Weekly Market Commentary – 16th August 2019

Markets Amplify Global Headwinds
This week was another eventful one for global markets. They fell at the start of the week on news that Trump was going to ramp up his trade war with China, rose when he decided not to and then plummeted again when weak data out of China and Germany stoked fears of a global recession. So far global GDP is slowing rather than falling, but markets worry that a slow to act Fed and a needlessly disruptive trade policy will make the difference between stalling and falling. Hence the extreme reaction to every bit of news in either direction.

Elsewhere, although not unrelated, markets have also begun fretting about negative interest rates. While they aren’t exactly new, the Swedish central bank has pursued a negative rate policy since 2015, they are uncommon. With a possible recession on the way and most interest rates at or near zero already, we might see a much wider adoption. How effective they’ll be is still unknown, however, while the central bank might be willing to directly pay people to borrow, the same is unlikely to be true of your mortgage lender.

EM: Peso Plummets Following Surprise Election Poll Results
Argentina has a turbulent economic history. It’s a nation which experienced rapid development at the start of the 20th century but suffered a reversal in fortune by the end of it. Since the 70’s, the nation has undergone two sovereign debt defaults, periods of chronic inflation and a succession of governments who have had debatable impact on the country’s economic growth.

This week, a new chapter was written when the Buenos Aires stock exchange’s main index the Merval plunged to record lows. The Merval fell 37 per cent in local terms in one day triggered by opposition candidate Alberto Fernandez’s strong showing against President Macri in the primary elections over the weekend. Markets believe an impending victory for Fernandez will see much of Macri’s previous work to transform Argentina come undone. More troubling is the renewed volatility in the Peso, further depreciation could impact its debts of which 80 per cent is denominated in foreign currency, raising the possibility of another sovereign default.

Companies: Will Uber ever become profitable?
Uber’s share price tumbled ten per cent this week after the company’s earnings result failed to live up to market expectations. Following Lyft’s beating revenue expectations as well as trimming costs last week, it was hoped that Uber would do the same. Instead the company posted a quarterly loss of £4.3bn and costs grew by 147 per cent signalling that the company is still very much stuck in traffic. The bulk of the losses stemmed from stock compensation following the IPO in May.

It is understandable that growing companies will need to be given time to become profitable – it took Amazon 14 years to turn green post IPO. What is worrying investors is that the company’s growth has almost stalled. Uber’s core ride sharing business only grew by two per cent compared to the same quarter last year. One bright spot was Uber Eats whose revenues jumped up 72 per cent (year-on-year).

Global: Yield curve inverts for the first time in over a decade
This week a major part of the yield curve inverted for the first time in over a decade, when the rate on 10 year US Treasuries briefly dropped below the rate on 2 year bond. A yield curve inversion has historically been used as a warning of an impending recession. The curve threatened to invert last year and came very close over the Christmas break, but just about managed to avoid it, suggesting markets believe we’ve been close to a recession for a while.

Economic data seems to support the case. Following on from weak industrial production data, it wasn’t surprising to see Germany’s economy contract last quarter but more troublingly, Singapore, a nation which acts as a bellwether for global growth given that international trade dominates its domestic economy downgraded their GDP growth figures for the year. The US is also starting to feel the pinch. Manufacturing fell 0.4 per cent for the month of July.