May Market Commentary

Introduction

It’s difficult to know where to begin this month. In France? Where we now know the French Presidential election will be a straight fight between Emmanuel Macron and Marine le Pen. In the UK? Where, having declared several times that she saw no need for a General Election, Theresa May summoned everyone to the polls on 8th June. Or in North Korea? Where the simmering tensions between Kim Jong-un and Donald Trump threaten peace and stability in the region.

Politically, the world was a volatile place in April – but the world’s major stock markets reacted with studied indifference. The French index was the biggest gainer, up 3% in the expectation of a victory for Macron on 7th May. Two markets – the UK and China were down by 2% – and the rest inched ever-so-slightly upwards.

…Or maybe we should start this commentary in the corridors of Brussels, where the EU was busy setting out its negotiating position for Brexit – negotiations which are not now expected to begin in earnest until after the UK General Election. For good or ill, Brexit is going to dominate the news agenda between now and March 2019, the supposed date when the UK will leave the EU. Clearly we need to report on Brexit in this commentary and – rather than distort the UK or Europe sections – it seems more sensible to introduce a separate ‘Brexit’ section from this month. Naturally we have placed it between the UK and Europe…

UK

As Chancellor Philip Hammond led a trade mission to India there was disappointing economic news to start the month in the UK. Figures for February confirmed a fall in output in both the industrial and construction sectors, down by 0.7% and 1.7% respectively. The pound duly fell back on the weak economic data and the Halifax announced that house prices were growing at their slowest rate for four years.

But all this paled into insignificance when Theresa May changed her mind and called a General Election. She’d spent the previous week walking in Wales, and clearly views Jeremy Corbyn as somewhat less of a challenge than Mount Snowdon. All the indications are that she can expect to be back in Downing Street with an increased majority, allowing her to pursue the Brexit negotiations without needing to worry about the House of Commons.

Back with the economy, cheaper air fares held inflation steady at 2.3% and there was finally some good news as the International Monetary Fund upgraded its forecast for UK growth, lifting it to 2% for the year from the 1.5% it had forecast in January.

Good news too for the UK taxpayer, who has now recouped the £20.3bn used to bail out Lloyds Bank. Could the same eventually happen with RBS, with the troubled bank posting its first quarterly profit – £259m in the first three months of 2017 – for nearly two years?

There was also good news from British car manufacturers, with March being their most productive month for seventeen years, as they produced 170,691 vehicles and exported a car every twenty seconds.

…But sadly, the bad news returned at the end of the month with overall growth slowing to just 0.3% in the first three months of the year, and retail sales falling at their fastest rate since 2010. With online sales continuing to grow, you can unfortunately expect future commentaries to be reporting ‘yet more job losses on the nation’s high street.’

Eventually, the bad news won out with the FT-SE 100 index of leading shares being one of only two major markets to fall in April, dropping by 2% to end the month at 7,204. It was a different story for the pound, however, which ultimately rose by 3% against the dollar to $1.2952.

Brexit

April was the month when Theresa May decided to seek the clear Commons majority she apparently needs for the negotiations – and when Europe set out its position that the divorce must be settled before there are any talks on a future trade deal.

As we noted above, substantive talks will not begin until the result of the General Election is known so – in public at least – the next six weeks are likely to see a lot of sound and fury and little of real significance. You need no more evidence of this than the recent meeting over dinner, which according to the German press, led Jean-Claude Juncker to describe Theresa May as ‘delusional,’ whilst UK Government sources said they simply did not recognise that version of events.

Even after the Election result is known it remains to be seen whether any genuine progress will be made before the summer holidays and the subsequent German elections in September. With twenty-two months to go to the March 2019 deadline, it’s easy to see the negotiations being concluded in one very late night sitting on 28th March 2019…

Europe

The big story in Europe was, of course, the French Presidential Election with Emmanuel Macron (23.9%) and Marine le Pen (21.4%) finishing first and second in the initial poll, and going through the run-off on Sunday 7th May. That is widely expected to see a comfortable victory for Macron, and both stock and currency markets duly breathed a huge sigh of relief. The ‘Macron rally’ added $290bn to the value of world stock markets, and the euro jumped to a five month high against the dollar.

Whoever wins on 7th May is going to face some big problems as they walk into the Elysee Palace. Clearly terrorism and immigration will be high on the list, but so too will be unemployment. While France has a high standard of living and high productivity, it also has a high unemployment rate – around 10% with some 3m people out of work. This is roughly double the rate of neighbours like the Netherlands and Austria, whilst the rate is below 5% in the UK and below 4% in Germany.

There are, however, some encouraging signs for the wider European economy, with the Purchasing Managers’ Index in Germany recently hitting its highest level since May 2011: the indicator for the Eurozone as a whole also stands at a six year high. Consumer confidence also appears to be improving, with indicators such as retail sales and new car registrations all moving in the right direction.

