Market Update 21st February 2020

 Pace of Active Manager Consolidations Shows No Sign Of Slowing

Bar a few mega merges, last year we mainly witnessed a consolidation of small sized asset managers. Downward pressure on pricing from regulatory changes and ever-growing inflows into cheaper passive alternatives have left beleaguered boutiques more open to the idea of merging. The industry consolidation we saw last year shows no signs of stopping this year with the focus seemingly shifting from small to mid-sized firms.

This week, Jupiter announced its intention to buy Merian Global Investors while Canadian investment giant Franklin Templeton made an unexpected acquisition of rival Legg Mason for $6.5bn. As much as Franklin boss Jenny Johnson argues that it’s an offensive move, the firm has been bleeding assets for a while now so it’s hard not to see it as anything but defensive. With the squeeze in charges and the popularity of passive instruments showing no signs of abating, this is now the new normal. Despite the increase in consolidation for smaller fund houses, it may not be enough to bring costs down to a level to compete with the largest of players nor for it to be attractive enough against passive alternatives.


JAPAN: VAT Might not have been a good idea

Japan’s economy shrank at the fastest rate since 2014 as a questionable timed tax hike, coming in amidst the trade war played a part in the downturn. Typhoon Hagibis was also another factor in annualised GDP falling 6.3 per cent last quarter. It appears that Japan hasn’t learnt from a similar sales tax raise in 2014 which led to consumers closing their purse strings and plunging the nation into recession. Last quarter had a similar theme as spending fell 2.9 per cent.

Unfortunately for the Japanese it appears things won’t get better this quarter. Worries over a technical recession which happens when an economy contracts over two consecutive quarters is rising due to the anticipated strong impact from the Coronavirus. Only a few days after the announcement, Korea also sounded the warning bell saying it must do everything it can do support the economy which was just showing signs of recovery pre-virus outbreak.


UK: Housing Market showing early signs of recovery

The dispelling of Brexit gloom coupled with the unusually warm weather this time of the year has led to house buyers flocking back into the property market. Transaction activity rose last month and with it so did property prices. Asking prices rose £2500 for the month of January alone and the average asking price for a home now stands at around £309,399 – just £40 shy off historical records.

Commercial real estate is also showing tentative signs of recovery. A few months of relative calm after a decisive victory has helped lift sentiment and whet the appetitive for further buying and selling for investors. This renaissance also appears to extend to UK commercial property fund managers. Last year saw the sector hit with almost £2bn in outflows and funds with a high exposure to the retail sector punished. This week BMO UK Property fund switched its pricing from “bid” basis which tends to happen when these funds are experiencing outflows to “offer” indicating the fund is gearing up for an acquisition.



EU: Commissioner fights against US Tech Dominance

A long running fiery battle between Google and the EU started in 2010 over accusations that the search engine was pushing rivals from search results to promote its adverts and Google Shopping service, looked to have been simmering down and heading towards a settlement in 2014. But the arrival of EU Competition Commissioner Margrethe Vestager promptly reversed this course and instead handed out $9bn in fines against Google. The former Danish finance minister has since become well known for her dogged pursuit of US tech giants culminating in Donald Trump describing Vestager as the worst person he’s met.

Despite infuriating Trump, Vestager and other EU officials this week published a new digital strategy which will rein in Silicon Valley. The new strategy will focus on fair competition, digital protection for individuals and sustainability. Fair competition will mean opening up high quality data, which are currently hogged by big tech, effectively allowing tech start-ups compete on a level playing field.

News Update 14th February 2020

 Sajid Javid succumbs to Johnson’s power grab

This week we saw an unexpected change in Downing Street, when the chancellor decided he would rather go through the hassle of moving house than put up with the Prime Minister and his aides trying to take control of the Treasury. Boris Johnson and his advisers have taken an unprecedented step of trying to have complete control of all government departments firmly in Number 10. The one small mercy for Mr Javid is at least he won’t have to go through conveyancing.

