In all the time we’ve been writing these market commentaries it’s difficult to remember a more turbulent month than October 2014.
Throughout the summer we have been writing about events in the Ukraine and the worries that conflict posed for Europe. Fortunately we now have a ceasefire in the region – and Russia and the Ukraine have just concluded a deal (brokered by the EU) for supplies of gas to resume. Just as well, last week the temperature in Kiev dropped to five degrees and 60% of Government buildings were without any heat.
But as the dust has settled in the Ukraine, so the focus of world discontent has moved elsewhere. Anyone who’s flicked on a news bulletin in the past month will know about the continuing struggle against the Islamic State (IS) and the battle for the town of Kobani. What’s already becoming clear is that the battle against IS will not be over quickly – military strategists are already talking of ‘years not months’ – and stock markets are naturally worrying about the cost of a sustained conflict.
Markets in the Far East were also unnerved by the pro-Democracy protests in Hong Kong. Again these seem to have settled into an uneasy calm for the time being, but with the election of a new Chief Executive not due until 2017, this will not be the last we hear of the Umbrella Revolution.
Leaving conflict aside, world stock markets were also unsettled by a very downbeat assessment of the world economic outlook from the International Monetary Fund (IMF). Their report was published at the beginning of October, with the IMF cutting its forecasts for global economic growth which, it warned, would be “weak and uneven.”
Chief IMF economist Olivier Blanchard stated that the recovery was becoming “more country specific” and there were sharp downgrades for Russia, the Middle East, Japan and the Eurozone, with the Japanese stock market falling by 1.4% on the day the report was published.
Speaking to the BBC after the IMF had published its report, Chancellor George Osborne had warned that the UK economy was bound to be affected by the slowdown in Europe. “The UK,” he said, “is not immune to what is happening on the continent.”
Absolutely correct – and when you throw in the political uncertainty following the Scottish referendum and Clacton by-election results, it was little wonder that the UK market faced a nervous month.
And yet the month started well for the UK. Growth in the second quarter was revised upwards to 0.9% and the jobless total fell to its 2008 level. Inflation fell to 1.2% – a five year low – and economists predicted that any interest rate rise would now be in the second half of 2015.
Then the wheels started to fall off… A report by the Ernst & Young Item Club said that UK growth in 2015 was likely to fall to 2.4% – below the 3.1% expected for this year. George Osborne also found himself faced with falling tax revenues: more jobs are being created but they’re low-paid jobs – and more people are becoming self-employed. The net result was that Government borrowing rose to £11.8bn in September.
The Chancellor duly gave a stark message to his cabinet colleagues: ‘don’t expect any traditional tax giveaways before the 2015 Election: there’s no money left.’ With UKIP now confidently expected to win the Rochester & Strood by election it was not the news the Tory party wanted.
UK company news was rather depressing in October: payday loans lender Wonga was forced to write off £220m of debts having been caught out sending bogus debt collection letters. Having been caught out overstating its profits, staff at Tesco head office found they could look forward to a visit from the Serious Fraud Office. Warren Buffet unceremoniously dumped 245m shares in the supermarket chain, calling his investment “a huge mistake.” Meanwhile Lloyds banking group prepared to sack 9,000 staff – 1/10th of their workforce.
Having started October at 6,623 the FTSE-100 index was down around the 6,350 mark in the middle of the month, hit by worries from Europe and the IMF’s report. However it recovered well, and closed the month at 6,546 – down just 1% in October.
For months there has been one section of this bulletin you could always rely on. Whatever happened in the rest of the world there was always a paragraph about the success of the German economy. Oh dear…
Fears of a recession in Europe grew sharply as German economic output in August dropped 4% – the biggest fall since 2009. Economists had been expecting a fall of around 1.5% due to the later school holidays, but the 4% figure took everyone by surprise.
German exports were also down, falling by 5.8%, whilst imports fell by 1.3%. This meant that Germany still produced its regulation trade surplus, although it shrank to €17.5bn. Even Germany, it seems, is not immune to the slowdown in the economies of its trading partners, with ING economist Carsten Brzeski warning that, “The economy needs a small miracle in September to avoid a recession.”
