July Market Commentary

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UK-coins-LargeJune was a good month for British and Chinese manufacturing, a disastrous month for General Motors (GM) and sadly, the England team who can now be found on the beaches of the Algarve. At least they escaped the anger directed at South Korea’s players, who were pelted with toffees on their return to Seoul!

UK

Much of the debate in the UK in June yet again centred on the housing market, the dangers of a property bubble and the likelihood of interest rate rises. Of potentially much greater long term significance, however, was the visit of Chinese premier Li Keqiang and the heads of several Chinese companies looking to invest in the UK.iStock_UK coins Large

As the BBC reported, the plane carrying the Chinese leader and friends was “the Sino-UK commercial relationship in microcosm” with representatives of nuclear power, solar power, telecommunications, financial services and car manufacturing unfastening their seat belts at Heathrow.

UK exports to China currently lag behind those of France, and are roughly a quarter of Germany’s exports. Clearly David Cameron is keen to increase the UK numbers, but many commentators are worried about China becoming an increasingly dominant player in the UK economy. As we reported in an earlier bulletin, the security concerns about the seemingly open access granted to telecoms giant Huawei refuse to go away.

The Chinese visitors would undoubtedly have approved the reported surge in UK factory output, which is enjoying one of its strongest growth periods for 22 years. Research firm Markit reported that manufacturers raised production in May to meet increasing demand, continuing the encouraging growth seen in April. The UK Purchasing Managers’ Index is now at 57.0 – with any figure above 50 representing growth as opposed to contraction.

Figures for May confirmed that UK inflation had fallen to 1.5% – helped by lower fares for flights – but this good news was easily balanced by the bad news everyone has been expecting: interest rate rises are on the way. The Telegraph reported that rate rises would begin this year and ‘could peak at 5%.’ If you’ve been brought up on interest rates at 0.5% this is clearly worrying: if you’re old enough to remember double-digit interest rates then you might be a little more relaxed. Besides, interest rate rises will be good news for savers, who can now take advantage of the New ISA rules and allowances.

Finally for the UK, back to what’s really important. The ONS reported that house prices rose steadily across the UK in April, with the average house costing 9.9% more than in April 2013. London, of course, remains the driver behind the surge, with prices there up by 18.7%. To put that in perspective, it is roughly 20 times the average pay rise seen in the UK last year.

Bank of England Governor Mark Carney responded to this by writing that the Bank would not hesitate to take “proportionate action as [it was] warranted,” a statement which takes us straight back to interest rate rises…

Against all this uncertainty the FTSE-100 index had a disappointing month, falling by 1% to close at 6,744.

Europe

Germany and France had similarly lacklustre months from a stock market point of view, with the German DAX index down 1% to 9,833 and the French CAC-40 index falling by 2% to 4,423.

However, German manufacturing enjoyed another good month and figures for April confirmed that the country’s trade surplus had widened again – up from €16.6bn in March to a five month high of €17.4bn. Compared to the previous month exports were up by 3% to a total of €93.8bn. Unemployment remained steady at just over 5% and inflation was down to a four year low at 0.9%, helped by a slowdown in food prices and lower energy costs.

There was similar good news in France, with both unemployment and inflation remaining steady and the trade gap narrowing very slightly. However there were some fears that the general fall in inflation across Europe – it is now down to 0.5% for the Eurozone – might ultimately lead to deflation and stagnation. This would mean the Central Bank having to introduce a stimulus package, perhaps along the lines of the bond-buying programme recently seen in the US.

Away from hard economics, the big news in Europe was the abdication of Spain’s King Juan Carlos, to be replaced by his son, King Felipe VI. In his first speech the new king called for a ‘new Spain, that we will build together.’ Whether he was referring to the economy or the football team wasn’t clear…

US

Traditionally the American automobile industry was seen as the bellwether of the whole economy. If Detroit – Motor City – was doing well then America was doing well. Detroit filed for bankruptcy in July 2013 and in June 2014 General Motors (GM) had a truly disastrous month, having to recall another 8.4m vehicles over the faulty ignition switches which are allegedly responsible for three deaths. GM set aside $1.2bn to deal with the problem, up from the $700m it had earlier allocated, but the mood at their HQ won’t be helped by the news that Orange County in California has filed a civil suit against the company.