While direct control will no doubt be more efficient, as the hidden agendas and power struggles that characterise Westminster will be swept away, we are all aware that good governance requires challenge and oversight. With no one at the cabinet table likely to tell the boss he’s had a terrible idea, the more likely it is a bunch of terrible ideas are about to become policy. Given some of the policies that have made it out of even the most independently minded cabinets, maybe their insights won’t be missed that much.

US: Jobs report gives the economy a positive  start to the year

The pace of hiring within the US kept up its run last month as employers added another 225,000 jobs to the economy – easily beating economic forecasts of 164,000 jobs. Notable job gains occurred in construction, transportation, warehousing and healthcare. Unemployment rates continued to remain low at 3.6 per cent. All this will be pleasing news for President Trump who has made a burgeoning economy a key point in his re-election campaign.

Speaking of election campaigns, the Democratic nominations shook off the technical debacle last week to move onto the second contest in New Hampshire. Results saw Bernie Sanders, Pete Buttigieg and Amy Klobuchar do well while the wheels fell off for early favourites Joe Biden and Elizabeth Warren. While Sanders has performed well in the early states, Iowa and New Hampshire are not very representative of the country and even less representative of Democratic voters. Biden will be hoping to come back in more diverse states like Nevada and South Carolina which are up next.

GERMANY: Coronavirus puts economic growth into quarantine

The tender green shoots of recovery for Germany are at significant risk of getting trampled on by the Coronavirus. Germany, a key economy for the Eurozone, flirted with recession last quarter and the final figures released this week showed a country in stagnation. But its reliance on exports to China make it vulnerable to the sudden stop in activity seen as part of the efforts to combat the virus. This could tip Germany’s, and possibly the Eurozone’s GDP growth negative for the quarter.

For Germany, industrial output was down 3.5 per cent for the month of December while new orders slowed by two per cent. Vehicles are Germany’s biggest export thus global supply chain disruptions alongside the disruption to China could have a strong material impact on GDP growth. For the wider eurozone, sharp drops in factory output for France, Italy and Germany helped drag down industrial production to 2.1 per cent.

EMERGING MARKETS: Cutting season continues

Mexico joined a list of emerging economies in easing monetary policy this year. The nation cut interest rates four times last year, each time by a quarter basis point and the central bank continued the trend at the latest meeting this week. Rates now stand at seven percent.

By cutting rates, Mexico hopes to boost a moribund economy which last year contracted for the first time in a decade. Uncertainty around the free trade agreement and manufacturing weakness were two of the key reasons why the economy struggled last year.

However, early indicators (pre-coronavirus) all tilt towards positive growth this year. Consumer confidence is improving, core inflation remains stable and vehicle production, which is Mexico’s key export, increased in January.

US Election Season Gets Underway While the UK leaves the EU

This week finally sees Britain exit from the European Union. While the transition period, secured as part the withdrawal agreement, means that nothing will actually happen for another eleven months, it seems odd not to mention the culmination of something we have written about almost incessantly for three years. Regardless of your position on Brexit, this marks the largest constitutional change to the UK since devolution and its impact will be felt for generations. Elsewhere, while one period of political uncertainty nears an end another is just beginning.

The first votes in the Democratic primary take place in Iowa on 3rd February. This marks the official opening of election season and there will be a near non-stop coverage from now until the general election in November. With a large field of mostly unknown candidates bar former vice president Biden and 2016 democratic runner-up Sanders, expect each twist and turn to be treated as an unexpected shock as the rest of the world scrambles to find out more about each temporary front runner.

Global: Why the Coronavirus impact could be worse than SARS
In terms of the number of infections, the coronavirus has now exceeded SARS. And in terms of global economic impact, the final figure could be even higher than the $40bn hit to the economy SARS caused in 2003. Technological advancements have meant the speed at which these “black swan” events impact asset prices have risen. Last week, western markets were muted monitoring developments: this week they were negative as the virus spread.

