June Market Commentary

1 June 2013

 

Introduction

What was the old compliance wording? Markets can fall as well as rise? May was certainly the month when that was borne out, with many of the major stock marching steadily upwards – only to suddenly have a day where the wheels fell off and previous gains were wiped out.

The FTSE-100 and the Japanese Nikkei Dow indices were good examples. The FTSE recorded a 13 year high, at one point coming within 90 points of its 1999 all time high. The Japanese Nikkei Dow burst through 15,000, with global markets being boosted by the actions central banks around the world had taken to boost the global economy – and by indications that those measures were having some effect.

But then came a survey showing that Chinese factory output had slowed for the first time in seven months. When this was added to worries that the US Federal Reserve might end its bond-buying programme earlier than anticipated the markets moved rapidly downwards. The FTSE fell by 2.1% in one day (the worst daily performance for 12 months) and the Japanese market – always sensitive to Chinese economic activity – fell by 7%.

As China continues its inexorable rise towards the largest economy in the world, it is interesting to note that news from that country is now driving world stock markets every bit as much as news from the USA. Signals from the States were mixed in May – but they didn’t have to day to day impact on stock markets that the news of a slowdown in Chinese factory output did.

UK

May was the month when attention turned to the UK housing market again. Figures released for March showed that mortgage approvals had risen in that month, and Nationwide’s house price index confirmed that house prices had risen in May, albeit only by 0.4%. Overall, though, it was felt that the market was regaining some momentum.

The one negative was a report from the BBC suggesting that 50% of people currently with interest only mortgages will struggle to repay them: the average shortfall was estimated at £71,000.

Is this renewed focus on the housing market necessarily a good thing for the UK economy? The ‘Help to Buy’ Scheme was a central part of George Osborne’s Budget but it has recently come under fire from commentators who feel the Chancellor should be concentrating on manufacturing industry and exports – not once again turning to the housing market as the main driver of the UK economy. Expect the debate to rumble on.

Away from housing it wasn’t a good month for the Co-Operative Bank, which saw its debt downgraded to junk bond status following heavy losses on loans to property companies. Losses of £600m were announced and the proposed deal to buy 632 branches from Lloyds TSB collapsed. Not surprisingly Chief Executive Barry Tootell wrote a short letter containing the words “I” and “resign.”

Neither was it a good month for lending to UK businesses. The same set of figures which confirmed a rise in UK mortgage approvals showed that lending to businesses had fallen by 3.6% in March – a worrying trend if it is repeated next month.

The month ended on a further downbeat note, with the OECD cutting its forecast for UK growth in 2014 to 1.5% from the previous 1.6%. The reason – as if you couldn’t guess – was the continuing problems in the Eurozone.

As noted above, the FTSE briefly came within 90 points of its all time high in May. In the event it finally finished the month at 6,583 to give a relatively modest rise of 2% for the month. If the rest of the summer is as volatile as May was for stock markets, expect to hear the old adage ‘Sell in May and go away’ trotted out a few times over the coming months.

Europe

The month in Europe opened with a fine spat between Germany and France – a leaked German memo referring to France as “Europe’s biggest problem child.” The memo criticised French industry for being uncompetitive and the French social security system for being too generous. Needless to say Francois Hollande didn’t escape, as he was dismissed as being ineffective and “meandering.”

Certainly France has serious problems, as another 39,800 people were added to the unemployment register. The jobless total has now increased in France for 53 out of the last 61 months as the country starts to reflect patterns already seen in Spain and Greece, with youth unemployment continuing to be a particular problem.

Figures released early in the month showed that the European recession was set to continue, with the private sector shrinking for the 15th consecutive month.

Despite this lack of good news, European stock markets performed well in May, largely thanks to the perceived willingness of the central banks to intervene. The German market rose by 5% to finish May at 8,349 and France rose by a more modest 2% to 3,949. All the more traditional ‘problem children’ – Spain, Italy and Greece – also saw their stock markets move ahead in May.

USA

The economic signals from the USA were mixed in May. On the negative side, GDP growth for the first quarter was revised downwards to 2.4% and the Purchase Managers’ Index in the manufacturing sector fell to a seven month low of 51.9. Whilst any figure above 50 continues to indicate optimism, this was significantly down on previous months.

More optimistically, figures for April confirmed a fall in inflation to 1.1% and 165,000 new jobs were added in the economy. The trade deficit also narrowed to $38.8bn for the month, as imports of crude oil dropped to their lowest level for 17 months.

Consumer confidence in the US also seems to be improving: how much that will reflect in increased sales for Apple is open to doubt though, as the authorities on both sides of the Atlantic continued to probe the company’s seeming reluctance to pay tax. This didn’t stop Apple approaching the market with a $17bn bond issue (the biggest ever seen outside the banking sector) as it looked to raise money to fund bigger payouts to shareholders.

The Dow Jones index rose by 2% during May, breaking through the 15,000 barrier to finish the month at 15,116.

Far East

As noted above, China is becoming the dominant country for determining stock market sentiment, and the news that factory output had slowed sent markets tumbling around the world. It’s important to remember though, that some slowdown in Chinese economic activity is almost inevitable given the rapid rate of expansion seen over the last five to ten years.

Despite talk of a ‘slowdown’, Chinese exports were up 14.7% year on year in April, with imports up by 16.8%. The country recorded a trade surplus in the month of $18.6bn, and the stock market reacted favourably, finishing May 6% higher at 2,301.

The stock market success of the year – at least among the major economies – has been Japan, with a 33% rise since the end of 2012. However May saw the market finish down very slightly at 13,774 amid concerns that the recovery may be running out of steam despite the best efforts of the Bank of Japan. Exports have not risen as much as had been expected, industrial production is falling and domestic demand is reported to be patchy at best.

However all was rosy in South Korea, where the trade surplus reached a three year high of $6bn as demand for smart phones continued to rise inexorably.

Emerging Markets

Worries are starting to emerge that the economic boom that was supposed to come about thanks to the 2014 World Cup and the 2016 Olympics is simply not going to happen. Anyone who watched the chaotic scenes as work on the Maracana stadium continued almost up to kick off in England’s friendly with Brazil will be hard put to keep faith with the Brazilian ‘economic miracle.’Two of the ‘big three’ emerging markets – India and Russia – saw their stock markets barely move in May, but the third – Brazil – recorded a worrying loss of 4%, meaning that the market there is down by more than 10% since the start of the year.

May’s star performers in the emerging markets sector were clustered among the Asian markets, with Bangladesh, Sri Lanka and Pakistan all rising by over 12%. In a normal month those would have been stellar performances – but May was not a normal month and the New Zealand stock market rose by the small matter of 76%.

The two main laggards were in South America, with markets taking their lead from Brazil, as the Argentinean stock market fell by 9% and Peru was down by 8%.

And finally…

How important is the boss? “Very” seemed to be the answer, as several analysts reported pressure on Manchester United shares following Sir Alex Ferguson’s retirement. So plenty for the incoming manager David Moyes to think about as he wrestled with the twin problems of the expectations of the world’s stock markets and a star player looking for a transfer. That was May: the month when world stock markets were influenced by Chinese factory output and Wayne Rooney…

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