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November 2013 Market Commentary

04.11.2013

October was another good month for world stock markets, with all the major markets except China and Japan making gains. Despite the continuing disagreements between the President and Congress, the US Dow Jones index reached another record high – even though the agreement to end the financial stalemate and keep the country solvent came at the 59th minute of the 11th hour and only lasts until February.

In the UK, there were further worrying signs of a housing bubble developing, with several indicators confirming the recent rises in house prices. Meanwhile, a ‘gas war’ between Russia and the Ukraine edged ever closer, and Standard & Poors confirmed Greece’s economic woes by officially demoting it from a ‘developed’ to an ‘emerging’ market. If it was any consolation, Lonely Planet highlighted Greece as one of the places to go on holiday, now that the recession had pushed prices back down.

However, there was good news in Spain, as the country finally came out of its seemingly never-ending recession.

UK

October saw Chancellor George Osborne on a trade mission to China, where it was announced that he would make it easier for wealthy Chinese to visit the UK, a move warmly welcomed by London’s retailers.

It was also announced that Chinese telecoms firm Huawei would build a research centre in the UK, which raised national security concerns amongst some analysts. China is also to invest in a UK nuclear power plant and the Chinese companies involved have apparently struck a deal which will see them receive a guaranteed payment at a price the Financial Times’ energy blogger described as “much too high.”

At the moment, the UK has a £20bn trade deficit with China: contrast this with Germany which enjoys a trade surplus as they have the manufacturing capability and the technology that China wants.

The UK jobless total fell to 2.49m and shares in the Royal Mail made a strong start when they started trading, but it was the UK housing market that really captured the attention. The Office for National Statistics reported that house prices had reached record levels, and mortgage approvals were at their highest since February 2008. Those pundits who had voiced concern about George Osborne’s ‘help to buy’ scheme creating a bubble sat back and looked smug.

In keeping with other major indices around the world the FTSE did well in October, rising by 4% to finish October at 6,731. It is now up 14% on the year.

Europe

As noted in the introduction, October was the month when Spain finally came out of recession. The country’s GDP grew by 0.1% between June and September – hardly a roaring success, but clearly better than a further decline. There is, of course, still the small problem of 26% unemployment to worry about…

By contrast, the number of people in work in Germany rose to 42.1m – the highest since re-unification in 1990. Unemployment increased marginally to 2.2m, or 5.2% of the working population. Overall, unemployment in the eurozone stands at 12.2% with the lowest rates in Austria, Germany and Luxembourg and the highest in Greece (27.6%) and Spain.

The rate of inflation in the eurozone fell from 1.1% in September to 0.7% in October.

Both the major European markets moved ahead in October – the German DAX index turned in another strong performance to finish 5% higher at 9,034 (up 19% since the start of the year) and the French CAC-40 index rose by 4% to 4,302 and is now up 18% on the year.

Despite their unemployment problems, the markets in Spain and Greece also rose in October.

US

In the US, President Obama nominated economist Janet Yellen to follow Ben Bernanke as Chairman of the Federal Reserve. If confirmed, she will become the first woman to lead the ‘Fed.’ Yellen is a staunch ally of Bernanke and a supporter of his stimulus package, so not surprisingly the move was welcomed by the stock market.

At the end of September there was deadlock between Obama and Congress over the US Budget, with the country facing the prospect of defaulting on some of its loans if no deal was agreed. But on October 16th the late night pizzas were delivered, the talks went on long into the small hours of the morning and a deal to save the country was finally announced.

The deal was roundly seen as a victory for the President and a crushing defeat for the right wing of the Republican Party. However, the deal only keeps the US Government solvent until mid January and only allows the Treasury to borrow until February 7th – so in three months time we may well be here again. Perhaps not the best way to run the biggest economy in the world…

Nevertheless, the Dow Jones index took it all in its stride and duly recorded a record high on Tuesday 29th when the market closed at 15,680. By the end of the month it had slipped back to 15,546 for an overall gain of 3% in October, with the market being up 19% since the start of the year.

Far East

The Chinese juggernaut rumbled on in October as figures showed third quarter GDP growth of 2.2%, up from 1.7% in the second quarter. This was to some extent fuelled by a looser monetary policy, with the Chinese central bank once again injecting cash into the economy.

It wasn’t all good news as figures released for September showed that inflation had risen to 3.1%, and China’s trade surplus narrowed slightly as it fell to $15.2bn for the month.

The economic indicators weren’t particularly good for Japan in October. Figures released for September showed that unemployment had fallen to 4% but inflation increased to 1.1%. The trade deficit increased to 932bn yen – almost double that of a year ago – and was worryingly the 15th consecutive month when the country had recorded a deficit.

It was, however, a good month for South Korea, with record exports and a surge in the country’s trade surplus to $4.9bn – up from $3.7bn a year earlier. Exports were up 7.3% compared to 12 months previously, boosted by increased demand for mobile phones and cars from the US and Europe. South Korean inflation also fell to a 14 year low.

The Chinese stock market fell back 2% in October, closing at 2,140, whilst Japan was more or less unchanged at 14,403, but is still up a very healthy 39% since the start of the year. The market in Hong Kong rose by 2% to finish at 23,208.

Emerging Markets

It would appear that a repeat of the cold winters of 2006 and 2009 may be on the cards in the Ukraine, as the prospect of a ‘gas war’ with Russia grows ever closer. Russia turned off its neighbour’s gas supply in 2006 and 2009 and is threatening to do the same again, with Gazprom claiming that the Ukraine has a £500m bill outstanding.

The emerging markets ‘club’ gained a new member as Greece was relegated by the ratings company Standard & Poors after its “consistent and dramatic” decline.

However, the major stock indices in the emerging markets sector all saw significant gains in October, with India leading the way as the market recorded a 10% rise to finish at 21,278. The markets in Russia and Brazil both rose by 4% to finish the month at 1,515 and 54,255 respectively.

And finally…

It appears that along with giving us the next World Cup and the next Olympics, Brazil may also be about to supply us with the world’s biggest bankruptcy.

Two years ago Eike Batista, the Brazilian oil tycoon, was worth £34.2bn and boasted that he would soon be the richest man in the world. Naturally he spent his wealth extravagantly and kept a Mercedes in his living room – a move which may not have gone down well with Mrs Batista. Sadly the wheels have now fallen off (the company, not the car) and lawyers will shortly file for bankruptcy. The fleet of six private planes have already been sold and the yacht is ‘being dismantled.’ There is no word on the Mercedes…

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