Greater interconnectedness’ also means this pneumonia inducing virus will have a strong impact on global supply chains. For example, US companies like Starbucks and McDonalds who have a presence in this region have been impacted. And finally, let’s not forget China. The country’s contribution to world growth has increased greatly since 2003. The country has also evolved. China was able to cope with SARS largely due to its manufacturing dependant model, now, contribution from retail and services outweighs this. With most of China being shut, impact to the nation’s and ergo global growth could be even stronger.

Global: Key Central Banks Hold Interest Rates Steady
To the surprise of few, Federal Reserve (Fed) committee members this week unanimously voted to maintain interest rates, citing improving economic conditions as the main reason against taking action. Interest rate range remains between 1.5 to 1.75 per cent. The only real action noted was the Fed tinkering with one of their levers which controls rates. The central bank is aiming to get the interest rate close to the middle of the range and are doing it by raising the amount of interest it pays banks on the reserves they hold on the Fed’s balance sheet by five basis points; effectively moving rates to 1.6 per cent from 1.55 per cent.

Over in the UK, and in Mark Carney’s final committee meeting the Bank of England also kept rates at 0.75 per cent as improving business sentiment and stronger employment data held the bank from making any changes. Despite both central banks choosing to sit on the side-lines this time, the markets expect both to cut rates this year.

Companies: Facebook Stock Falls Despite Strong Earnings
This week, Facebook’s stock fell seven per cent after last quarter’s earnings report came out. And this is due to the technology giant pretty much being a victim of its own success. Over the last five years, the stock has exceeded market expectations for both revenue and profit forecasts every single end quarter. In Q4 last year, the company again outperformed on both factors, but less than what investors were expecting. Revenues grew 25 per cent to $21bn.

The company’s main source of income is derived from expanding its user base and then using this to sell to advertisers. And the number of users is growing. Facebook hit 2.5bn users across its family of apps. Last year, it grew its overall user base by eight per cent compared to the previous year. One possible explanation for the stock falling is the company’s cautious guidance for this quarter. If tighter regulations rules come into play in turn forcing Facebook to build privacy into their suite of products – the company won’t quite be the same cash cow it is today.

Weekly Market Commentary – 24 January 2020

Will this year’s Davos Conference Kickstart Real Climate Change Action?
This week all eyes turned to the Bank of England ahead of the January Monetary Policy Committee meeting. Rates have only moved three times in the last ten years and have hovered around half a percent that whole period. On the surface, a 50% chance of a rate cut back to 0.50% is extremely underwhelming. While the potential move is deeply ordinary, it’s the symbolism that’s generating the buzz. A reversal following two years of minor rate hikes would send a very negative message about the state of the economy.

Elsewhere the annual gathering of the wealthy and self-important at Davos kicked off. While the importance of this gathering is debatable, most years it’s just backslapping and hobnobbing, it is notable how earnestly everyone is discussing climate change this year. 2019 saw the issue enter the zeitgiest, capturing the public’s attention – and that has definitely caught the attention of the elite. Whether all the heartfelt speeches and initiative announcements amount to anything remains to be seen.

Autos: Tesla becomes the World’s second most valuable automaker
Despite struggling with profitability as it tries to scale up production, Tesla’s market cap broke the $100bn level this week. In doing so, it became the world’s second largest automaker by market value. To put it into further context, Tesla is more valuable than the next biggest automaker, Volkswagen, despite selling 97 per cent fewer cars. This suggests markets view being a leader in electric cars as more valuable than leading in actually making and selling cars.

Increasing car sales and its new Shanghai plant are the two factors driving the recent share price rally. Tesla delivered twice as many cars (367,500) last year compared to the year prior. It is also hoped that its new factory will capture more of the Chinese market. If Tesla continues to stay above the $100bn mark on average for the next six months, Elon Musk will receive $350m in the first of up to 12 stock pay-outs.

UK: Manufacturing Optimism Hits Five Year High
Market expectations for the Bank of England to cut interest rates this month, fell ten per cent this week driven by improving sentiment amongst manufacturing businesses and unemployment rates hitting record lows. Odds on the central bank to cut rates is now evens. The CBI survey of business optimism increased by 23 per cent in the last quarter of 2019 – a stark contrast from the -44 per cent recorded in the prior quarter.

