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Markets, October into November: Chill winds

, November 8, 2018, 0 Comments

Markets-marketexpress-inMarkets were the lead story in October and definitely not a happy one. Instability, Rotation, Fed tightening, Trumpian unorthodoxy, Italian recalcitrance, Brexit ineptitude and, of course, the all-conquering overvalued FAANGs: all of them have contributed to the difficult markets over the last few months and most look set to continue for some time yet.

Nevertheless, I cannot help feeling that the correction in US equities will prove to be salutary for markets in general and does not forebode a new crash in 2019. I say this on the basis that more attention is at last being given to political and economic developments together with a new focus on fundamental valuations. Accordingly, not a case of ‘onwards and upwards’ but ‘keep your head while others are losing theirs’.

Perhaps the most unsettling development in 2018 is the spreading and intensification of divisions between and within governments, regions, neighbourhoods, ethnic and religious groups and even generations. The root cause appears to be a feeling of unfairness in the sharing of the fruits of globalisation in the boom years and of the pain in bad years (notably since 2008). Consensuses, collaborations, treaties and laws are increasingly being questioned if not broken.

This is grist to the mill of autocratic and corrupt regimes but makes democratic leadership especially difficult when charismatic figures such as Trump, Salvini, and Bolsonaro are in full cry. Whether or not one agrees with their policies there are economic and social consequences if and when challengers of the existing order are elected. Citizens may gain or lose their jobs, pay more or less tax, feel like spending more or less while companies have to cope with the impact on sales networks, supply chains and operating costs. Investors, in turn, have to anticipate the future behaviour of governments, citizens and businesses and it is fair to say that many of them are currently rather unsettled by trade disputes and sanctions, the future of both the EU and EA (Mr Salvini will exploit Mrs Merkel’s weakness to push to the limit before blinking) and, more parochially, Brexit and/or a Corbyn-led government.

Despite President Trump’s displeasure over the Fed’s ‘normalising’ the main impact appears so far to be on Wall Street rather than Main Street. The US jobs market is buoyant with more vacancies than unemployed people, wages are higher , consumers are spending and business remains generally confident. Fed Chair Powell is a welcome change from his hubristic predecessors in his wish to restore ‘normal’ levels of interest rates and back off from printing money unrestrainedly. Ironically, it may be the rest of the global economy that brings Fortress America down to earth and Mr Trump may himself have been a major instigator by picking fights everywhere and, even more ironically, that it may be the Fed that has to bail out the rest of the world as it did in the Great Financial Crisis.

China has been struggling for some time, despite the wondrous official data of recent years, to make the switch from manufacturing and exporting to domestic consumption. There is no doubt that China’s authorities, especially the PBoC, are smart but you have to be extraordinarily smart to manage centrally an economy of such size, diversity and dynamism.

Mr Abe may be Mr Xi’s new best friend but Japan’s economy is still drifting and the BoJ cannot fix it. The latest batch of data from the Euro Area and national economies is almost entirely soft. German consumers are still happy enough but they are not spending and their employers are not exporting as much as they used to. Consumers are less happy in other countries and also not spending.

Normality in the Euro Area is close to being an oxymoron and the ECB can do little other than keep the Italian and Spanish bond markets ticking over and is muttering about stopping doing even that. Meanwhile, the Bank of England is reduced to watching impatiently Brexit ‘progress’ along with much of UK business, which is in danger of lapsing into stasis. Consumer Confidence could be worse but wobbling house prices may yet undermine the few sectors that are operating normally.

The age of Central Banks’ largesse (and hubris) is over but they were never really in control even if they were once supposed to be in charge. This is a reality RBI Governor Urjit Patel seems to share with Mr Powell and it seems somewhat unfair that both are under fire from their political masters.