October Market Commentary

October Market Commentary

Introduction 

What goes down immediately comes back up? If only saving and investing were that simple…

That’s what happened in September. In August, we reported that almost all the major markets we cover in this Commentary had fallen. The good news last month was that almost all the markets went back up. There were no spectacular rises – Japan and South Korea led the way as both markets gained 5% in the month, and a couple of markets barely moved at all – but the news was overwhelmingly positive.

The reason – as with so many things – may lie in the White House. President Trump delayed a planned $250bn (£203bn) tariff increase on Chinese goods as ‘a gesture of goodwill’ and China responded by scrapping some tariffs on US goods. The two sides are now due to hold fresh talks on resolving their long-running trade dispute, with the world economy – and stock markets – once more waiting with fingers crossed.

There was bad news for the world’s oil supplies in September, as a drone attack on two major facilities in Saudi Arabia reduced crude oil production by 5.7m barrels a day – roughly half the kingdom’s output.

A Yemeni rebel spokesman said they had deployed ten drones in the attack, but the US was quick to blame the attacks on Iran. For now, the Saudis say that they will make up for the lost production by drawing on reserves, but you suspect they must remain vulnerable to future attacks of this nature.

In the UK, all eyes were on Brexit as the Prime Minister’s deadline for leaving the European Union draws ever closer. As we report below, September brought plenty of work for the lawyers – but no real progress.

UK

The big story in the UK – Brexit aside – was the collapse of Thomas Cook. It had been on the cards for a long time and once the Government – entirely predictably – refused the company’s request for a bailout the end was inevitable. There were estimated to be 150,000 people to bring home – and almost as many questions for Thomas Cook executives to answer over the bonuses they’d paid themselves as the company slid towards administration.

Longer term, the most lasting impact of the company’s collapse might well be yet more holes in high streets up and down the country, and it was another bad month for retail in the UK. Hot weather in August failed to boost retail sales as footfall fell again, Topshop announced huge losses of around £500m and bookmakers William Hill announced the closure of more than 700 shops. You may think the last part of that sentence is good news, but it will inevitably lead to more empty shops on our high streets.

There was some good news in the retail sector – Next defied the gloom with a rise in profits and the nation’s pubs cashed in on the heatwave – but there were two stories which really crystallised the sector’s problems.

According to research from accountants PwC and the Local Data Company 2,870 shops (16 a day) closed in the first six months of 2019. Perhaps even more tellingly, Marks and Spencer, the bedrock of so many high streets, was relegated from the FTSE 100 index of leading shares, the first time since the index was formed in 1984.

Away from the retail gloom there was the usual mixture of good and bad news. Lloyds Bank announced that it was facing up to £1.8bn in fresh claims over the mis-selling of Payment Protection Insurance and factory output fell by its fastest rate since 2012. Confidence in the service sector was down and there were fears that the UK could be ‘nearing a recession.’

Apparently not. Figures from the Office for National Statistics for July showed that the UK economy had grown by 0.3% in the month, helped by the ‘dominant’ services sector. Average pay was up by nearly 4% compared to a year ago – the fastest increase in a decade – and unemployment was down to its lowest level for 45 years with 300,000 more people in work than a year previously.

This was obviously good news for Chancellor Sajid Javid, who duly stated that the Government has “turned the page on austerity” and announced a raft of spending plans and infrastructure projects in his speech at the Conservative conference.

Your view on whether it was a good month or a bad month for the UK very probably depends on your starting point. Perhaps we should leave the last word to the FTSE 100 index which (even without poor old Marks and Sparks) enjoyed a good month, rising by 3% to close September at 7,408. Helped by a ‘no-deal’ Brexit appearing less likely, the pound was up 1% in the month, closing at $1.2294.

Brexit 

This is a section on the commentary that is hardest to write, as every day that passes makes the content quickly out of date. In the last month we have seen the whip removed from 21 Conservative rebels, the proroguing of Parliament deemed illegal by the Supreme Court and the Commons recalled – not, it seems, to sort out Brexit but to squabble over semantics.

But here we are in October. According to the Prime Minister we will – “do or die” – have left the European Union by the end of the month. According to the majority of MPs that is the last thing we will do. October will bring Boris Johnson’s speech to the Conservative conference, his meeting with the other European leaders at the EU summit and – inevitably – any amount of fun and games in Parliament.

We suspect that most readers of this Commentary are heartily tired of those ‘fun and games’ and would like our political leaders to deliver some certainty. That is unquestionably what business, savers and investors want.

Europe 

The Eurozone economy is still flagging, and the European Central Bank (ECB) decided to take action in September, announcing that it will restart quantitative easing from 1st November, purchasing €20bn (£17.8bn) of debt every month.

The ECB said that the programme would run for “as long as necessary” while interest rates would continue “at their present or lower levels” until Eurozone inflation reached its target rate of 2%. ‘Lower levels’ might actually be something of an understatement, given that the ECB cut the deposit facility rate – the rate it pays to banks who have deposits with it – from minus 0.4% to minus 0.5%.

In August, Italy had a new government as the anti-establishment Five Star movement formed a new coalition with the centre-left Democratic Party (PD). “We consider it worthwhile to try the experience,” Nicola Zingaretti of the PD had reportedly said.

A month on it appears that the Italian people have tried the experience and decided they don’t like it, with 54% of them saying they want the previous government to return.

In company news, Google agreed a payment of €1bn (£890m) to end a probe by the French tax authorities, and EU competition chief Margarethe Vestager has said that she wants yet more data regulation. One wonders if the EU sees fining the tech giants every year as a substitute for the tax they may not be paying…

In keeping with most of the world stock markets, the two major European markets did well in September. The German DAX index rose 4% to 12,428 while the French stock market rose by a similar amount to end September very neatly at 5,678.

