October Market Commentary

As we said, it was all going so well. And then the Republicans and the Democrats fell out (again) and suddenly the US Government was on the point of running out of money.

The last day of September started with the news that vast parts of the US bureaucracy could shut down at midnight, leaving pensions unpaid, passports unissued and taxes uncollected. Not surprisingly, stock markets around the world took fright at the news and immediately went into reverse – but not by enough to reverse the gains made earlier in the month.

UK

September in the UK ended with the party conference season, and the main political parties bidding to outdo each other in the race for the electorate’s affections. Chancellor George Osborne, used his speech to announce that the second stage of the ‘Help to Buy’ scheme would be brought forward. Fears that it would lead to a housing bubble were brushed off – but figures from the Halifax showed that house prices rose 5.4% in the year to August, the fastest rise since 2010. Cleary worried about a bubble, the Royal Institute of Chartered Surveyors called for limits on borrowing if house price rises exceed 5%.

On the whole, the news for the UK economy was positive in September. As above, the OECD upgraded its forecast for the economy, following similar upgrades in the previous month from the CBI and the Chambers of Commerce.

Jaguar announced plans to create 1,700 jobs in Solihull as part of a £1.5bn expansion and strong data from the service sector had the UK on course to outstrip Europe. The Purchase Managers Index leapt to 60.5 – a 15 year high – with growth accelerating in manufacturing, services and construction.

Against this, the UK balance of payments deficit doubled in July, rising to £3.08bn due to a slowdown in exports to countries outside the EU, and the shop vacancy rate on the high street remained “stubbornly high.” According to a report from the Local Data Company the average vacancy rate in the top 650 shopping centres is 14%.

Fortunately, the FTSE just about decided that its glass was half full and closed the month 49 points higher at 6,462.

Europe

News from Europe was less positive, particularly in Spain, as figures released for June showed that Spanish debt had once again risen to record levels. The figure now stands at €943bn (£792bn) which is equivalent to 92% of the country’s entire economic output. This is nearly 15% higher than a year ago – despite several public spending cuts – and exceeds the Spanish Government’s target limit of 91.4%.

The austerity measures in Spain have already led to street protests, with unemployment now topping 26%. Prime Minister, Mariano Rajoy’s, government is aiming to reduce public spending by €150bn over the next two years, but rising unemployment – and the consequent increase in benefit payments – will make this target difficult to reach.

Further unrest in Spain seems inevitable and a similar situation appears likely in Greece, as ECB chief, Mario Draghi, ruled out another lifeline for the country. There will be no further re-structuring of the country’s debts and, with an €11bn shortfall in the country’s finances predicted for the second half of 2014, further civil unrest seems a foregone conclusion.

Despite this bad news, the two major European markets performed well in September. Germany – where unemployment remained level at 5.2% and inflation was slightly down at 1.5% – saw its stock market rise by 6% to finish September at 8,594. In France, the market was up by 5%, breaking through the 4,000 barrier to close at 4,143.

US

As detailed in the introduction, an impasse between the two sides in Congress threatened to see the US Government run out of money by midnight on September 30th. This was worrying enough in itself, but the real concern was that this could ultimately lead to the US breaching its debt ceiling and – eventually – defaulting on its debt.

This stalemate last happened 17 years ago during the Clinton administration when there was a similar disagreement over priorities (this time, Congress wants to delay the President’s ‘Obamacare’ health measures).

With both sides blaming the other there was no agreement, and Americans woke up on October 1st to the ‘economic shutdown.’ Non-essential Government services would be withdrawn, and hundreds of thousands of federal workers were told to stay at home.

US consumer confidence – which fell to a 5 month low in September – is hardly going to be helped by fears about the Government making workers redundant.

The month had started so well with the Dow Jones reaching record levels as Ben Bernanke, Chairman of the Federal Reserve, announced that the economy was ‘too fragile’ and therefore the $85bn per month stimulus package – the so-called ‘wall of money’ – would continue.

The news was not so good for Blackberry – it was once the tech stock everyone wanted to own but these days it’s sadly out of favour. The company announced it was cutting 4,500 jobs worldwide and anticipating losses of $995m thanks to disappointing sales of the Z10 smartphone. 6.8m phones were manufactured: only 2.7m were shipped. There’s an expensive warehouse somewhere…

Far East

The major news in the Far East was that the two Koreans were once more speaking to each other and the shared Kaesong industrial facility was re-opened. Given that the North relies on Kaesong for so much of its foreign currency, it could never have stayed closed indefinitely, but whether this will herald a more general thaw in relations is open to debate.

The Bank of Japan’s Tankan index revealed a sharp rise in Japanese business confidence, particularly in the manufacturing sector, with the index rising to plus 12 for the July to September quarter, up from plus 4 in the previous quarter.

In China, figures for August showed inflation down to 2.6% and the trade surplus increasing by 8.4%, thanks to improved exports. South Korea also saw its trade surplus increase, helped by the seemingly insatiable demand for Samsung products. Back in China, tax rebates were offered to manufacturers of solar panels in a bid to prop up the struggling sector and do something about pollution.

Far Eastern stock markets had a good month: Hong Kong was up 5% at 22,860 whilst the Japanese market posted an 8% rise to close at 14,456 – up nearly 40% on a year to date basis. In China the Shanghai Composite rose 4% to 2,175.

Emerging Markets

September was another good month for the major emerging markets with the stock markets in India, Russia and Brazil all making gains. India finished the month up 4% at 19,380 (shrugging off worries about a 6.1% inflation rate) whilst the Russian market rose 7% to 1,463. With the World Cup and the Olympics both seemingly back on track, the Brazilian stock market rose by 5% to close at 52,338. That said, the Brazilian market remains down some 14% on a year to date basis – not quite as bad as Peru, however, where the market has fallen by 32%.

The best performing emerging market is – as always it seems – Venezuela, which is up by over 200% in 2013. Japan is the world’s second best performing market, closely followed by Pakistan and Nigeria.

Away from the stock markets, unemployment in both Russia and Brazil fell, to 5.2% and 5.3% respectively – more or less equal to that in Germany – and like China and South Korea, Russia saw a significant increase in its trade surplus with the June figures showing a surplus of $13.3bn compared to $11.5bn for the same period in the previous year.

And finally…

In the US, Twitter took advantage of what seemed – at the time – to be favourable market conditions to file papers in the first stage of a flotation that is expected to value the micro-blogging site at around $11bn. This puts a valuation of $78.5m on each of the 140 characters you’re allowed to use in a ‘tweet.’

More pertinently, a US company is coming to the stock market with a valuation equal to the deficit faced by the Greek Government in the second half of next year. It makes you think…