August 2012 Market Commentary
Last year it was Greece: this year, it’s Spain. Summer comes around, and with it comes another European country in crisis. On July 23rd the Spanish government had to ban short-selling of shares, bond yields reached unprecedented levels and it looked like the whole country – not just the banks – would need a bailout. ‘Plus ca change’ as the new French president would say.
The problems of the Spanish banks and their exposure to property are well documented. These are now being compounded by the fact that more Spanish regions – including Catalonia – look certain to follow Valencia in seeking financial help from Madrid.
If Spain does require a bailout – and ECB chief Mario Draghi has said he’ll do “whatever it takes” – then the burden will inevitably fall on the more prudent European states such as Germany, the Netherlands and Luxembourg. Moody’s accordingly changed their economic outlook forecast for these countries from ‘stable’ to ‘negative.’
Away from the European crisis the rest of the world rumbled on. America is increasingly focused on the forthcoming presidential election, with Obama still ahead in the polls – but only just. China reported that GDP growth in the first quarter of the year was the lowest for three years and that the economic growth target for the year had been reduced to 7.5%.
Britain, meanwhile, decided to put any economic problems on hold for two weeks and concentrate on the Olympics. Unfortunately two weeks is a long time in economics at the moment and who knows what the position will be when the Olympic flag has been folded up and formally handed over to Rio de Janeiro…
George Osborne reeling as the economy enters the disaster zone. Not the headline David Cameron wanted to wake up to on the day before the Olympics – but unfortunately the GDP figures for the UK were far worse than expected and it was the Chancellor who bore the brunt of the criticism. The data from the Office for National Statistics showed that the economy had shrunk by 0.7% in the three months to June and apparently left the City “stunned.” According to the opposition – “the Government’s deficit reduction strategy [was] in tatters.” With the Government borrowing £1bn more than anticipated in June it certainly appeared that Plan A was a little off course.
More banks were implicated in the LIBOR fixing scandal and (to no-one’s surprise) banking is now the least trusted profession in the UK. At least there’s a ready made scapegoat if the medal haul of Team GB doesn’t come up to expectations…
UK mortgage lending fell in June – repayments outstripped new loans for the first time in 12 months – and the number of new mortgages approved was down to 44,192, the lowest for 18 months
And yet the UK also managed to produce plenty of good news in July. BMW are to invest £250m in their UK plants over the next three years, and Jaguar announced that they will be creating an extra 1,100 jobs at Castle Bromwich. A £4.5bn Intercity rail deal will also see 900 new jobs in the North East.
The UK stock market rallied slightly through July, and ended the month marginally up at 5,635.
While there was good news for the UK on the jobs front, the employment situation in Europe can be summarised in one word: “grim.” The jobless rate in Europe is now 11.1% – the highest since the creation of the euro. Youth unemployment rose to 22.6% in May with over 50% of the under-25s in Greece and Spain without work. In Spain as a whole there are now 5.7m people unemployed.
How long these levels will be manageable without some social consequences is debatable. Perhaps anticipating this there was a meeting between the US Treasury Secretary Timothy Geithner and Germany finance minister Wolfgang Schaeuble at the end of the month. They agreed on more cooperation and the world’s stock markets breathed another sigh of relief and edged up a few points. Meanwhile the EU finance ministers happily signed off the terms of the bailout to the Spanish banks.
Unsurprisingly, the Spanish stock market turned in the worst performance among all major markets in July, falling by just over 5%. Italy and Portugal also fell, but markets in France and Holland moved ahead. Denmark also turned in a strong performance, rising 6.49% in the month, and the German DAX index finished the month at 6,772 – a rise of 5.5%.
A mixed bag of economic indicators for the United States in July: the rate of inflation remained unchanged at 1.7% and the trade deficit narrowed slightly to $48.7bn. Against this, most experts viewed the 80,000 new jobs created as slightly disappointing and unemployment was more or less unchanged at 8.2%.
President Obama continues to lead Republican Mitt Romney in the polls – albeit narrowly – and still looks the marginal favourite for the November election.
In company news, Microsoft posted it’s first ever loss ($492m in its fourth quarter thanks to a failed acquisition) and the profits of Amazon and Starbucks were also deemed ‘disappointing.’ Facebook (now approaching a billion users) posted a second quarter loss of $157m and its shares continued to fall – with the Swiss Bank UBS admitting it had lost $350m investing in them.
Despite these disappointments the Dow Jones index closed up fractionally on the month, finishing at 13,008 – putting the US market up 6.5% on a year-to-date basis.
Although both imports and exports slowed in June, the Chinese trade surplus widened to $30bn. Exports for June totalled $180bn – up more than 10% on the previous year.
China’s Central Bank lowered the benchmark interest rate to 6% – this was the second reduction in less than a month and is a clear move aimed at boosting the economy. Inflation in China fell to 2.2% as pork prices (one of the biggest contributors to recent inflation) finally declined.
However the Chinese stock market fell significantly – down 5% on the month (a fall almost equal to Spain’s) as there were clear worries about the world slowdown affecting the Chinese economy. As noted above, the economic growth forecast for the year was also reduced. Manufacturing was under pressure in China and it was interesting to note that another export-led economy, Taiwan, also slashed its growth forecasts in the light of the slowdown.
The Japanese stock market was also down, falling just over 3% to 8,695, whilst the other major Far Eastern market, Hong Kong, finished the month fractionally up at 19,796.
The World’s emerging markets turned in their usual mixed performance in July. India was slightly down, Russia was slightly up and Brazil rose by just over 3% to finish the month at 56,097. As already noted, Denmark was the outstanding performer among World markets, with those countries that have significant debt problems leading the way down.
On a year to date basis the performance of Venezuela continues to outstrip every other market – it is now up by more than 100% this year. Denmark, Estonia, Turkey and the Philippines are all up by over 20% in 2012.
Regular readers will not be surprised to learn that Spain and Portugal have suffered the heaviest falls in the current year.
A report for the Tax Justice Network pointed out that “a global elite of the super-rich” had at least $21tn hidden in offshore tax havens at the end of 2010. With the need to write about banking bailouts and the wealth of American whizz-kids, the default unit of currency for this monthly report is the ‘billion.’ Occasionally we have to slum it in the millions, but $21 trillion? That’s a lot – it’s equivalent to the combined size of the US and Japanese economies.
This prodigious sum is held by less than 100,000 people around the world. Unfortunately the writer of this report is not numbered among them and will therefore be back next month…
Personal service. Always available for any queries or advice.Mrs S - Leicestershire