US

Over the past few months, Wall Street has seen any number of tech ‘unicorns’ (companies valued at more than $1bn) turn in disappointing results.

In September it was the turn of Slack, which is a useful co-working tool but nothing earth-shattering. For its most recent quarter Slack managed to lose $363m (£297m) on sales of $145m (£119m). Old fashioned investors, brought up on companies making a profit and paying a dividend to their shareholders, must think the world has gone mad.

It may go madder yet as Peloton – a company which allows you to virtually race your stationary exercise bike against other people on stationary exercise bikes – announced plans to raise $1.3bn (£1.1bn) in an initial public offering that values the company at more than $8bn (£6.5bn).

John Foley, founder of the loss-making firm said, “At its most basic level, Peloton sells happiness.” Unless, of course, you are expecting to be paid a dividend…

Back in the real world, US jobs growth slowed in August as the trade war with China took its toll: the economy added just 130,000 jobs in the month.

Hopefully some of those newly employed people – having obviously spent $2,245 (£1,840) on a basic Peloton bike – will still have some cash left over to buy Apple’s new iPhone 11 (which costs roughly half a bike). Performance of the new phone will be closely watched, amid concerns that Apple is continuing to lose impetus.

As expected the US Federal Reserve cut interest rates by a quarter of a percent, to a range of 1.75% to 2%. Despite the President’s desire to see yet more rate cuts, it seems unlikely that he will get his way, with the Fed making it very plain that they do not see rates falling below 1.5% to 1.75% any time before 2022.

For now, though, Wall Street pronounced itself satisfied with the rate cut and the pause in the trade war hostilities, rising by 2% in the month to close September at 26,917.

Far East 

It wasn’t just Thomas Cook: September saw the controversy over excessive pay for Nissan executives roar back into life. Chief executive Hiroto Saikawa admitted breaking internal company rules via a scheme designed by disgraced former boss Carlos Ghosn. Several more executives appear to have received more pay than they were allowed, through a stock appreciation scheme.

Another executive who’s had his share of controversy stepped down, as Jack Ma – founder of Chinese internet giant Alibaba and advocate of staff working 12 hours a day, six days a week – was replaced as Chairman by current CEO Daniel Zhang.

Ma has famously said that without his ‘996’ system – working from 9am to 9pm – China’s economy will “lose impetus.” Could he be right? China’s exports were down in August – 1% compared with the same period a year ago – as the trade war with the US continued to bite.

Make no mistake, China’s economy is still expanding at a rate the West can only dream about, but the pace is that expansion is slowing significantly. The government is continuing to bring in measures to stimulate domestic demand, through both tax cuts and ‘introducing more liquidity into the financial system’ – or, as most people would say, making loans easier to get.

As far as the region’s stock markets were concerned, September was a good month. China’s Shanghai Composite index and the Hong Kong Hang Seng index were both up by 1% to 2,905 and 26,092 respectively – the latter despite the continuing pro-democracy protests. And as we noted in the introduction, the Japanese and South Korea markets both rose by 5%, with Japan closing at 21,756 and South Korea  at 2,063.

Emerging Markets 

We reported last month on the deepening crisis in Argentina, as the government imposed currency controls in an attempt to stabilise the financial markets. This shows no immediate signs of lessening, with foreign currency purchases now restricted following a sharp drop in the value of the peso. Businesses now need central bank permission to sell pesos so they can buy foreign currency and make purchases abroad.

The government was taking action of a rather different sort in India, as it announced a surprise cut in corporate tax rates – from 30% to 22% – in a bid to boost the economy and offset any slowdown caused by the US/China dispute and its impact on world trade. Unsurprisingly the move was welcomed by the Indian stock market, which rose 4% in the month to close September at 38,667.

The Brazilian market was up by a similar amount to 104,745 – but it was a very different story in Russia, where for the third month in a row the stock market barely moved. Having closed June at 2,766 the Russian index closed July at 2,739, August at 2,740 and September at 2,747 – once more unchanged in percentage terms.

And finally 

It’s always good to see people striking back against ‘too much progress’ and they did just that last month as Sainsbury’s were forced to re-introduce tills to eight ‘till-less’ stores around London. Irritatingly for the supermarket, customers wanted to pay in the ‘traditional way’ and have a chat as they paid.

“It’s clear that not all customers are ready for a totally till-less store,” grumbled Chief Digital Officer Clodagh Moriarty.

Over the pond, next year’s Presidential race is gearing up, and Democratic candidates may be going to even greater lengths – or heights – to impress the voters.

The last debate among the Democratic hopefuls saw three out of the ten candidates standing on booster-boxes to appear taller than they really are. Normally a trick reserved for leading men in Hollywood, a rogue camera angle caught Senators Kamala Harris and Amy Klobuchar plus former Urban Development Secretary Julián Castro all gaining a few extra inches.

Closer investigation of Boostergate revealed that Mr Castro’s box was the biggest – so I think we can safely rule him out of the Presidential race.

What we may not be able to rule out, though, is meeting an alien – at least if men have anything to do with it. A study by Oxford University has found that men are 40% more likely than women to initiate contact with an alien. In the study nearly two-thirds of men thought initiating contact would be a good idea, whereas less than half the women who were questioned deemed it a sensible move. Astrophysicist Dr Peter Hatfield – who organised the research – reckons that the chance of establishing contact with aliens in the next 100 years is around 10%.

It’s hard not to wonder what the chances are that those aliens will be the ones to resolve Brexit…

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