August Market Commentary

July got off to the best possible start when Janet Yellen, Chair of the US Federal Reserve, announced that there would be no more financial crises “in our lifetime.” Speaking on a trip to London, she said that the reforms of the banking system since the 2007 to 2009 crash had “minimised the risk of a similar disaster happening again.” Phew, that’s alright then. And if you’re reading this commentary, Ms Yellen, just skip over the bit about Italy…

Sadly, the word ‘crisis’ isn’t just confined to banking. July was the month when Kim Jong-un got a little feisty with an ICBM launch at the beginning and end of the month. The Washington Post described the first test as ‘a grave milestone’ and the regime in Pyongyang claimed the second test brought ‘the whole of the US within range.’ At the beginning of August, CNN was reporting ‘unprecedented levels’ of North Korean submarine activity: the situation is only going to get worse.

In fact, there was plenty to worry about in July. Lloyds of London warned that a global cyber-attack could cost the world economy $53bn, there were simmering tensions between China and India and the IMF downgraded its growth forecasts for both the UK and the United States. Meanwhile, at the G20 summit in Hamburg President Trump fell out with all the other world leaders over climate change. Then he went back to Washington to sack most of his administration…

Despite all this, July was by and large a good month for world stock markets, with three of the markets we cover making appreciable gains and none seeing significant falls.

UK
There was mixed news for the UK economy during July. As we reported above, the IMF downgraded its forecast growth for the year, cutting it from 2.0% to 1.7%. There was also bad news on productivity – the constant theme running through George Osborne’s Budget speeches – which the Office for National Statistics reported had dropped back to pre-financial crisis levels.

Figures for May showed that UK manufacturing had fallen – although this was largely due to a 4.4% drop in car production – and consumer spending had its worst quarter since 2013 in the three months to June, with expenditure dropping 0.3% year-on-year.

Against this, unemployment fell a further 64,000 to 1.49m, bringing the unemployment rate to 4.5% – the lowest since 1975. The number in work rose to 32m, the highest figure ever recorded and up 324,000 on the previous year. London remains Europe’s leading tech hub and both Google and Amazon have recently announced plans for substantial new investment in the city.

Even retail sales gave a glimmer of hope (despite the downturn in consumer spending) as sales rose 0.6% in June for a quarterly jump of 1.5%. And having surged to 2.9% in May, inflation dropped back to 2.6% in June, helped by lower fuel prices.

The UK mirrored the example set by France (see below) in announcing that new petrol and diesel cars will be banned from 2040. BMW followed this announcement by revealing that its new electric Mini will be built in Cowley – giving a huge boost to the car industry and the West Midlands.

With economic growth in the second quarter of the year edging up to 0.3% from the 0.2% seen in the first quarter, it is probably fair to say that the UK ended July with its glass slightly more than half full. That was the view taken by the FTSE-100 index of leading shares, which closed the month up 1% (and 3% for the year as a whole) at 7,372. Helped by fears that a rate rise in the US will now be delayed, the pound ended the month at $1.3224 – it is now up by 7% against the dollar for the whole of 2017.

Brexit
Do you remember when you were at school? The teacher would go out for five minutes, tell you to carry on with your work and the class would immediately descend into chaos.

In July, that’s how it was with Her Majesty’s Government. Theresa May went on holiday and the class immediately started fighting over Brexit. Philip Hammond seemed to favour a never-ending transition period after leaving the EU and ‘friends of Boris Johnson’ muttered darkly in corners. Ultimately, 10 Downing Street announced that free movement would end in March 2019, but you really do suspect that no-one has any idea.

Business organisations – speaking via the CBI – definitely want some sort of transition deal after Brexit, but credit ratings agency, Moody, suggested that there was now a ‘substantial probability’ of no deal being reached. Given the fact that all 27 members of the EU will need to agree the deal and there is just 19 months to go until March 2019 that view is looking increasingly credible. With Europe now largely on holiday for a month and then the German elections due in mid-September, it is easy to see it being October before any significant progress is made.

Europe 
As in the UK so it was in France, with Ecology Minister Nicolas Hulot announcing a ban on the sale of any car that uses petrol or diesel fuel by 2040. There is some way to go however: at the moment, hybrid vehicles make up 3.5% of the French market, with pure electric vehicles accounting for just 1.2%. The announcement was part of a renewed commitment to the Paris climate deal, with Hulot saying that France planned to become carbon neutral by 2050.

However, both the UK and France were beaten to the punch by Volvo, with the Swedish-based, Chinese-owned company announcing that all its new models will have an electric motor from 2019. Geely, Volvo’s Chinese owner, has been quietly pushing ahead with electric car development for more than a decade and now plans to sell one million electric cars by 2025.

There was good news in Spain, as the economy grew by 0.9% in the second quarter of the year, finally taking it back to the size it was before the credit crunch of 2008. But there was less good news in Italy – this is the bit you might care to skip, Ms Yellen – where CNBC described the Italian economy as a ‘basket case.’ The country has €2tn of public debt, which is around 133% of the country’s GDP and – as we have reported in previous commentaries – several of the country’s banks have needed rescuing, burdened by loans that will simply never be repaid. ‘No more financial crisis in our lifetime’ is a laudable aim, but it reckons without the Italian banks.

