April Market Commentary

To say that March was a busy month is an understatement. Russia went to the polls to elect a new President and, in the least surprising result of the year, Vladimir Putin won another six year term. With the Chinese Communist Party removing the rules limiting Xi Jinping to two terms in office, two of the world’s three superpowers now effectively have presidents for life. North Korean leader, Kim Jong-un, jumped on the train and headed to Beijing for talks, ahead of his meetings with Moon Jae-in, the South Korean leader, and with Donald Trump. Presumably Kim and Xi Jinping did not discuss sanctions: China is supposedly imposing harsh UN sanctions on North Korea – and yet Kim saw his economy grow by more than 3% last year. ‘Curious and curious-er’ as Alice would have said.

Talk of sanctions and trade tariffs brings us to Donald Trump, who kept one of his pre-election pledges as he imposed a 25% import tariff on foreign steel and a 10% tariff on aluminium. The world may be worrying about a trade war between the US and China – and China has recently hit back with tariffs on US imports – but Trump is sticking to his ‘America first’ policy, and figures for February showed that the US added 313,000 jobs in the month.

In the UK, we had Chancellor Philip Hammond’s first Spring Statement, and agreement was finally reached on the transition agreement with the European Union, which will last until New Year’s Eve 2020.

Unsurprisingly, talk of a trade war meant that it was a bad month for world stock markets, with all but two of the major markets we cover in this commentary falling in March.

UK

As mentioned above, March in the UK brought us the first of Philip Hammond’s Spring Statements. There was relatively good news on the UK’s debt and borrowing figures but, as George Osborne frequently reminded us, the UK is always vulnerable to economic activity in the wider world, and any optimistic figures from the Chancellor could swiftly be consigned to the bin if the threatened trade war between China and the US develops.

He did, however, give a pointer to what we might see in the Autumn Budget. The plastic tax had been widely trailed, as had yet more moves to tax multinational companies such as Google and Apple. Interestingly, he made a reference to ‘seeking views’ on encouraging businesses who want to use digital payments. And why wouldn’t he? Digital payments can be tracked and taxed and would represent a way to strike back at the black economy.

Sadly, there are rather a lot of businesses on the UK high street that would like to take any payment, digital or otherwise. Restaurant chain Prezzo announced the close of 94 branches with the loss of 1,000 jobs; Next said it was experiencing ‘the toughest trading for 25 years’ and the Bargain Booze chain admitted it was close to administration.

House price growth was the lowest for five years and the balance of payments deficit in the three months to January widened to £8.7bn as imports of fuel increased.

There was good news on inflation however, which dipped to 2.7% thanks to a fall in petrol prices, which allowed the Chancellor to comment that most people should see a rise in their real wages “by the end of the year.”

Unfortunately, it looks as though the Bank of England will have increased interest rates well before then, with some commentators expecting an increase in base rates as early as next month and the Bank saying that rises might need to be “earlier” and “by a somewhat greater extent” than they had previously thought.

Unsurprisingly, the FTSE 100 index of leading shares didn’t like the sound of this and fell 2% in March to end the month at 7,057. It is now down by 8% for the first three months of the year – its worst opening quarter since 2009, when we were mired in the financial crisis. However, it was a good month for the pound, which will at least give you some comfort if you are planning a holiday abroad. The pound was up by 2% against the dollar in March and is now trading at $1.40.

Brexit
Well, we have spent a few months in this commentary reporting ‘no real progress’ on the Brexit negotiations. Now, it seems we might finally be getting somewhere, with the UK and EU reaching an agreement over the ‘transition deal’ – the relationship and arrangement we will have with the EU after we leave, which is currently less than a year away on March 29th 2019.

Your view of the transition deal will very much depend on your initial stance of Brexit: but let us try and summarise the main points as impartially as possible:

• The transition period will end on New Year’s Eve 2020 – three months earlier than had been predicted
• The UK will be able to negotiate, sign and ratify trade deals – for example, with the USA – during the transition period
• Existing international agreements and EU trade deals will continue during the transition period
• The financial settlement we have already agreed is locked in, and both sides are committed to ‘acting in good faith’ during the period
• It is less good news for the UK’s fishermen: the UK can only ‘consult’ on fishing during the transition period
• New EU citizens arriving in the UK during the transition period will have the same rights as those EU citizens already here
• And nothing has so far been agreed regarding the border between Northern Ireland and the Republic of Ireland.

It has been repeatedly said of the EU negotiations that ‘nothing is agreed until everything is agreed’ – but you have to think that the above will be the basis of our relationship with the EU for the 21 months after March next year.

Those in favour of Brexit generally see greater control of trade policy and the agreement to act in good faith as ‘wins’. They are less keen on the extension of free movement and the fisheries policy. Those in favour of staying in the EU see it all as a mistake – but we are moving inexorably towards March 2019 and the UK will be leaving the EU.

Europe
The beginning of March brought the Italian election and – to no-one’s surprise – no clear result. The Eurosceptic, populist Five Star Movement was the biggest single party with a third of the vote, but Matteo Salvini, leader of the anti-immigrant League was also claiming the right to run the country as part of a right-wing coalition with former Prime Minister Silvio Berlusconi’s Forza Italia party. Inevitably, forming a coalition could take weeks of negotiation and horse-trading.

Much of the attention elsewhere in Europe focused on the Brexit deal, although French leader Emmanuel Macron will see his resolve tested this week by a series of rail and airline strikes as the transport unions begin a series of planned strikes in protest at his reform agenda.

The two major European stock markets both drifted down by 3% on the worries about a global trade war. The German DAX index was down to 12,097 while the French stock market closed the month at 5,167.

