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October 2012 Market Commentary

08.10.2012

‘No news is good news’ as the old saying goes – or as world stock markets interpreted it in September, ‘No catastrophic news is good enough, thank you.’

Clearly all is still not well with the world’s economy, but there were no full blown crises in September and most stock markets took this as their cue to inch forward. Amongst major markets, Germany and Hong Kong were the star performers. China finally reversed several months of falls, whilst Japan – despite economic worries – was virtually unchanged. But with new tensions between China and Japan (as described below) this region needs watching carefully. The news for the UK was – as ever – mixed, with some good news on the jobs front muted by some very poor balance of payment figures. Prime Minister David Cameron heads to Birmingham for October’s party conference trailing Labour by a wide margin in the latest polls, and haunted by the news that Boris Johnson is preferred as party leader. Clearly not all of us are benefiting from an ‘Olympic feelgood-factor…’

UK

The month started with good news for the UK economy: the Guardian reported signs of a summer recovery in the manufacturing sector, and Honda announced that investment in its Swindon plant had reached £267m, with plans to increase production of three of its models. However, this was swiftly followed by the loss of 760 jobs at Northern Ireland engineering firm, FG Wilson.

The news for retail wasn’t good, with it finally being confirmed that the Olympics had hurt high street sales. Excluding the poor Easter, August was the weakest month for retail since last November. There was further bad news when JJB Sports went into liquidation. Sports Direct are expected to take over some of the stores, but significant job losses look inevitable.

Evidence that the high street continues to suffer at the hands of the internet came when Tesco announced that they would be opening more ‘dark stores.’ These are not supermarkets catering for the shopping habits of Darth Vader, but shops that are closed to the public – existing only to service online orders. There are already four in London, and Tesco now plan to open similar stores around the UK.

On the economic front the really bad news was saved for the end of the month when a UK trade deficit of £20.8bn was confirmed for the second quarter – the biggest ever trade deficit in one quarter. Clearly the turmoil in Europe had some part to play, but the figures were nevertheless disappointing. The Chancellor’s Autumn Statement is on December 5th and critics are already predicting that George Osborne may have to admit that his economic policies are not working. Having started the month at 5,711 the FTSE finished it at 5,742. It had been significantly higher before the inevitable drift downwards on the end-of-month bad news.

Europe

The month started on a slightly downbeat note for Europe, with Moody’s lowering expectations for the EU’s long term AAA credit rating. This is now ‘negative’ – hardly surprising given that (according to the BBC business desk) the problems of the Spanish banks may have been understated.

But there was a dramatic turnaround on September 7th, with stock markets soaring as ECB President Mario Draghi – and no, I can’t resist the Super Mario joke – singlehandedly saved the world, despite the fierce opposition of the Bundesbank. Draghi’s plan is simple – it’s to buy the bonds of the distressed Eurozone countries such as Spain and Italy in almost unlimited amounts. The scheme is known as OMT (Outright Monetary Transactions) which the Germans condemned as “tantamount to financing governments by printing banknotes.”

Of course, countries that want a bailout – sorry, an outright monetary transaction – will have to agree to all sorts of stringent conditions and sign a pledge of everlasting austerity. European markets rose sharply when the plan was announced, but many were unconvinced. Larry Elliott in the Guardian was one of several commentators to be sceptical, describing Draghi’s plan as being ‘based on flawed economics’ and warning that it would not save the Euro.

We shall soon see… Figures released at the end of the month from an independent audit of Spanish banks showed that they would need a bailout of €59.3bn to survive ‘a serious downturn’ in their fortunes. It is hard not to think that at some point the prudent Northern Europeans might lose patience with their Southern cousins.

And yet the Dutch went to the polls on September 12th with many pundits predicting gains for the far-right and far-left parties, which would have been widely seen as a vote against Europe. In the event the voters resoundingly backed the pro-Europe centrist parties, inflicting a heavy defeat on the Eurosceptic far-right in particular.