Four out of nine monetary policy committee members have stated that they are willing to cut rates if economic conditions don’t improve. According to soft data published this week – they may not have to. The PMI, an index of the prevailing direction of economic trends in the manufacturing and service sectors, depicts an economy coming out of contractionary mode and returning to growth. PMI for the month of January was 52.4 up 1.7 points from December, mainly due to a strong services sector.

Global: Wuhan Virus Wreaks Havoc in China
Millions of Chinese residents preparing to travel ahead of the Chinese New Year saw their plans disrupted by an outbreak of the Coronavirus. A strain of the deadly virus first broke out in the Chinese city of Wuhan, causing neighbouring cities to go into lockdown. So far 26 people have died across China and more than 800 are thought to be infected. There is no current cure for the disease. Cases have also been reported globally but the world health organisation is currently split as to whether an international ate of emergency needs to be declared.

So far, the spread of the Wuhan virus, which comes from the same family as SARS, has only adversely impacted Asian markets. The impact on western markets has been much more muted as investors closely monitor the spread of the virus.

Weekly Market Commentary – 17 January 2020

Phase One Trade Deal May be more politically Symbolic than Economic
Markets this week cheered the completion of a Phase One trade deal between the US and China. While subsiding political tension has been a boon for markets, for most countries, it means diddly-squat. Tariffs on $120bn of imported Chinese goods have been halved, but 25% levies still remain on an extra $250bn. These won’t be rolled back until Phase Two, which is likely to happen after the US elections in November. A smart move by the White House as it puts the onus on China to maintain favourable ties, raise import levels from the US and not tamper with its currency.

For China, it’s the equivalent of being a donkey stuck in a box with a carrot dangling just out of reach, hurt by a slowing economy, tariffs and an appreciating currency. The increase of US agricultural imports to China could have an adverse impact on European and Asian (ex-China) imports to the region. For now, with both sides maintaining high tariffs, it appears that the trade deal is more politically inclined than economically significant, much to the rest of the world’s annoyance.

US: Banks Kickstart Earnings Season
Big US banks heralded the start of the earnings season this week. And despite falling interest rates making lending less profitable, both JPMorgan Chase (JPM) and Citigroup posted double digit revenues last quarter. The less rate-sensitive parts of the business, including corporate and investment divisions boosted results for both companies. That’s not to say that consumer borrowing didn’t add to the bottom line. Rising wage growth and rising house prices have led to US consumers flexing their credit muscles. Both companies reported an increase in spending and loan balances for Q4.

Not all banks had positive earnings. Wells Fargo’s saw its profits halve last quarter as the bank was forced to set aside $1.5bn for ongoing fines. The bank emerged largely unscathed from the financial crisis and was subsequently lauded as a pillar of financial stability. However, the bank’s reputation was tarnished after a cross-selling scandal in 2016 led to millions of consumers having bogus accounts opened for them without their knowledge

UK: Rate Cut Expecations Rise Amidst Weak Economic Data
Sterling fell below the $1.30 level this week on the back of noise from the Bank of England (BoE) and weak economic data. GDP growth fell more than expected for the month of November coming in at -0.3 per cent. It’s no secret that the BoE’s tone has been one of lowering interest rates if the economy doesn’t pick up. But candid comments from policy maker Gertjan Vlieghe who is willing to vote for cutting rates at the upcoming monetary policy committee meeting, helped fuel sterling’s descent. A lot hinges on December’s GDP data; should the “Boris Bounce” kick in, expectations of a rate cut in January could very well cool.

Elsewhere former BoE boss Mark Carney has been snapped up by Johnson to become the UK’s climate change finance advisor. Carney’s key focus will be changing the financial system in order to achieve the goals of the Paris agreement and help the UK transition to a net-zero emissions economy by 2050.

Eurozone: Investors Scramble for Sovereign Bonds
This week we saw unprecedented investor demand for European sovereign debt. Spain attracted the largest ever order book for a eurozone bond. Orders for the 30-year Italian government bond topped 44 billion euros and Belgium’s 10-year bond issuance raised close to five times what it was hoping to raise. Even Germany with its zero per cent yielding government bonds managed to raise an additional 1 billion euros.