US
It is a testament to the newsworthiness of its President that we now accumulate as many notes for the US section of this commentary as we do for the UK.

As above, Donald Trump slapped tariffs on imports of steel and aluminium, with China responding over Easter by imposing tariffs on a number of US imports, including wine. There has been much wailing in the California wine regions – but the state is staunchly Democratic and the President is teetotal, so he is unlikely to lose any sleep. With 313,000 new jobs added, there are plenty of Americans who approve of what the President is doing.

Trump’s ‘America First’ policy and concerns for national security were further evidenced as he blocked the takeover of chipmaker Qualcomm by Singapore-based rival Broadcom.

At $140bn (£100bn) the deal would have been the biggest technology sector takeover on record, but there was “credible evidence” that it threatened US security, with fears that it could have put China ahead – or further ahead – in the development of 5G wireless technology.

If March was a good month for jobs and for national security, it was a dreadful month for Facebook. The company had $58bn (£41bn) wiped off its value after the Cambridge Analytica data breach scandal, leaving CEO and founder Mark Zuckerberg with a lot of apologising and explaining to do.

Nor was it a good month for Wall Street with the Dow Jones index inevitably falling amid worries about a trade war. It closed March down 4% at 24,103.

Far East
After the death of Mao Zedong in 1976 the Chinese Communist Party introduced a ‘two term limit,’ intended to ensure that a cult of personality could not re-emerge and that no-one could ‘rule for life’. But in March the ‘two sessions’ – the annual meetings of the national legislature and the top political advisory body – did what had widely been expected and scrapped the rule, effectively opening the way for Xi Jinping to rule indefinitely.

One of the first appointments the new ruler-for-life would have rubber-stamped was that of US-educated economist, Yi Gang, as the next governor of China’s central bank. It is an appointment seen as an attempt to ensure continuity, as China continues to try and rein in growing debt and risky financial practices.

No doubt, the cautious new central banker would have approved of China’s growth target for 2018, now confirmed as 6.5%. This is below the growth of 6.9% reported for 2017 (the first time in seven years that the pace of growth had picked up) and unquestionably reflects the country’s commitment to less risky economic policies and lending.

As mentioned above, the month ended with Kim Jong-un visiting China – seen as a necessary prequel to his meetings with Moon Jae-in and Donald Trump. The visit received a cautious welcome in South Korea, which wants to see the end of nuclear weapons in the Korean peninsula.

There was good news for Samsung in South Korea as the company launched its new S9 and S9+ phones at the World Mobile Congress: the company seems to have regained much of the ground lost when its phones recently took to rather inconveniently exploding…

Unsurprisingly, three of the four major Far Eastern markets were down in March, reflecting concerns over a possible trade war between China and the USA (with China responding by imposing tariffs on US imports over the Easter weekend). China’s Shanghai Composite index fell back 3% to 3,169. The Japanese market was down by a similar amount to close the month at 21,454 while the Hong Kong index was down just 2% to 30,093. The one market to buck the trend and manage a gain during the month – albeit only by 1% – was South Korea. Buoyed by hopes of positive talks with the North the market rose 1% to end the month at 2,446.

Emerging Markets
As we mentioned in the introduction, Vladimir Putin secured another six year term as Russian President, winning 76% of the vote, with his main rival, Alexei Navalny, barred from contesting the election. This came hot on the heels of the tit-for-tat expulsions of ‘diplomats’ after the alleged poisoning of former spy, Sergei Skripal in Salisbury, but that was never going to affect the result of the election. Putin’s share of the vote was up from the 64% he won in 2012. Asked if he would run again in 2024 (by which time he will be 72), Putin replied, “What you are saying is a bit funny. Do you think I will stay here until I am 100 years old? No!” So that confirms it then…

With the West supposedly imposing sanctions, the Russian stock market is more immune than some to threats of a global trade war, and the stock market was down just 1% in March to 2,271. The Indian stock market was hit much harder and fell 4% to end the month at 32,969. The Brazilian market was the only other market of those we cover not to fall in the month, closing up just 12 points at 85,366.

And finally…
There is news that the Church of England will now accept contactless transactions through Apple and Google Pay, albeit only for weddings, christenings and church fetes. Donations via contactless to the collection plate are still being trialled. “It may take too long,” said a Church spokesman. “The old ways could still be the best.”

…A sentiment that was probably echoed by Kentucky Fried Chicken. We wrote about the problems of KFC last month: how the bargain bucket became the empty bucket after they jilted long time food delivery partner Bidvest for the sultry charms of DHL.

Like a middle-aged man admitting the truth after a mid-life crisis, KFC have now repented their error and begged Bidvest for forgiveness. A new agreement has been reached and at least 350 of KFC’s 900 restaurants can look forward to what Bidvest promise will be a “seamless return.”

Rather less seamless may be the foreheads of Apple engineers at their new $5bn (£3.6bn) headquarters in Cupertino. Apple had a problem: according to Reuters, “if engineers had to adjust their gait when entering the new building they risked distraction from their work.”

The solution at the 175,000 acre campus, which is home to 13,000 employees, was doors with completely flat thresholds and massive glass windows with extra transparency and whiteness. So transparent and white that “when the walls have been cleaned you can’t even tell they are there.”

Which was bad news for Apple’s super-intelligent engineers as they walked along lost in thought. Several Apple employees have been left bloody and concussed after walking into the transparent doors and windows. The San Francisco Chronicle has published transcripts of three 911 calls made after Apple employees injured themselves in this way. “We did recognise that this could be a problem, especially after the doors and windows had been cleaned,” said an Apple spokesman.

If only Apple had shown the insight of the Church of England…