Week in Review: Bad omens?
As Western economies waned, this was a week of worries. Germany’s economy contracted in the second quarter, the pound hit a ten-year low against the euro, and both the UK and US yield curves inverted between two-year and ten-year maturities.
The inversion of the yield curve is traditionally seen as a sign that an economic recession is on its way. Worries about the health of the global economy have been building for some time now, and a partial inversion of the yield curve occurred earlier in the year. Furthermore, the US 30-year Treasury yield dropped to its lowest-ever level, 1.91%.
Glimmers, then more gloom
So how did investors react to these portents of gloom? Not terribly well. Wall Street was in sombre mood, with the S&P 500 down 2.4% by Thursday’s close.
This was despite some glimmers of hope over the US-China relationship. On Tuesday, President Trump announced that he would delay the imposition of 10% tariffs on $150 billion of Chinese imports until December, although the levy on the other $100 billion would go ahead in September. But the relief that this prompted in the markets was soon outweighed by recession fears.
At the company level, General Electric (GE) was accused of a $38 billion accounting fraud in its insurance and oilfield-services businesses. The accuser, Harry Markopolos, passed the report to a hedge fund first before making it public; the fact that he will share in any profits from market movements gave GE ammunition to respond with allegations of market manipulation. Meanwhile, Burford Capital changed its board after coming under attack from a short seller last week.
The German juggernaut stalls
European investors were downbeat too. The FTSE World Europe ex UK index had lost 2.0% by Thursday’s close. A major factor in this was the 0.1% quarter-on-quarter contraction in the German economy in the three months to the end of June. Germany is the world’s fourth-largest economy.
The outlook is not much clearer. The ZEW survey indicated that investors’ expectations about the economy have become even more depressed, with a recession now seen as a likely prospect.
European politics got in on the act, of course. In Italy another election is looming, and the hopes of a Brexit deal appear to be fading. With equities looking risky against this backdrop, investors piled into bonds and gold instead.
Sterling’s stuffing knocked out
In the UK, the FTSE 100 hit a six-month low. This was despite the slump in sterling; a weak pound usually bodes well for the FTSE, as many of its largest constituents earn the bulk of their earnings abroad. As the prospect of a no-deal Brexit draws closer, investors are focusing on what that might mean for the UK’s economic prospects.
That said, the hard data from the UK economy was reasonably solid this week. Although unemployment ticked up to 3.9%, the number of people in work increased too. Meanwhile, weekly earnings rose by 3.9% in the second quarter. This was up from 3.6% in the first and was the strongest period of earnings growth for 11 years. As a result, UK consumers have more money in their pockets, despite inflation exceeding the Bank of England’s target, with consumer prices rising 2.1% over the year to July.
Investors, however, seem to have placed the encouraging employment and wage-growth data in the context of the heightened Brexit uncertainty and the UK economy’s second-quarter contraction, announced last week.
Don’t cry, Macri, Argentina …
If the developed world was jittery over the week, the developing world was downright turbulent. Much of the focus was on Argentina, where Alberto Fernández, the opposition populist candidate won the primary election with a 47% share of the vote. If this voting pattern were to be repeated in October’s presidential election, President Macri would be defeated in the first round.
The market reaction was swift and savage. The Argentinian peso depreciated by 33%, the Buenos Aires stock exchange plunged by around 50%, and the 100-year US-dollar government bond fell 39%. The credit-default-swap market indicated that the probability of the country defaulting on its debt within the next five years was 78%. Investors were rattled by the prospect of Fernández taking power as his running mate is former president Cristina Fernández de Kirchner. During her eight years in power, Mrs Kirchner introduced protectionist measures, including currency controls, and presided over a sovereign bond default. Macri responded by attempting to bribe the electorate with tax cuts and investors with promises to boost consumption.
For fans of the carry trade, Argentina’s interest rates are near 75%, a very nice differential to the negative yields in developed markets. Currency volatility is, however, a somewhat off-putting factor.
Cathay not so pacific
China provided no respite from the prevailing woe. The protests in Hong Kong continued, with demonstrators disrupting flights from Hong Kong airport. The Chinese government ordered Cathay Pacific to bar staff who participate in the protests from flying to or over the mainland – driving the company’s shares to a 10-year low. Fears are growing that Beijing could deploy the People’s Liberation Army to restore order.
On the Chinese mainland, growth in total social financing (a measure of credit and liquidity) slowed to 5.7% p.a. in July. Industrial-production growth slowed to 4.8%. This was the lowest rate since February 2002. Retail sales were more buoyant, rising by 7.6%. This was behind expectations, however.
Despite all this, the Shanghai and Shenzhen stock markets had a better week than many of their global peers. The CSI 300 was up 1.7% by Thursday’s close. The main factor in this appears to be investors’ hopes of further stimulus from the Chinese authorities – hopes that will have been fuelled by this week’s poor economic news from home and abroad.
And finally …
The humble lichen is easily overlooked. A complex organism that’s neither plant nor fungus, lichen may cover as much as 6% of the earth’s surface. Some lichens are thought to be the most long-lived organisms on earth. Interesting enough, then. But they’re hardly sexy.
One species of the New Zealand organism, Xanthoparmelia scabrosa, was nicknamed “sexy pavement lichen” by the University of Otago’s Dr Allison Knight after she discovered that it was being promoted in China as an alternative to Viagra. But Dr Knight warned that the substance can also be toxic. “I don’t recommend going out and licking the footpath,” she said.
RISK WARNINGThe value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.
The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.
Any data contained herein which is attributed to a third party ("Third Party Data") is the property of (a) third party supplier(s) (the "Owner") and is licensed for use by Standard Life Aberdeen**. Third Party Data may not be copied or distributed. Third Party Data is provided "as is" and is not warranted to be accurate, complete or timely.
To the extent permitted by applicable law, none of the Owner, Standard Life Aberdeen** or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Past performance is no guarantee of future results. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates.
**Standard Life Aberdeen means the relevant member of Standard Life Aberdeen group, being Standard Life Aberdeen plc together with its subsidiaries, subsidiary undertakings and associated companies (whether direct or indirect) from time to time.