21 Aug 2017
Back at the coal face
My last missive before disappearing off on holiday took the line that there were insufficient warning signs flashing to suggest that a major market correction was imminent. As I write this morning – and I will admit to a little bit of selectivity in my choice of data – my Bloomberg screen tells me that since the 24th July the MSCI World Index, when measured in sterling, has registered a change of… 0.00%. So quite a good time to be away. However, that’s not to say there weren’t a couple of scares in the interim, and the underlying mood of the market feels nervous despite, or perhaps because of, the fact that most equity indices remain close to all-time highs.
Certainly the pound’s steady decline in August has given a bit of a boost to UK-based investors, with the same MSCI World Index falling around 1.25% over the period when measured in US dollars, but this still represents a limited setback. The pound itself remains under pressure from a mixture of factors: Brexit uncertainty; a persistently large trade deficit; weaker-than-expected inflation; the lower likelihood of an imminent interest rate rise from the Bank of England being the main ones. Heading the other way has been the euro, benefitting from continued economic recovery on the Continent as well as speculation that the European Central Bank might rein in its monetary largesse.
Indeed, ECB monetary policy is what everyone is getting excited about ahead of this week’s Jackson Hole Economic Symposium, the annual gathering of central bankers hosted by the Federal Reserve Bank of Kansas City. Markets love having something to look forward to, and it helps to fill acres of print and hours of airtime. However, in reality, I would contend that Jackson Hole has failed to deliver a major surprise to markets since 2010, when then Federal Reserve chairman Ben Bernanke hinted very broadly at a new round of Quantitative Easing, the catalyst for a near-30% rally in US equities over the next six months. I find it very hard to believe that Mario Draghi of the ECB will use this platform to signal a policy shift that could have a much more negative effect on financial assets. That’s not to say there won’t be some very interesting speeches and presentations, but I am expecting more theory and less action.
|FTSE 100 Weekly Winners|
|Standard Life Aberdeen||5.1%|
|London Stock Exchange Group||3.8%|
|FTSE 100 Weekly Losers|
|Babcock International Group||-3.1%|
|Marks and Spencer Group||-3.1%|
|Direct Line Insurance Group||-2.9%|
The two main things that have been getting under the market’s skin recently are both connected to President Trump. Apparently the mere mention of his name at the Edinburgh Festival guarantees a chuckle for stand-up comedians, but his influence is no laughing matter for investors. His double-act with North Korea’s President Kim Jong-un threatens the world with nuclear holocaust, a potential event so extreme that it falls well outside the normal parameters of asset allocation decisions. Indeed, it would be so catastrophic that pricing in even a small probability of it happening would have such a depressing effect on risk assets that investors appear to have concluded that it’s hardly worth bothering. That might seem like a cavalier approach, but ultimately most people conclude that, despite appearances to the contrary, both Trump and Kim are rational actors and will acknowledge the destructive impact of the possible outcome, much as was guaranteed by the threat of Mutually Assured Destruction during the Cold War.
The other Trump-inspired concern at the moment is the lack of policy-making at the White House combined with the ongoing power struggles amongst the staff. Markets were able to take some solace from the fact that Gary Cohn, the ex-Goldman Sachs Chief Economic Advisor, won out over Chief Strategist Steve Bannon. Cohn, a possible replacement for Janet Yellen as chair of the Federal Reserve, is seen as one of the few reliable actors in the White House soap opera, and the fact that he remains in situ provides at least some hope that progress will be made on measures such as tax reforms. However, the disbanding of Trump’s business advisory council last week illustrates the low ebb of industry’s relationship with the President. Lack of economic momentum remains a real risk, because, as we have highlighted previously, there is limited scope for further valuation upside. T here is also the not insignificant fact that the US government will breach its currently agreed debt ceiling sometime in the autumn, threatening a shut down if no new agreement is reached. While we would expect something to be thrashed out in the end, as it always has been during previous episodes, the mood is so ugly at the moment that the US could be peering over a fiscal cliff again before Christmas.
These elements of uncertainty have, perhaps, been part of the inspiration behind the extraordinary rise of Bitcoin over the summer. While I was away it rose a mind-boggling 54%! Bitcoin deserves its own Weekly Digest, which I promise to produce in the next few weeks, but my current observation is that the main reason it is going up is because it is going up! A handy acronym to describe the mindset is FOMO – Fear of Missing Out – and it is interesting to note the increasing amount of enquiries we are receiving about it and how to invest in it. For now, there are no suitable vehicles (save the US-listed Bitcoin Investment Trust, which trades at an 80% premium to the underlying price!), and we are certainly not yet considering it in our asset allocation decisions.
Finally, on this day in 1893, France became the first country to introduce registration for motor vehicles. This week, which novel by Mark Twain features a total solar eclipse?
Year-to-date market performance
FTSE 100 Index, past 12 months
Past performance is no indicator of future performance
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