July 2013 Market Commentary
June saw the G8 summit taking place in Northern Ireland – but amid the talk of recession, tax evasion and the cost of the security, it was the fate of two men that stole the headlines.
American hero – or whistleblower, depending on your stance – Edward Snowden was holed up, first in Hong Kong and then in the departure lounge at Moscow airport, having revealed the full extent of NSA surveillance of American citizens.
Meanwhile Nelson Mandela was in intensive care as the world waited for updates on the condition of the man who did so much to shape South Africa – and wondered what the future would hold for the region when the inevitable finally happened.
In the UK, Chancellor George Osborne presented his Spending Review – there barely seems to be a month he’s not presenting something – and then found himself embroiled in a spat over healthy eating with the unlikely figure of Eric Pickles.
For world stock markets June might just have avoided the ‘disasters’ column (unless you were in Brazil or China) but it was undeniably a poor month.
Every major stock market in the world fell, and the situation in Brazil is particularly worrying. The stock market there, is now down by 22% since the start of the year, as the country’s rulers ignore their own people in pursuit of swelling FIFA’s already healthy coffers via next year’s World Cup.
June started positively in the UK with news that the construction industry was showing signs of life as house prices continued to rise. According to figures from the Halifax, UK house prices rose by 2.6% in the year to May, the best performance since 2010. Both private housing projects and infrastructure projects moved ahead on the back of these figures.
There was the usual row about a huge company paying no corporation tax on enormous profits – this month it was Vodafone’s turn – but these days the general reaction is a resigned shrug.
George Osborne used his Mansion House speech to declare that the time was right to sell the bailed out Lloyds TSB back to the private sector. The Government owns 39% of the bank, but Osborne warned private investors not to expect a “Tell Sid” type of privatisation. A share placing with the City institutions seems far more likely.
But the real focus of the Chancellor’s month was his spending review, given on the same day that opinion polls revealed young people are increasingly supporting the Conservatives and becoming less tolerant of benefits and welfare payments.
It’s safe to say that Osborne’s supporters were not disappointed with the review which, the Chancellor said, was necessary “to end the something for nothing culture.” It allowed him to claim that overall welfare spending would have been reduced by £22bn by 2016 – by which time there will be an overall cap on welfare spending of £100bn.
The Daily Mail captured the overall mood and made a reasonable bid for headline-of-the-year by declaring, ‘The laddie’s not for turning.’
However the FTSE-100 was unimpressed, and buffeted by the news from the US and China closed the month 6% down at 6,215.
The month got off to a bad start in Europe as the Bundesbank cut growth forecasts for the German economy, predicting that it will grow by just 0.3% this year.
For 2014, the forecast is now 1.5% growth, a sizeable reduction from the earlier 1.9%. Naturally a slowdown in external demand was blamed, aided and abetted by the continuing uncertainty in the eurozone.
Sadly, the month didn’t improve. The well documented problems in Greece, Italy and Spain rumbled on and by the end of the month all the European stock markets were down. Germany fell by 5% to end the month at 7,959 whilst France recorded a similar fall, finishing June at 3,739. The markets in Greece and Italy both saw double-digit falls, with the Greek stock market down by over 15%.
On the face of it another good month for US employment, as the non-farm payroll figures revealed that a further 175,000 jobs had been added to the economy. And yet, the rate of US unemployment resolutely refuses to fall, and throughout June this proved a drag on stock markets both in the US and overseas. Despite the increase in jobs, the unemployment rate actually rose to 7.6% as more people started looking for work.
A story that surprisingly didn’t get much coverage – but was a worrying sign of the times – was the news that Detroit had defaulted on its debts. The BBC reported that the city was immediately suspending repayments on all debts: instead, money would be used to ‘keep the city operating.’ Detroit – once famously America’s ‘motor city’ – has $11.5bn of unsecured debt, and there are suggestions that creditors will be offered only 10 cents on the dollar.
Later in the month Ben Bernanke, Chairman of the US Federal Reserve, gave a strong hint that the US would be ending its financial stimulus package sooner rather than later. This was the news world stock markets had long feared, and there were widespread falls – the FTSE tumbled 3% on the day of the announcement.
Given all the bad news, the Dow Jones index did well to only fall by 1% in June. It closed the month at 14,909 and is still 14% up for this year.
On the day that Ben Bernanke was doling out the bad tidings, world stock markets were further hit by the news that Chinese factory output had fallen for a second month in a row. There are now real fears that the Chinese economy is running out of steam, especially as there are now rumours of a clampdown on lending to businesses.
Nevertheless, Chinese influence continues to be felt around the world as a Chinese firm was granted a 100 year concession by Nicaragua to build a rival to the Panama Canal. Clearly this move will weaken US influence in the region.
Japanese growth for the first quarter of the year was revised up to 1%, giving projected growth of 4.1% this year for the world’s third biggest economy. June also saw the biggest ever foreign takeover by a Japanese company as SoftBank acquired a 78% stake in Sprint Nextel, the third largest phone carrier in the US.
Stock markets in the Far East followed the rest of the world downwards, with China falling by a miserable 14% in the month to finish at 1,979. Like the US, the Japanese market only fell by 1% to 13,677 and remains almost a third up in 2013. The Hong Kong market closed at 20,803, a fall of 7% in June.
Brazil captured many of the headlines in June. Inside the Maracana Stadium the national team took part in the Confederations Cup. Outside the people of Brazil took to the streets, protesting against Government corruption and the money being spent on the World Cup and the Olympics. In the first opinion poll to be released since the riots started, the approval rating of President Dilma Rousseff plunged from 57% to 30%.
Unsurprisingly, this turmoil was reflected in the Brazilian stock market – down 11% on the month to end at 47,457 and now down 22% since the beginning of January.
The other two members of the BRIC club had much better months: the Indian stock market was only down 2% at 19,396, whilst the Russian market fell just twenty points to close at 1,330.
A report published in June stated that by 2050 Nigeria would overtake the USA as the world’s third most populous country. Clearly, Africa is going to become ever more important in world economics, and anyone planning to read this report in 2050 can look forward to a special ‘Africa’ section…
As mentioned earlier, Chancellor George Osborne found himself embroiled in a culinary row with Local Government Minister Eric Pickles. Keen to establish himself as a man of the people, Osborne was pictured at his desk working on the Spending Review and eating a burger. Sadly, it was revealed that the burger was from upmarket chain Byrons and had cost £6.75.
Pickles – a man who gives the impression of always having a spare meat pie in his filing cabinet retaliated by being pictured at his desk with a green salad. A model of lean government, as the tabloids described him…
Keeping our savings performance on track.Mr O - Worcestershire