been so high in May turning a complete 180 degrees. By the end of June consumers were feeling negative about both their personal finances and the general outlook for the UK. 

Fortunately this view was not shared by the FTSE 100 index of leading shares, which rose 4% in the month to close June at 7,426. The pound survived the buffeting of bad news to end the month unchanged in percentage terms, trading at $1.2696. 

Brexit 

As we mentioned in the introduction, the race to succeed Theresa May is now down to two – former Foreign Secretary and ex-Mayor of London, Boris Johnson, and the current Foreign Secretary, Jeremy Hunt. The final decision will be taken by Conservative Party members, with the result announced on Tuesday 23rd July. 

All the indications at the moment are that Boris Johnson will win – he is an overwhelming favourite with the bookmakers – so what does he have to say about Brexit?  

Part of the reason he is such a firm favourite is that he has given a commitment that the UK will – deal or no deal – leave the EU on 31st. With so many top positions in the EU currently changing, and with many heads of government – Ireland’s Leo Varadkar is the latest – resolutely trumpeting the ‘no re-negotiation’ line, leaving without a deal is becoming a real possibility. Whether you see this as ‘crashing out’ or very sensibly moving to World Trade Organisation terms probably depends on whether you voted Remain or Leave. 

What a Johnson victory may well mean is an early Budget. At the moment the Budget is scheduled for November. However, Boris Johnson is reported to want to give the economy a real shot in the arm before the UK leaves the EU, so there could well be a tax cutting Budget in September, with cuts to both higher rate tax and stamp duty. 

Europe 

Among a media storm questioning her health after being seen shaking, German Chancellor Angela Merkel vowed that her coalition government will continue. This despite the surprise resignation of Andrea Nahles, leader of the coalition’s junior partner, the Social Democratic Party. 

If the political clouds are gathering over Mrs Merkel, the economic ones may be gathering over Germany as a whole following the release of more gloomy financial news. 

Industrial production in April was down by 1.9% compared to the previous month, with exports 0.5% lower than the same period in 2018. The Bundesbank – Germany’s central bank – is now predicting growth of just 0.6% this year, compared to a forecast of 1.6% growth it made in December. 

Clearly this is bad news not just for Germany but for the whole of Europe, as the slowdown in China and the US/China trade dispute continue to impact the German economy. 

There was more bad news in the car industry as Volkswagen announced plans to cut ‘thousands’ of jobs as part of a modernisation drive. Meanwhile BMW joined forces with Jaguar Land Rover to co-operate on electric cars as the traditional car makers continued to battle against new entrants to the market. 

There was more bad news on jobs as Deutsche Bank revealed plans to cut 15-20,000 jobs – although those would be worldwide cuts, not just in Germany. Meanwhile in the wider European economy the ECB said that it would keep interest rates on hold at the current record low levels until at least the middle of 2020, as it continues to try and spark some life into the Eurozone economy. 

And, as they say, all good things come to those who wait. After 20 years of negotiation it was finally announced that the EU had agreed a trade deal with Mercosur – the South American trade bloc which includes Brazil, Argentina, Uruguay and Paraguay. Brazil’s President Jair Bolsonaro called it “one of the most important trade deals of all time.” Whether Irish beef farmers, suddenly facing competition from South American imports, will agree is another matter…

There was plenty of ‘beef’ in European stock markets in June, as both the German and French indices rose by 6% in the month, to close at 12,399 and 5,539 respectively. 

US 

The month did not get off to a good start in the US, as figures showed that the economy had only added 75,000 jobs in May, far fewer than the 180,000 analysts had been predicting. It is possible that another month of poor figures could see a cut in interest rates from the Federal Reserve – something the President has long called for. 

The figures showed that wage growth was also sluggish, although US unemployment remains at a 50 year low of 3.6%. 

Something that wasn’t sluggish – and hasn’t been sluggish through much of 2019 – was the performance of the virtual currency Bitcoin, which has risen from £3,133 at the end of March to £9,335 by the end of June. Bitcoin is, of course, a virtual (or crypto) currency and in June, Facebook announced that it would be launching a virtual currency of its own – the Libra – in 2020. 

This virtual currency already has the apparent backing of Uber, Spotify and Visa and with bank JP Morgan also creating its own currency – the JPM Coin – June 2019 may turn out to be the month when virtual currencies took a major step forward. 

