Articles

September financial market commentary

10.09.2012

Anyone remember August 2007? Kanye West was number one with Stronger, Sven-Goran Eriksson was Premier League manager of the month – and the world was having a financial crisis. August 2007 was “when the world changed” according to Adam Applegarth, the ex-CEO of Northern Rock. It was the month when the US Federal Reserve and the ECB saw ‘a sudden lack of confidence’ and had to inject $90bn into the financial markets.

Five years on it would seem that – financially at least – not much has changed. The world continues to lurch from crisis to crisis and ‘a sudden lack of confidence’ has become a more or less permanent state of mind. Much of the news in August was bad, as it had been in July. And yet – as they had done in the previous month – most of the world’s leading stock markets managed to creep upwards. The notable exception – again as in July – was China, where there are real fears about the slowdown in manufacturing.

UK

The first two weeks of August saw the UK hosting the Olympics. Unfortunately the stellar performances of Team GB were not matched by Team GB Economy, and while David Cameron might have been basking in a warm glow while he was in East London it would certainly have gone by the time he was back at his desk.

‘Bank of England cuts UK growth forecast.’ ‘UK inflation up.’ ‘UK tax receipts down.’ The headlines were almost unremittingly bad – plus it appeared that the Olympics had failed to produce the hoped-for economic bonanza, with many central London businesses reporting record low takings as people decided to work from home and tourists staying away due to fears of congestion and high prices.

Despite all this, the FTSE managed a modest rise in August, up from 5,635 to close the month at 5,711.

There was also good news on the housing front. Nationwide’s figures for July had shown the biggest fall in prices since 2009, but the August figures were a revelation, with a 1.3% rise taking the price of the average home in the UK to £164,729.

Europe

European markets faltered at the beginning of the month as ECB Chief Mario Draghi announced that he would do “whatever it takes” to boost the European economy and then said he would have a plan “within the coming weeks.” Cynics suggested that meant when he got back from holiday, and markets – like bankers and politicians – predictably headed south.

The next day early details of the ECB plans were released and the markets recovered – although whether this was due to Senor Draghi’s conveniently discovered plans or the US announcing the creation of 163,000 new jobs was difficult to tell.

The harsh reality is that Europe faces a double-dip recession with growth falling to 0.2% in the 2nd quarter and the private sector contracting for the seventh month in a row. Inevitably the news from Spain and Italy was disappointing and “Spanish recession worse than feared” was an early contender for least-surprising headline of the month.

The July unemployment figures were released in August and once again showed that unemployment had reached a new high, with 18m people out of work throughout the eurozone. The unemployment rate is now 25.1% in Spain: the lowest is in Austria, at 4.5%.

Despite all this bad news stock markets across Europe rose, with healthy rises seen in Spain, Italy and Greece. The German DAX index was up just under 3% to finish the month at 6,971 and there was a similar rise in France, with the market ending the month at 3,413.

US

There are now less than 3 months to go to the US Presidential election, with Mitt Romney finally confirmed as the Republican nominee. The race remains tight, with mixed news on the economic front. As reported above, the US created more jobs but manufacturing jobs continue to go overseas, with workers at one factory in Illinois being forced to train the Chinese workers who will shortly take their jobs.

However the gloom didn’t reach as far as Infinite Loop, Cupertino, California as Apple became the most valuable company of all time, surpassing a valuation placed on Microsoft in 1999. 15 miles and 23 minutes away at Menlo Park the news was less good. Facebook shares continued to fall, reaching 50% of their IPO price.

Away from the billionaires, growth in the US slowed in the second quarter, falling to 1.5% as consumer spending slowed. Inevitably, the Federal Reserve announced that it was planning ‘stimulus action.’

The Dow Jones reacted to all of this by just managing to stay above the 13,000 level – but the rise was less than 1% in the month, with the index finishing at 13,090.

The Far East

As reported above, the big news coming out of the Far East in August was the slowdown in China, with both industrial growth and retail sales growth falling. It’s important to stress that both are at levels that more established markets can only dream of – industrial growth, for example, fell to 9.2% – but the signs are clearly worrying. This was reflected in the performance of the Chinese stock market, which fell by 5% to close the month at 2,110. Over the past twelve months the market is now down by 24% – a bigger fall than that recorded by Spain where the stock market is ‘only’ down by 18%.

It was confirmed that the Japanese economy had expanded in the 2nd quarter of the year – albeit by only 0.3% – but the July figures showed the country posting a trade deficit of 517m yen as exports to China fell and the continuing slowdown in Europe impacted further on Japanese exports. The stock market managed a small rise however, gaining 1.6% to finish the month at 8,839.

Elsewhere in the region the Hong Kong index was down very slightly, closing the month at 19,482. Of the smaller markets, Thailand, Taiwan and Malaysia all rose, whilst the markets in Singapore and the Philippines were slightly lower.

Emerging Markets

Of the major emerging markets Indian and Brazil were virtually unchanged through August. Russia posted a useful rise though, with the market up over 3% to close at 1,454. Star performer of the month was – as usual – Venezuela, up by a paltry 17%, but honourable mentions must go to Greece and Italy, where the stock markets rose by 9% and 8% respectively.

In general most world markets had a good month in August. China turned in the worst performance and with the crisis nations of Europe in the headmaster’s good books for once, it was left to Mexico and Sweden to have ‘must do better’ scrawled across their monthly reports.

And finally…

As previously noted “Spanish recession worse than feared” was an early front runner for the ‘least-surprising headline of the month’ award. However it was pipped at the post by the Guardian’s bombshell, “George Osborne unpopular.” With the UK economy resolutely refusing the Chancellor’s kiss-of-life, what’s the betting on a re-shuffle before the party conference season?

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Adrian Smith

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