Maybe the new bellwether of the US economy is Dropbox. The online storage company raised a further $250m of funding in a deal which valued the company at $10bn and opened the door of the billionaire’s club to its 31 year old founder, Drew Houston.

Further proof of the power of the new economy came in Seattle, where the city council unanimously voted to raise the city’s minimum wage to $15 an hour – just under twice the national average.

On Wall Street – where the minimum wage isn’t generally a consideration – the Dow Jones index closed the month at 16,827, up 2% on May’s closing level, having reached an all-time high of 16,947 on June 20th.

Far East

June saw two very positive pieces of news for the Chinese economy. At the beginning of the month it was confirmed that the Chinese service sector had grown at its fastest pace for six months in May, with the non-manufacturing Purchasing Managers’ Index up to 55.5 from 54.8. With the Chinese service sector accounting for more than 40% of its overall economy, this news helped to allay fears of a slowdown in the economy.

Later in the month, figures were released showing that manufacturing activity in China had grown at its fastest pace for the last six months as the recent stimulus measures from the Central Bank started to have an impact. Again the PMI moved in the right direction, up to 51.0 from 50.8 in May as confidence increased.

It was therefore hardly surprising that the Chinese trade surplus for May was at a 5 year high, with exports climbing to nearly $200bn and an overall surplus of $35.9bn. (To put that in perspective, the USA’s trade deficit for the month was $47.2bn.) Chinese exports to the European Union were up by nearly 13%.

Japan fared less well, as the impact of the sales tax increase continued to push inflation higher: it reached 3.7% in May, up from 3.4% in April. Against this unemployment fell to a 17 year low of 3.5% but the trade deficit widened to 910bn Japanese Yen – equivalent to £5.23bn. The Bank of Japan seemed content with this, and left monetary policy unchanged.

Despite inflation and the widening trade gap the Japanese stock market rose 4% in the month to end June at 15,162 – the best performance of the region’s markets. There was no need for the South Korean market to eat a toffee as the index rose 2% to 1,999, whilst Hong Kong managed a rise of 1% to 23,220. Despite the impressive trade and manufacturing figures the Chinese index was more or less unchanged at 2,048.

Emerging Markets

India is rapidly emerging as the stellar performer among this year’s stock markets, and the index rose another 5% in June to 25,414 – up 20% on a year to date basis. Brazil was not far behind as the stock market responded to the success of the World Cup by rising 4% to 53,168 and the other major emerging market, Russia posted a 2% rise to 1,466.

The Russian stock market now seems to have recovered from the adverse initial reaction to the problems in the Ukraine. The simple fact is that Russia has the gas that Ukraine – and Europe – needs, so it was no surprise to see the Russian trade surplus reach a two year high, with figures released for April showing a surplus of $19.7bn as exports grew at their fastest rate for two years.

And finally…

For the first time ever we seem to have had a month where nothing amusing happened in the financial markets. Rather June was the month where people – and companies – did things they probably wished they hadn’t. Payday lender Wonga was ordered to pay £2.6m in compensation for sending out fake solicitors letters and are now the subject of a meeting between the industry regulators and Her Majesty’s Constabulary.

Dutch airline KLM tweeted a picture of a departure board with the words ‘Adios Amigos’ as they knocked Mexico out of the World Cup – and promptly lost all its Mexican customers.

And of course, Luis Suarez was forced to eat a large slice of humble pie – after he’d first eaten a large slice of Giorgio Chiellini…

By Matthew Walne

Sources: Click here to view the sources

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