Scarcity drove the bulk of the demand. Net sovereign debt issuance for the bloc in 2020 is expected to be around 188 billion euros – its lowest since the financial crisis despite the growing government debt pile. There are virtually no expectations of interest rate rises in the short term which has also been a key selling point.

Weekly Market Commentary – 10th January 2020

Iran-US War Fears Subside

This week saw the welcome retreat of the political risk that dogged so much of 2019. The potential war between the US and Iran looks less likely than it did a week ago as the cycle of escalation that was feared never materialised. The passing of the Brexit bill also brings to a close a turbulent chapter in British political history. Both issues are likely to raise their heads again in 2020, but for now it’s a relief to see them both move on.  Elsewhere we get a chance to see what a Corbyn election victory might have looked like, as Spain formed a socialist coalition government this week. It isn’t quite accurate to compare this result to our own recent election. The left-wing socialist party did almost as badly as our own but has managed to secure a position as minority coalition partner. It will be interesting to see if any of their policy ideas gain traction, as many of Jeremy Corbyn’s policies were far more popular than he was.

 Companies: Aston Martin Stock Continues to Falter

Aston Martin first listed its shares for £19 each on October 2018. Since then the prices have fallen to £4.50. A run of consistently bad news has seen the share price plummet and the announcement this week saw the stock take another hit.  The luxury British carmaker confirmed it expected earnings to total £130-140m last year – a fall of around £100m from the year prior. Sales from Aston Martin dealers to consumer were up 12 per cent but the actual volume of cars requested by the dealers fell 7 per cent.

While the wheels seem to be coming off for Aston Martin, Rolls Royce continue to find another gear. The company posted bumper full year profits sending shares higher after the announcement. It beat its record number of cars sold by 25 per cent, powered by Cullinan SUV sales.

Global: US-Train War Threats Causes Market Turbulence

Markets reacted violently to Iran firing ballistic missiles at a US airbase in Iraq in retaliation for the killing of their top general. Fears of an all-out war twice triggered crude prices to break $70 dollars per barrel mark, before receding back to $65. Safe-haven assets like US Government Bonds, Gold and the Japanese Yen rallied.

It was only after a tweet sent out by Iran’s foreign minister that markets calmed. Mohammad Zarif tweeted that Iran had made a proportionate response and didn’t feel the need to go to war with the US. So far, looking at the rhetoric from both sides, it appears the threat of war is subsiding.

In the meantime, Iran may have to contended with a different scandal. Shortly after the missiles hit Iraq all 176 passengers of the Boeing 737 en-route to Kiev were killed shortly after take-off from Tehran. There are suggestions the plane may have been collateral damage in the missile strike which will complicate the situation. 

Spain: Forms first coalition Government since 1930s

After months of political uncertainty and two inconclusive elections, Spain finally has a functioning government. Interim Prime Minister Pedro Sanchez, leader of the socialist party PSOE won 120 seats but fell short of the 176 seats required to form a one-party government. Sanchez brokered a deal with far left Podemos and will lead Spain’s first coalition government since the restoration of democracy.

Whether a marriage between the hard-left and centre-left will work remains to be seen. In the meantime, the two parties have managed to agree to hike taxes for high earners and focus on reducing emissions and labour legislation improvements.


Weekly Market Commentary – 3 January 2020

Killing of Iranian Military Leader could trigger all out Iran-US War
This week has been characteristically quiet; it is traditional at this time of year to pad empty column inches with an annual roundup, and this time there is the added bonus of the end of the decade to provide even more filler material . We have avoided that temptation, if not the irony, and instead choose to scratch around looking for something to talk about. The markets don’t seem to mind the lack of activity however, as the opening days of 2020 have seen a strong start for most stocks.