…But let us leave Europe with our glass half full: the unemployment rate in the European Union has fallen to 9.1% – the lowest level since February 2009.

The major European stock markets were both down in July, but not by any significant amounts. The German DAX index fell 2% to 12,118 while the French stock market dropped just 1% to close the month at 5,094.

US
Let’s start by sparing a thought for Amazon boss, Jeff Bezos, who for one glorious day in July was briefly the richest man in the world as Amazon shares rose. Then they released disappointing figures, ungrateful investors sold the shares and poor old Jeff was back in second place, grubbing along on $89bn and still behind Microsoft boss, Bill Gates.

Not that July was a great month for Microsoft as it announced plans to cut ‘thousands’ of jobs worldwide in a bid to get its cloud computing business to compete more successfully with Google and – you guessed it – Amazon.

In the wider US economy, though, there was good news on US jobs as figures for June showed 220,000 new jobs created and unemployment remaining low at 4.4%. However, that was countered by bad news on retail with sales down by 0.2% for the month, against an expected 0.1% rise. Coupled with inflation falling to 1.6% this led many commentators to speculate that a future rise in interest rates would be postponed.

Google’s bottom line was hit as the company was handed a $2.7bn fine by the EU for promoting its own shopping comparison site at the top of search results – but that is just petty cash for Facebook, where advertising revenues for the second quarter climbed to $9.3bn with more than a quarter of the world’s population now logging onto the site each month.

There was even better news for the US at the end of the month as figures for the second quarter showed that the US economy had bounced back from weak growth in the first quarter, growing at an annualised rate of 2.6% between April and June. No surprise then that the Dow Jones Index finished the month up 3% at 21,891.

Far East 
The main story in the Far East was the growth of the Chinese economy in the second quarter of the year, which came in at 6.9%. That is equal to the growth in the first quarter and well ahead of the official target for the year, set at 6.5%.

Clearly, plenty of lenders are confident that the Chinese economy will continue to grow as figures from the Bank for International Settlements showed a surge in lending to China and Chinese companies: international banks lent $92bn to China in the first quarter of the year, well up on the same period in the previous year.

Woe betide us all if the Chinese economy ever slows down, but in the meantime there was no slowdown at Samsung as the South Korean tech giant reported record profits thanks to a surge in demand for memory chips. Profits were £9.3bn for the three months to June, up 72% on a year earlier.

China announced that it will now allow rice imports from the US – watch out for President Trump sacking his Rice Commissioner any day now – and also unveiled plans for a new ‘unhackable’ internet. To be centred on the town of Jinan, some 200 users from the military, government, finance and electricity sectors will be able to send messages secure in the knowledge that only they are reading them. No doubt that will be seen as a challenge by North Korean hackers…

As well as his successful missile tests, there was more good news for the Supreme Leader when figures showed that the North Korean economy had grown at its fastest rate for 17 years, largely based on mining, energy and exports to China. It is easy to see where North Korea is spending the money, and the month ended with more worrying news as China and India exchanged a war of words over disputed territory on the Doklam Plateau in the Himalayas, which is claimed by both China and Bhutan. China warned India – which is backing Bhutan in the dispute – that it will defend the territory “at all costs”.

Away from all the squabbling, what happened on the Far Eastern stock markets? The Chinese and Hong Kong markets both enjoyed a good month rising 3% to 3,273 and 6% to 27,324 respectively. The Japanese index was down 1% at 19,925 and the South Korean market barely moved – finishing just 11 points higher at 2,403. On a year-to-date basis, both the South Korean and Hong Kong markets have done exceptionally, with respective gains of 19% and 24%.

Emerging Markets 
For once a quiet month in the Emerging Markets section with – you will find this hard to believe – no Brazilian politicians being arrested for corruption. Instead, we will simply concentrate on reporting some encouraging performances on the major stock markets, with all three of the markets we cover up in July. The Russian index – after a very disappointing first half of the year – was up 2% to 1,920: the Brazilian market was up 5% to 65,920 and the Indian index up by a similar amount to 32,515. The Indian stock market is now up by 22% for the year as a whole.

And finally 
July was another fine month for the ‘And finally’ section of this commentary, beginning with a Texan contractor (understandably he preferred not to be named) who trapped himself inside a Bank of America ATM whilst changing the lock. He was rescued when a customer tried to withdraw $100 and instead received a note saying, ‘Please help, I’m stuck in here.’ He naturally thought it was a joke, but on failing to spot any TV cameras and hearing a faint voice coming from the hole in the wall, the customer decided to call the police…

…Never mind, perhaps machines will take over from those useless humans. Or maybe not. A security robot in Washington was tasked with patrolling the foyer of an office building. Instead, it patrolled itself straight into the building’s fountain and ‘drowned.’ So much for 21st Century technology. ‘We were promised flying cars,’ wrote one observer on Twitter, ‘Instead they’ve given us suicidal robots.’

Never mind, the makers of the robot can always console themselves with a cup of tea and Kit Kat – unless they happen to be in Japan. Nestle have opened a new factory there to make ‘exotic Kit Kats’ for which there is apparently a booming market in Japan. The new factory will make a range of flavours – among others – green tea and wasabi flavoured – maybe not to everyone‘s tastes..!

Sources