The Weekly - Normal Service Resuming?

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12/03/2018
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A week is a long time in these markets.  In fact a day can seem an extended period with major indices whip-sawing around, ready to embarrass the unwary.  However, this also provides opportunity and hedge funds will be relishing the return of volatility since early February.  Last Friday saw a 440 point rise in the Dow Jones or 1.77% as the monthly jobs report was released, one month on from the previous report which caused the first technically qualifying 10% correction for some time.  This latest report was a key event as the fear was that it could confirm and reinforce the inflationary worries that sparked off the falls in February.

The reality was rather different.  Not only was the reported wage growth for February below forecasts, the previously released January figure was also revised down slightly.  On top of this, the employment growth figure was much stronger than forecast and the previously released figures were upgraded.  So, there was evidence of increasing tightening within the labour market suggesting economic strength but the feared wage pressure was actually less than previously thought.  No wonder the markets moved strongly higher.  This doesn’t put this concern entirely to bed but it certainly suggests that the market bears have been looking in the wrong area for reasons to catastrophise.


Even Trump’s aluminium and steel tariffs have failed to dent subsequent market optimism.  When this was initially resurrected two weeks ago via some tweets, market bears seized on it as evidence that Trump’s anti-globalisation policies were now firmly back on the agenda having previously thought to be dead.  The resignation of Gary Cohn, Trump’s chief economic adviser, was seen as confirmation that he was going to implement them, despite opposition from this architect of the recently implemented tax cuts.  However, the strategy is evolving.  What now appears to be transpiring is that these tariffs don’t necessarily apply if you are a ‘friend’ of America and can illustrate that by not dumping in their back yard.  It does seem somewhat bizarre that the US has a large trade deficit with some countries whilst also being expected to protect those same countries from military aggressors.  It is with some reluctance that we suggest approval of Trump’s approach, but he certainly does know how to apply pressure at the weakest and most sensitive areas to extract what he wants.


Our own country exhibited the hypocrisy of trade deals and political sensitivities only last week, announcing a deal to supply more Eurofighter jets to Saudi Arabia whilst ignoring what they will be used for.  There are a lot of UK jobs riding on those orders and if we didn’t supply them then there are other countries who would.  It would be interesting to learn what Jeremy Corbyn would do – probably supply them but on condition that they are never used!


So, markets have had their early jolt for 2018 which has woken everyone up to the recently forgotten concept of equity market risk and volatility.  It looks like a storm in a teacup, for now, but we have learnt what is currently the market’s biggest fear and what is most likely to be the theme from here, which is helpful.  However, for us, it doesn’t really change anything, we never adjusted our asset allocation and we carry on as we were; overweight to equities (mainly non-US overseas) and underweight to fixed interest (no Gilts) as finally, interest rates are on the rise.  In this environment, defensive income payers are not going to be the area of highest returns as they will need a serious market sell-off to outperform, albeit in a falling market.  As an investor, you have to ask yourself, do I feel sufficiently concerned about the overall market outlook and valuations to plump for a strategy that will potentially lose the least in a bear market?  If the answer to that is yes, then you also have to be concerned about global growth and earnings which are at a rarely exhibited globally co-ordinated forecast rate of 3.7% for 2018  and 3.6% for 2019 (OECD).  The only major countries forecast to have falling growth rates are China and the UK which means that there has to be a serious setback coming from some, as yet, unknown catalyst.


Heavy-handed anti-globalisation policies from Trump would do it as would the emergence of inflation requiring much steeper rises in interest rates.  However, we feel that the former is designed to be much more subtle than a simple plan to reinvigorate industrial sectors of the US economy.  We will never know exactly why Gary Cohn resigned but he is an economic purist and very few are likely to agree with the unconventional political style of Trump where he tweets policy on the hoof without consultation with his advisers who are often playing catch-up.  This meeting with North Korea is a case in point where all the world’s leaders are nervous about giving Kim Jong-un legitimacy.  It would be a huge political coup for Trump and he would gain massive global kudos if he was able to pull some kind of peace deal out of this unconventional hat.  Of course, it already goes without saying that his much maligned aggressive military tactics would appear to have succeeded in getting us to this point.  It is hard to imagine anyone other than Trump getting into a war of words about button sizes and personal insults and then arranging a meeting to broker a deal.  However, perhaps many of the problems in the world remain because individuals cannot look forward and continue to dwell on the past which leads to years of deadlock.


Parking the political intrigue for now and focusing on the economic fundamentals, there are lots to analyse this week.  We have the Chancellor’s Spring Statement, there is US data on inflation and retail spending and we believe there will be more carnage to report on the UK high street before long.  Many international investors continue to avoid UK equities and we are underweight and can see little reason to change that position.  The speculation is building over a second Brexit referendum involving three choices – the deal, no deal or no change.  Whatever point we get to, the likelihood of a Corbyn government looks a real possibility and so why would you want to be too exposed to the UK equity market, regardless of the Brexit risk?


And finally, after the dismal showing by England in the rugby at the weekend, perhaps to be repeated against the Irish on St. Patrick’s Day at Twickenham, there is a silver lining to the Salisbury incident.  Perhaps Theresa May will decide we should boycott the football World Cup in Russia and then we will be spared the inevitable humiliation of that tournament.  At least the Russian snow has gone!

US jobs growth surges at fastest pace for 2 years


Global equity markets finished the week in strong fashion after the latest US labour market report revealed a surge in hiring last month. The American economy added 313,000 jobs in February, 108,000 more than expectations whilst unemployment remained unchanged for the fifth straight month at 4.1%. Importantly, the participation rate rose to its highest level for 6 months (albeit to just 63.0%) and that may have had an impact on wage growth which slowed to an annualised pace of +2.6%. However, the strong conditions signalled in the report, should translate into higher wages further down the line.


In the US, the tech heavy NASDAQ reached another record high with the S&P500 gaining by an impressive +3.5% with financials and industrials performing well. European bourses also had a strong week with the French CAC40 and German DAX30 gaining by +2.7% and +3.6%, buoyed by higher Eurozone economic growth forecasts at the ECB. Domestically, the FTSE100 gained by +2.2% with the Japanese Nikkei 225 the laggard amongst the major equity markets with a weekly gain of +1.4%.


Sovereign debt markets were largely muted with 10-year gilt yields 3 basis points higher at 1.52% with the US equivalent security 4 basis points higher at 2.90%. Meanwhile, Sterling regained some positive momentum to gain by +0.7% against the Dollar to $1.387 and by +0.6% against the Euro to 1.126%. The Dollar/Euro rate was largely unchanged although the American currency benefited against some weakness in the Japanese Yen to rise by +1.4% to ¥106.96.
Meanwhile in the commodity markets, Brent Crude ended the week +0.7% higher at $65.49 although rising production and inventory in the US could see oil come under pressure in the near term. Gold had a largely uneventful week with the precious metal rising by just +0.1% to $1,322 an ounce.

The Week Ahead

Economic data this week will centre on inflation and consumer spending. The latest Consumer Price Index data will bring an updated measure of inflation in both the US and Europe, on Tuesday and Friday respectively.  Wednesday’s Retail Sales data will then cast some light on the strength of consumer spending in the world’s largest economy. A modest rebound is anticipated following an underwhelming reading in February that saw headline sales slip -0.3% on the previous month.


Data is limited in the UK as we receive Chancellor Phillip Hammond’s Spring Statement – formally the Budget.  In its new guise, Hammond will only deliver an update on the economy and public finances on Tuesday, whereas budget tweaks are spared for now and will now come just once a year in the autumn.