Staying in cyberspace there was bad news for two US cities as Lake City in Florida followed Riviera Beach in paying a ransom (in Bitcoin, inevitably) to hackers after their computers had been offline for two weeks. According to reports, workers in Lake City disconnected computers within minutes of the attack but it was too late: they were locked out of email accounts and residents were unable to make payments and access online services. The ransom was reported as $500,000 (£394,000) and it is surely only a matter of time before the same thing happens to a local council in the UK. 

Fortunately Wall Street was not held to ransom and, in line with virtually every other major world stock market, the Dow Jones index enjoyed a good month, rising by 7% to close June at 26,600. 

Far East

We have covered the US/China trade row above – at least the month ended with a commitment to restart the talks aimed at ending the dispute. But in June it was the China/Hong Kong row that really made the headlines, as the Hong Kong legislature sought to allow extraditions to mainland China, arguing that it “would keep Hong Kong a safe city for residents and business.” 

This sparked huge protests and some of the worst violence seen in decades, with protesters worried ‘keeping the city safe’ will inevitably come to mean ‘not criticising the Chinese government.’ 

There are also worries that the proposed legislation might damage Hong Kong’s status as a global financial centre. “The proposed legislation would undermine Hong Kong as a hub for multinational firms [and] as a global financial centre,” said a Washington-based think tank. Despite the protests, the legislation is likely to go ahead at some point. 

Another long term worry for China is the spread of its deserts, apparently caused by global warming, deforestation and overgrazing. At least in June it took comfort in the arms of Japan as Shinzo Abe and Xi Jinping had what appeared to be a friendly meeting ahead of the G20 summit, with the US/China trade wars and tensions about North Korea seemingly bringing the two countries closer together. 

All the leading Far Eastern stock markets were up in the month. Despite the protests Hong Kong led the way, rising 6% to 28,543. The South Korean market was up by 4% to 2,131 while China’s Shanghai Composite Index and Japan’s Nikkei Dow were both up by 3%, to end the month at 2,979 and 21,276 respectively. 

Emerging Markets 

If the US economy got off to a bad start with the jobs figures, the Indian economy got off to an even worse start in June as it lost the ‘fastest growing economy’ title to China. 

Figures for the first quarter showed the economy growing at 5.8% – mightily impressive compared to economies in Western Europe, but below the 6.6% recorded in the previous quarter and below the 6.4% posted by China. 

Worse was to follow a few days later as the US imposed a 10% tariff on a series of Indian imports including imitation jewellery, building materials, solar cells and processed food. Inevitably this led to fears of job losses and – equally inevitably – India was quick to retaliate as it imposed tariffs on 28 US products, some as high as 70%. 

Will this mean a US/India trade dispute to mirror the US/China dispute? While it looks unlikely, India was the only one to fall in June, dropping 1% to end the month at 39,395. 

Meanwhile the markets in both Russia and Brazil moved up in the month: both markets were up by 4% in June, with the Russian market closing at 2,766 and the Brazilian market going through the 100,000 barrier to reach 100,967. 

There was clearly good news for the South American economy with the trade deal agreed with the EU which we have mentioned above. There was less good news for Argentina and Uruguay in the middle of the month. A massive power outage left both countries completely in the dark, wiping out power to tens of millions of people. Argentine President Mauricio Marci has promised a “full investigation.” As soon as he can find the light switch…

And finally…

We have mentioned cyber-attacks above and one company particularly badly hit was Norwegian aluminium producer Norsk Hydro, who saw 22,000 computers go offline in 170 locations around the world. The company refused to pay the ransom demanded and instead fought back against the hackers using the latest cutting edge technology: the pencil and paper. 

…And June really was nostalgia month as 1990s toys are apparently making a comeback on a wave of millennial nostalgia. If you were in a school playground in the 1990s – or your children were – you may remember Tamagotchi (digital pets) and they’re being re-joined on shelves by Teenage Mutant Ninja Turtles, Power Rangers and Polly Pocket. There is also, according to analysts, an increasing market for the films of the same era as grown-up millennials feel nostalgic for their childhood.

If you haven’t made your fortune from your own version of Cash in the Attic, perhaps the answer is to get serious about Crazy Golf. You may have thought Crazy Golf was just a game to play at the seaside, but now the ‘sport’ is dreaming of Olympic recognition and hosting a series of championships up and down the UK. 

While Tiger Woods was pocketing $2m (£1.6m) for winning the US Masters, near-namesake Mark Wood, a local council finance manager, won £50 as he was crowned UK Crazy Gold champion. The secret? According to the sport’s insiders, it is to keep your ball safely tucked inside a sock. That way, it keeps an even temperature and rolls consistently. 

Get out there! With that vital piece of inside information there’s nothing to stop you…

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