Elsewhere tensions in the middle east threaten to reach boiling point as the tit-for-tat exchange between the US and Iran shows a real chance of dramatically escalating. The death of a senior Iranian military commander in a US air strike, is expected to provoke a strong response. So far Iran has been targeting oil infrastructure, either in the Strait of Hormuz, or in its drone attack on Saudi Arabia. Oil prices have jumped on the news.

France: Pension reform strike show little sign of abating
France, the country which goes on the most strikes (amongst selected OECD countries), is now undergoing its longest strike in the last half century. The transit strike which has now stretched to 30 days has shut down public transport services, reduced the number of hospital staff, teachers and police officers at work. At the crux of the
matter is pension reform. France currently has 42 different types of pension regimes across the public and private sectors. Pension benefits are mostly worked out using an employee’s 25 highest-paid years of work in the private sector and in the public sector it’s based on payments made in the last six months before retirement.

Macron’s new reform plans include shifting to a single universal points-based system where employees are rewarded for each day worked as well as phasing out early retirement for some sectors. Whether this strike will have a significant impact on the country’s growth rate remains to be seen. A similar strike in 1995, again over pension reform, only knocked 0.2 percentage points off economic growth.

Global: Canada’s Economy Unexpectedly Contracts
Consumer spending continues to drive US economic growth, with the final Saturday of December raking in a whopping $34.4bn – the largest shopping day ever recorded. However, across the border, retail numbers from Canada paint a more woeful picture. Sales contracted 1.2 per cent for the month of October: well below economist expectations of 0.5 per cent. Combine this with weak industrial figures and a housing environment where new house prices have barely risen last year and it was unsurprising to see Canada posted a 0.1 per cent contraction in growth for October.

Recession fears are rising. And while the retail figures only run up to October, manufacturing data for the month of December shows a stalling sector as new orders fall, and the existing backlog rapidly dwindles. None of this has troubled its currency however. the Canadian dollar was the best performing currency against the US dollar last year. A combination of resisting rate cuts as well as an oil price rally in the last few months of 2019 helped drive strong returns.

China: Central Bank Frees up Funds ahead of Chinese New Year
The People’s Bank of China (PBOC) cut the amount of cash that all banks must hold as reserves, releasing around 800 billion yuan (£88 billion). While markets have welcomed an anticipated US-China Phase one trade deal, analysts expect a deal will relieve only some of the pressure weighing on the Chinese economy, which has been impacted by a slowdown in both domestic and global demand. This in turn has slowed down business investment and reduced confidence. Thus, freeing up funds should help inject stimulus into the economy.

Freeing up more cash also reduces the risks of a credit crunch. The Chinese New Year holidays are set to fall later this month, earlier than usual, and it’s expected that demand for cash will surge as people withdraw for travel and shopping. The PBOC remain confident that overall liquidity in the banking system will remain stable ahead of the Chinese New Year.

Weekly Market Commentary – 20th December 2019

Have we seen an end to the “Boris Bounce”?

This week, the certainty that the market has been so excited about following the Conservative victory was quickly vanquished, replaced with our old friends’ ambiguity and doubt. The announcement by Johnson that he would amend his Brexit bill, to expressly rule out extending the transition period after we leave the EU, put an end to the so-called “Boris Bounce” with both stock markets and the pound falling back to where they were before the election. As we get into the free trade negotiations next year, expect a few more bounces and bounce-backs as talks progress.

Elsewhere Donald Trump made history, becoming just the fourth US president to be impeached. There will now be a trial held in the Republican controlled Senate that is expected to acquit the president and leave him in office. Given the exercise is doomed to fail, there are more than a few on both sides wondering why bother. In the end the facts of the case were so stark as to leave little choice but to proceed. With the outcome seemingly pre-determined, markets have paid little attention.

UK: FCA probe Bank of England Early Audio Leak
Reports emerged this week that an unnamed supplier had allowed some traders to get ahead of the market by listening to Bank of England (BoE) Governor Mark Carney’s comments seconds before it was publicly available. This allowed enough time for high speed traders to gain an unfair edge. The audio feed of the press conferences was installed to act as a back-up in case the main video feed failed.

