What a difference a month makes. January, whose name ultimately derives from ‘ianua’ (Latin for door), has this year delivered on its promise of change, at least on markets. After a torrid final quarter of last year, US stocks posted their best opening month since 1987, as banks and smaller companies – in other words, the domestic economy – led the S&P 500 to gains of 7.9% and the Dow Jones Industrial Average to gains of 7.2%.
The S&P 500 continued its happy New Year run last week, banking a series of positive corporate earnings announcements, among them reports from ExxonMobil, Fiat Chrysler and Chevron. Even Apple, which forecast a stagnant fiscal 2019, sufficiently reassured investors with its unimpressive earnings announcement that its stock rose in response.
For pessimists, there was plenty to worry about, from the economic impact of the recent US government shutdown to ongoing trade disputes to bouts of extreme weather, not least in Michigan, where the town of Hell did indeed freeze over.
Yet more important to investors last week were the warming words of Jerome Powell, Chair of the Federal Reserve, when he indicated a more dovish trajectory for interest rates and confirmed – in the usual stultifying jargon – that the Fed is willing to slow its programme of quantitative tightening if needed; music to investors’ ears.
A less ameliorative tone emerged from the White House, as the Trump administration announced a series of criminal charges – stealing secrets and violating business laws and sanctions – against Huawei Technologies, one of China’s few technology giants. Meanwhile, US–China trade talks continued apace – one apparent sign of rapprochement was Beijing’s stated willingness to reduce its US trade surplus over the coming six years.
But investors prefer hard data and, on Friday, they got it in spades. The US non-farm payrolls report showed 304,000 new jobs in January – the largest increase in almost a year and far, far above projections. Average hourly earnings rose just 0.1% and the jobless rate edged up to 4%; but that remains low, especially once you account for the impact of the recent shutdown. In short, 100 straight months of job creation isn’t to be sniffed at.
Venezuela’s government has omitted to even report unemployment figures since April 2016, presumably not for reasons of modesty. Last week, the US and EU both announced their preference for the chief opposition leader. There were more concrete measures, too.
“The US has now materially escalated the situation by sanctioning the Venezuelan state oil company PDVSA, effectively blocking US persons from doing business with the company,” said Anthony Kettle of BlueBay Asset Management. “Given the US is just about the only paying customer of the company – Russia and China take oil in repayment for pre-existing loans – this cuts off the Maduro regime’s access to the US dollar, and ultimately erodes support for the military. Both Venezuelan and PDVSA unsecured bonds have rallied almost 50% this month in anticipation of regime change but Treasury Department blocks on purchases have left trading at a standstill. We would expect the financial effects of any crisis to largely be contained to the country itself.”
The same could not be said for China, where any signs of worsening financial conditions are quickly felt on markets worldwide. Last week Caterpillar, the US construction equipment manufacturer, reported disappointing sales on declining Chinese demand. The announcement fits with other Chinese data releases last week: manufacturing activity at a three-year low; aggregate finance to the economy slowing; foreign investment falling; and, perhaps most worrying, a birth rate of just 15 million in 2018, its 27th year below the replacement rate.
Yet news of Fed softening helped Asian markets too. The Shanghai Composite index and Japan’s TOPIX both ended the week marginally higher, despite growth worries and last week’s disappointing Japanese inflation and trade data releases.
One country feeling the full force of China’s slowing growth is Germany. Last week, it slashed its growth outlook for 2019, citing Brexit and trade problems. Economic growth figures showed growth in France still positive in the final quarter of 2018, but Italy now in recession for the third time in a decade. Still, it was notable that government bond sales by Spain, Portugal and Greece all met with record demand; Greece even introduced its first minimum wage increase (of 11%) in more than a decade.
The UK, once again, provided quite a spectacle – and not for the right reasons. Theresa May finally rallied her party around an amendment to her own deal; one that she had, until recently, said was impossible, and which, at time of writing, the EU says still is. Forecasting what happens next is beyond our ken. All the same, it didn’t stop the FTSE 100, which merrily rose in line with global markets, breaching the 7,000 barrier for the first time since early December.
BlueBay Asset Management is a fund manager for St. James’s Place.
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