The other worrying news – in a “haven’t-we-been-here-before way” – was the financial strength of several European banks. The Guardian reported that checks by the European Central Bank and the European Banking Authority showed that 25 banks needed more money, with nine in Italy failing the ‘stress test.’ Apparently one in five banks across Europe failed the test, “leaving a €25bn black hole in the continent’s banking system.”
Not surprisingly both of the major European stock markets fell in October: the German DAX index was down 2% at 9,327 while the French CAC-40 index fell by 4% to close the month at 4,233.
In contrast, the news in the United States was largely good, as Chairman of the Federal Reserve Janet Yelland confirmed that the programme of quantitative easing would finally end, after five years and an injection of around $6tn (yes, trillion) into the US economy. The practice of buying bonds would end in October.
Yelland also confirmed the Fed’s commitment to the record low interest rate “for a considerable time.”
It was confirmed that the US economy had grown at 4% in the April to June period and, according to the Federal Reserve, growth was continuing at a ‘modest to moderate’ pace, with gains in consumer spending, manufacturing and commercial construction helping to deliver the growth – as well as ‘modest’ wage growth.
In company news, Google saw a fall in its third quarter profits – down 5% on the same period a year ago to a paltry $2.8bn. One of the key figures for Google – the average cost per click – was down by 2%: analysts were disappointed and the shares duly clicked down by 3%.
No such fall for the Dow Jones index, which finished the month at 17,390 for a gain of 2%.
The news that everyone was waiting for in October was the growth figures for the Chinese economy – and in keeping with so much else in October, they were disappointing.
GDP in the third quarter rose by 7.3% – ahead of the expected 7.2% but below the previous year’s figure of 7.5%. This was the Chinese economy’s weakest performance since March 2009. With the economy growing at its slowest pace since the global financial crisis there was inevitable speculation that the government might need to introduce stimulus measures.
Naturally this news had a depressing effect on the region’s economies, as did the announcement that Samsung’s quarterly profits had fallen by 60% as sales of the Galaxy Smartphone slowed down. Nevertheless is was still a surprise when the Bank of Japan announced what the Wall Street Journal described as a ‘massive and unprecedented’ stimulus package at the end of the month, confirming it would pump trillions of Yen into the market. It seems that the Bank’s board was divided on the issue, but it looks like the economic demands of Prime Minister Shinzo Abe are holding sway – for the moment.
The Japanese stock market responded positively to the news, rallying to close the month 1% higher at 16,414. The Shanghai Composite index was 2% higher at 2,420 but the biggest gainer was the Hong Kong market, up 5% in October at 23,998. The only faller was South Korea, dragged down by the bad news from Samsung, where the market fell 3% to finish the month at 1,964.
It was another good month for the Indian stock market, which confirmed its status as this year’s star performer, gaining 5% in the month to close at 27,866 – now up 32% in 2014. The Russian market was also up by 5% as the cessation of hostilities with the Ukraine saw it regain much of the ground lost through the summer: it closed October at 1,488.
The Brazilian market managed a smaller rise – up 1% to 54,628 – as President Dilma Rousseff was re-elected for a new term. Not everyone was pleased with result though, and marchers were quickly on the streets of Sao Paulo, protesting against her government’s alleged continued role in potentially allowing or enabling corruption.
Many of you will have seen that the EU has asked the UK for an extra €2.1bn contribution to help out – among others – the beleaguered economies of Germany and France.
But maybe it’s not so surprising when you see that the UK is busy taking over some of the traditional industries of those two countries – specifically wine and beer production.
In the year to March 31st 46 new wine producers registered with the taxman, bringing the number in the UK to 135. Meanwhile there has also been a sharp rise in the number of beer producers – particularly craft breweries – which is up by 188% in the past five years.
Clearly the French and German economies are buckling under such intense competition, so it’s small wonder that we’re having to help them out. But rest assured: we are delighted to confirm that everyone in this office has stayed soberly at their desk, playing no part whatsoever in stimulating the demand for wine and beer…