The FCA are investigating the issue further. But they will have to do so without their leader Andrew Bailey. Bailey will be the next governor for the BoE despite his time with the watchdog peppered by several high-profile controversies.

Meanwhile the BoE continued its wait and see approach leaving rates unchanged. While a post-election economic bounce is expected given the greater clarity around Brexit, the Central Bank will continue to monitor how the UK’s relationship with the EU develops and whether global growth stabilises next year before making a change to rates.

Global: Will weak retail figures hurt the UK and US?
This week, both US and UK retail sales underwhelmed economists’ expectations. In the US, retail sales for the month of November rose at a sluggish pace as sales increased by 0.2 per cent for the month of November. Over in the UK the figures were even more dire. The volume of retail sales fell sharply by 0.6 per cent.

Consumer spending has been the key driver of growth for both economies and the weak numbers indicates it’s likely that economic growth will cool this quarter. However, both figures don’t account for Black Friday sales which fell out of the four-week reference period.

There is still hope that GDP will continue to grow this quarter for both nations. Residential investment activity, manufacturing and industrial production rebounds may be enough to maintain US GDP growth even if final retail sales figures falter. With Brexit still hanging over the UK, it remains to be seen if progress on the issue, possible now following the election, will translate into economic growth for Q4.

Sweden: Central Bank Closes Chapter on Negative Interest Rates
This week, Sweden’s Central Bank (“Riksbank”) raised interest rates by a quarter percentage point from -0.25 per cent to zero. By hiking rates, Riksbank became the first central bank to raise rates from sub-zero to neutral this year. Denmark, Eurozone, Japan, Switzerland and Hungary’s interest rates still remain in negative territory.

Sub-zero rates tend to be beneficial for borrowers and detrimental to savers. Since Riksbank became the first Central Bank to implement negative interest rates a decade ago, house prices have soared, business and household debt has increased while “Zombie” firms which rely on cheap loans to survive have drained productivity. With Sweden hiking rates will other countries follow suit? Not Japan in the near term.

Despite some positivity around trade, The Bank of Japan cited negative risks to Japan’s economy, leaving interest rates steady this week.

Weekly Market Commentary – 13 December 2019

Brexit Clarity Following Conservative Win
This week, after years of uncertainty following the Brexit referendum, the country finally took a decisive step. In what direction remains to be seen. With a solid majority Boris Johnson has many more options in front of him; not beholden to any particular wing of the party, personal ideology or even much of a manifesto. Whether Johnson carries on in the style in which he’s begun or tacks to the centre is now the big question and might ultimately depend on who ends up sitting opposite him.

One thing we have some short-term clarity on is Brexit. The UK will leave the EU at the end of January and nothing much will change now until 2021. The shape of the UK’s relationship with the EU after that is yet to be determined, and like the rest of the Johnson premiership, all options are still on the table.

US: Federal Reserve Hold Rates Steady
The Federal Reserve (Fed) announced interest rates will be held steady following their latest committee meeting this week. The Fed also expects no further rate cuts from now to the end of 2020. Following numerous cuts in 2019, the Fed’s tone has changed from one of uncertainty to positivity for the US economy. With a strong economy, tight labour market and low inflation, the Fed can afford to keep interest rates unchanged.

However, they will continue to monitor the wider global economy and cut interest rates if needed. There were no objections from any of the committee members against holding rates steady in the last two FMOC meetings.  Following days of underperformance due to trade war fears, the US stock markets rebounded with both the Dow Jones and the S&P 500 ticking up marginally following the announcement, while bond yields fell slightly.

South Africa: Rolling Blackouts Heighten Recession Fears
In February we observed floundering state-owned utility firm Eskom receive a hefty bailout package by the South African government, and in turn causing the balance sheet to balloon. Now the company is back in the headlines for steering the nation toward a technical recession. Eskom has been curbing power via rotational load shedding; heavy rains have soaked the coal which is used as fuel. Load shedding involves intentionally shutting down power in different areas within South Africa for non-overlapping periods of time. Earlier this week Eskom initiated a “stage 6” load-shedding effectively cutting 6,000 megawatts from the national grid.