There was even good news on Greek debt as Eurozone finance ministers finally agreed terms with the Athens government, allowing them to ‘unlock’ a delayed bailout programme. For those of you that haven’t been keeping up, Greece is now part of the way through its third Eurozone bailout programme, with this one worth up to €86bn.

Both of Europe’s major stock markets were up in April: the German DAX index rose by just 1% to 12,418 while as we noted above, the French index – anticipating a Macron victory – rose 3% to finish April at 5,267. And we must put in a word for Greece – the Athens stock market was up 7% in April, reaching the giddy heights of 712 as it breathed a sigh of relief at the latest bailout.

US

Having announced a separate section for Brexit, it is tempting to do the same for ‘the pronouncements of the President.’ Donald Trump campaigned on drastic tax reform to stimulate the US economy, simplifying the tax system for individuals and slashing US corporation tax from its current level of 35% to just 15%. In April, Treasury Secretary Steve Mnuchin appeared to pave the way for this reduction, calling it “the biggest tax cut ever.”

Meanwhile, his boss was promising a “haircut” for US banking laws – at the moment, it seems that this may involve the separation of retail and investment banking – plus a renegotiation of the North American Free Trade Agreement.

Let’s turn to some concrete news: the US economy added only 98,000 jobs in March – far fewer than economists expected and only half the number for January and February. Despite this, though, the unemployment rate fell to 4.5%, the lowest since May 2007. Perhaps the low number of jobs created was a function of the US economy growing by only 0.7% in the first quarter of the year – the slowest rate of growth since the first quarter of 2014 and leaving the President some way to go to meet his election pledge of raising growth to 4%.

In company news there was another sign of the ‘new’ economy as the increasing share value of electric car maker Tesla saw it overtake General Motors in total capitalisation, having passed Ford in late March. Tesla’s total valuation is approximately $52bn: next up is Honda, which is currently worth $53bn.

Like all other world markets the US Dow Jones index rallied after the first round of the French Presidential election, and eventually finished the month up by 1%: having started April at 20,663 it ended at 20,941.

Far East

Tesla may be moving upwards but Toshiba seems to be heading in exactly the opposite direction. Having reported a loss of 532bn yen (£3.8bn) for April to December 2016, the company delayed publishing its audited accounts and admitted that its future may be in doubt.

Meanwhile, there was much better news in China, where growth in the first quarter of the year beat expectations. Growth was 6.9% according to official figures, compared to a target of 6.5% for the year as a whole. State-led infrastructure investment, demand for new property and an increase in consumer spending were all responsible for the higher growth rate, with retail sales in February up 10.9% on the same period in 2016.

Having spent his campaign criticising China for using an artificially low currency to “rape” American industry, the newly diplomatic President Trump had a meeting with Chinese leader Xi Jinping and said that China “was not a currency manipulator.” In truth, the almost weekly missile tests in North Korea are giving both men far more to worry about than currency manipulation.

Despite the tension in the region three of the four leading Far Eastern markets rose by 2% in April. Hong Kong was up to 24,615, Japan rose to 19,197 and the South Korean market advanced to 2,205. The one exception was China, where the Shanghai Composite index was down by 2%, ending April at 3,155.

Emerging Markets

April was a quiet month for the three major emerging markets we cover, but the corruption scandal in Brazil centring on the state oil provider Petrobras continues to have repercussions. A US judge has now fined Brazil’s engineering giant Oderbrecht $2.6bn in a case inevitably connected with Petrobras, as the engineering company agreed to a plea bargain deal with the US, Brazilian and Swiss authorities, pleading guilty to bribery in twelve Latin American countries.

Other than that a quiet month, but a pleasantly uniform one. It may be some time before this happens again, but all the three emerging markets we cover in this commentary saw their stock markets rise by 1% in April. India was up to 29,918: Brazil rose to 65,403 and the Russian market had its first positive month of the year, ending April at 2,017 – although it remains down by just over 9% for the year as a whole.

And finally…

Last month was, of course, a vintage crop for the ‘and finally’ section of this commentary. We were worried how this month would maintain the high standard – but it got off a good, slithery start with news from the Association of British Insurers that an anorexic python had swallowed £790 in vet’s bills. This was in their annual report, which revealed that the average cost of a claim on your pet insurance is now £757 – something of a shock for those of us that spent the bank holiday watching re-runs of James Herriot and thought it was seventeen shillings and sixpence.

Costing rather more than a trip to the vets was a trip from Taunton to Trowbridge. The towns are just 64 miles apart but that didn’t stop Great Western Rail offering a ticket for £10,000 on its website. The company blamed a (very expensive) ‘anomaly…’

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