The month ended with a general strike in Greece – for those people still counting it was the third in recent times. Finance Minister Yannis Stournaras warned that the country faced a thirties-style ‘great depression.’ It cannot be long before the EU comes under pressure to relax the terms of Greece’s €130bn bailout.

Star performer among the major European markets was the German DAX index, up by 4% to close the month at 7,216. The French index fell by 2%, whilst among the more ‘adventurous’ European stock indices, Italy was unchanged, Spain up by just under 4% and Greece – despite the strike – up by over 14%.

United States

Little more than five weeks to go to the US Presidential Election and if the men with the satchels (bookmakers if you’ve led a sheltered life) are to be believed, Michelle Obama can once again start planning to re-decorate the White House.

Her husband is well ahead in the polls, although whether this is good news for the US economy depends on your political standpoint. Having been borrowing since the 1700s (when it needed money to finance the American Revolution) the US Government is now $16tn in debt (which is around $50,000 for every man, woman and child in the country). Democrats and Republicans continue to argue over how quickly the deficit should be reduced. ‘Very gradually’ say the Democrats, and so far this argument seems to be holding sway.

The really good news for the US in September came with the report that private firms had hired 201,000 new employees in August, well ahead of the forecasts. With the July figures also revised up by 10,000 this was a real shot in the arm for the economy. Unemployment may still not be falling as quickly as the Federal Reserve would like – the figures for August showed a slight fall to 8.1% – but it is clearly moving in the right direction.

Nevertheless the Federal Reserve announced another round of Quantitative Easing on September 13th, saying that it would continue to buy up mortgages. Is the Fed bailing out the banks at the ultimate expense of the taxpayer? Or helping to create the conditions in which unemployment can fall and the economy can pick up? Only time will tell. But while we wait for the eventual verdict it was a good month for the Dow Jones: it finished September at 13,437, having started the month at 13,090.

Far East

Perhaps the most worrying news to come out of the Far East in September wasn’t economic, but political. Japan and China held what were described as “severe” talks over the disputed Senkaku Islands. The Islands are in the East China Sea and in 1968 it was discovered that they may be close to substantial undersea oil reserves. They’re currently controlled by Japan, but both China and Taiwan dispute this. With anti-Japanese riots breaking out in China, this is a potentially worrying development in the area.

Inevitably there were concerns about the Chinese economy as well: figures for August confirmed that exports had grown less than had been forecast, and imports had also decreased, leading to fears of a slowdown in the Chinese economy.

Central banks in both Japan and Taiwan launched stimulus packages to try and boost their economies in the face of a potential worsening of trade in the region, with Japan’s growth figures for the second quarter being revised sharply downwards.

The Chinese stock market reversed recent falls by finishing the month up 2% at 2,086: Japan was virtually unchanged and the Hong Kong market rose by an encouraging 7% to close the month at 20,840.

Emerging Markets

Among the larger emerging markets, India enjoyed an excellent month, rising by 8% to close at 18,763. Brazil also rose – by 4% – whilst the Russian MICEX index was up by just four points to 1,458.

Among smaller countries the stock markets of Slovenia, Sri Lanka and Cyprus were the winners, with perennial superstar Venezuela managing a frankly pathetic 6% gain on the month. Wooden spoons were handed out to Tunisia and Morocco, with both markets falling by around 5% in September.

And finally…

With the world economic outlook continuing to look uncertain, many investors are still looking for alternative investments – and what could be better than a Prime Minister’s old clothes? An anonymous bidder snapped up the suit Margaret Thatcher wore on the day she was confirmed as Tory party leader for £25,000 whilst a bidder from South Korea bought six other items from her former wardrobe.

You should also feel cheerful if you own a warehouse full of olive oil, as the recent drought in Spain will apparently push up prices to record levels. But perhaps that’s good news for those of us whose waistlines have paid the price for the words ‘lightly drizzle with olive oil…’

If the content of this month's market update raises any questions regarding your current investment and savings then please give us a call on 01676 521111 or request a call back from one of our financial planning specialists.

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