By curbing power over consecutive days, the rolling blackouts have impacted factories and mining activity and ground traffic to a halt. However, the impact to GDP growth this quarter may not be as sharp as the last. Many businesses have begun winding down ahead of the Christmas holiday period.

UK: Economic Growth Flatlines
Steep falls in the manufacturing and construction industries have contributed to Britain’s economy stalling. In the three months to October, year-on-year growth in GDP was 0.7 per cent – the slowest growth rate since 2012. Manufacturing output continued its decline falling for the seventh consecutive month as factories battled against sluggish global economy and Brexit uncertainty.

The services sector was the only bright spark. In particular, estate agencies, healthcare and the scientific sector where the main drivers of modest growth. Looking at latest the soft data for November, key confidence indicators have dropped below 50, indicating an economy heading towards recession.

Weekly Marketing Commentary – 6 December 2019

M&S Property Gating isn’t the same as Woodford
This week’s gating of the M&G Property fund has reignited the debate between whether commercial property funds should be daily dealing or not. And even though the press coverage has been as high as the Woodford debacle, it’s much less controversial. Unlike equity funds, commercial property funds are inherently much more illiquid and harder to chop and change. Brexit uncertainty has meant that transaction volumes have languished at recent lows. With few buyers or sellers, property funds are even more vulnerable to a run. The need for prudent liquidity management is becoming ever more important.

What we could query however, is the high level of retail exposure within the direct property space. High streets are dying out in favour of online shopping. Even then not all retail exposure is bad, owning supermarkets or warehouse centres for the likes of Amazon is beneficial. What we really could question is if some of the funds could have sold down their bad retail exposure sooner and not during a time of stress.

OIL: OPEC Slides towards further cuts
It appears OPEC is gearing up for further oil cuts this year. A preliminary meeting of ministers involving Saudi Arabia and Russia, recommended production cuts of 500,000 barrels a day. Current production levels are around 1.2m barrels a day. The fear is that crude market could be heavily oversupplied in the first half of next year as US shale supply continues to ramp up while the global economy remains weak. So far OPEC cuts have done little to raise the price of crude oil because of US Shale supply and whether the latest cuts will have a significant impact remains to be seen.

Elsewhere but continuing with the same theme, Saudi Aramco has managed to raise $25.6bn in its initial public offering becoming the most valuable firm in the world and knocking Apple off the top spot. Market valuation for the state-owned oil giant reached $1.7tn just shy of the $2tn target the company was hoping for.

Eurozone: Does Germany Need Public Stimulus?
As Eurozone recession fears remain elevated and growth prospects look muted, economic forecasters and central banks alike have been urging member states to open their cheque books and spend their way out of the trouble. But key member states like Germany could be forgiven for asking whether they even need to. Latest data shows a tightening labour market, a relatively robust domestic economy and rising construction rates. These are some of the reasons that explain why German Chancellor Angela Merkel is keen to continue balancing the budget. Having said that, the chancellor’s tone is softening.

One of the main reasons in the change in tone is the continued deterioration in industrial production. New orders have dried up and not just from external customers – domestic demand has also been shrinking. The wider eurozone bloc suffers from the same ailments, but with even higher unemployment rates. The good news is that inflation for the bloc is picking up, a sign that the ECB’s low interest rate policy is working.

Global: Trump opens up new trade wars
China-US trade talks continue to progress well with China planning to scrap tariffs on US imported soybeans and pork products. However, the self-proclaimed tariff man President Trump took the opportunity this week to threaten Brazil, Argentina and France with hefty levies. Argentina and Brazil where accused of currency devaluation while France over Macron’s imposition of a digital services tax.

In July France passed a tax that targets around 30 big tech companies. The three percent charge applies to revenue from digital services earned by firms with more than $28m in French revenue and $830m worldwide, essentially appearing to discriminate against American tech companies. In turn, the Trump administration threatened duties of up to a 100 per cent on French imports of cheese, Champagne and other products. Trump also said he was putting new tariffs on steel and aluminium from Brazil and Argentina.