December Market Commentary
War? Soaring energy and food prices? Covid surging in China and people taking to the streets in protest? Worries about a prolonged recession here in the UK?
In November, there was plenty for world stock markets to worry about – but, as we will see below, the markets largely shrugged aside the concerns, with some making significant gains.
The problems that we have written about for virtually all of this year didn’t go away – but they didn’t get any worse either – and world stock markets seemed to breathe a collective sigh of relief.
The month started with the G20 leaders meeting in Bali. Joe Biden and Xi Jinping had a long meeting, with the leaders of the world’s two biggest economies committing – at least for now – to ‘no new cold war.’
The big story of the month did come from China – but it had nothing to do with tensions with the USA. As we have written previously, Xi Jinping has now been confirmed as ruler of China for a third, five year term and remains committed to his ‘zero Covid’ policy. But the country has poor rates of vaccination – especially among the elderly – and it was inevitable that Covid would spike in China at some point.
This happened in November, and was met with another wave of lockdowns. This time, though, the lockdowns sparked protests in major cities across the country, with protesters holding up blank sheets of A4 to signify their dissatisfaction (and forcing one major paper manufacturer to deny that it had removed all A4 from sale).
As we will see in the Far East section, the lockdowns coincided with disappointing economic data from China. There are several worrying trends in international trade – October was the quietest month since 2009 for the port of Los Angeles: international shipping rates are falling sharply – but, as above, the stock markets on which we report in the Bulletin largely ignored them in November.
November also brought us the Autumn Statement from Jeremy Hunt, the UK’s fourth Chancellor of the year. Whatever 2023 brings, it surely cannot be another year with four different Chancellors of the Exchequer.
As always, let’s look at all the details and the accompanying figures.
Jeremy Hunt was appointed as Chancellor on October 14th. Almost his first act as Chancellor was to publicly humiliate his then-boss Liz Truss as he fed her ‘plan for growth’ into the parliamentary shredder. When Truss was forced to resign later in the month Rishi Sunak became the UK’s third PM of the year and confirmed Hunt as Chancellor. You suspect that is where the changes will end: the Conservative Party seems to have lost its taste for rebellion.
Hunt duly rose to present his Autumn Statement – a Budget in all but name – on 17th November, stating that his priorities were “stability, growth and the public services” and making a commitment to “rebuild our economy.”
Much has been written about the Statement, but clearly it marked a complete reversal of Kwasi Kwarteng’s ‘fiscal event’ in the space of just eight weeks. Whatever your views on the speech, one thing is crystal clear: we will all be paying more tax. If Truss and Kwarteng had abolished a tax, it seemed that Hunt brought it back – and increased it.
Whether the Budget will be a success remains to be seen. If the only yardstick is the strength of the pound then – as we will see below – he has already succeeded. If the yardstick is winning the next General Election, then the ever-growing list of Tory MPs who are standing down tells a less rosy picture…
Away from Westminster, the words ‘inflation’ and ‘recession’ continued to be at the forefront of the economic news.
The month started with the news that thanks to rises in basic commodities like tea bags, milk and sugar, food inflation had ‘soared’ to a record 11.6% in October. ‘Hold my beer,’ said November. By the end of the month increases in meat, eggs and coffee had pushed the figure to 12.4%.
In the middle of the month, the Office for National Statistics reported that overall inflation had reached a 41-year high of 11.1%. The good news was that analysts believe it may have peaked at that level. The bad? City AM revealed that people in the UK are paying ‘the highest electricity bills in the world.’
The Bank of England is, of course, charged with keeping inflation under control. ‘UK braces for fresh interest rate hike,’ said the headlines at the start of the month. The Bank duly delivered, lifting rates by 0.75% to 3%, the highest rise since 1989 and taking rates to their highest level since 2008. With inflation in double-figures, the Bank also signalled that more rate rises were likely to come.
Not satisfied with raising interest rates, the Bank of England warned that the UK faces the longest recession since records began, with the economy facing a ‘two-year slump’ and unemployment ‘nearly doubling’ by 2025. Official figures confirmed that the UK economy had contracted by 0.2% in the third quarter of the year.
Was there any light amid the gloom from the nation’s high streets? Not much. Sainsbury’s did say it would be hiring 18,000 staff for Christmas, but saw profits dip by 8% to £340m for the six months to September 17th, as it was forced to absorb rising costs. Marks and Spencer warned of a ‘gathering storm’ – but profits at Lidl quadrupled to £41m – up from £9.8m in the previous year – after its ambitious expansion.
…But if you really want to talk about profits, look no further than BP. ‘It’s an ill wind’ as your grandmother used to say, and on the back of surging energy prices, BP duly reported profits of $8.2bn (£6.7bn) for the three months to September – more than double its profits for the same period last year. The company said it expects to pay $800m (£652m) in windfall taxes this year: calls for even higher taxes on windfall profits were not hard to find.
Despite the worries about inflation and a recession, the FTSE 100 index of leading shares took comfort in the possibility of inflation having peaked (and, as we will see below, on promising numbers on inflation from the US). It closed November up 7% at 7,573. The pound finished the month up 5% at $1.2048: the days of it nearly touching parity with the dollar after Kwasi Kwarteng’s speech seem a long time ago…
Two major stories dominated the Ukraine section of the Bulletin in November – a section that now seems almost certain to record a grim anniversary in February next year.
Ever since the war started, there has always been a fear that it could spread, with NATO being drawn into direct confrontation with Russia. In November, it briefly looked like that could happen when missiles landed on a Polish village. Although the first reaction was to blame Russia, it now appears more likely that the missiles were fired by Ukraine in self-defence: for now, at least, a wider conflict has been averted.
The other – and in the long-term, more important – story was Russia’s continuing attacks on Ukraine’s power supplies. At the beginning of the month, the BBC was reporting that ‘energy terrorism’ had left 4.5m Ukrainians without power. By the end of November, the headline had changed to ‘6m without power as winter bites,’ with NATO chief Jens Stoltenberg claiming that Russia is ‘using winter as a weapon of war.’
The situation is grim, as the online publication Spiked reported:
“Blackouts had until recently been managed in a rolling, coordinated fashion. Now they are affecting whole cities, like Kyiv and Lviv, without warning. It is not just electricity that is down. Running water and even mobile phone reception is being shut off across Ukraine. Temperatures are already hovering around freezing. Many of Ukraine’s millions of city-dwellers rely on communal heating for their apartment blocks [and] now face the very real prospect of whole heating systems collapsing.”
The article points out that Ukraine is simply running out of parts to repair its power grid – much of which relied on Russian stock. With at least three months of a harsh winter to come, it is small wonder that Kyiv mayor Vitali Klitschko is openly discussing the evacuation of Ukraine’s capital.
From the front line in Ukraine to an office building in Frankfurt. The European Central Bank ended October by raising its benchmark deposit rate by 0.75%. This took the rate – which was below zero as recently as July – up to 1.5%, the first time the Bank has made two consecutive rate rises of that size. That said, the move was exactly in line with market expectations.
Away from interest rates, most of the news in this section of the Bulletin concerned Germany.
The month started with Chancellor Olaf Scholz making his first overseas visit. The chosen destination was Beijing. Scholz was only on the ground for 11 hours, meeting Xi Jinping and making points on the war in Ukraine and curbing Russian aggression. He was, however, accompanied by a team of top CEOs: CNN had little doubt about the real meaning of the visit: ‘business with the world’s second-largest economy must continue.’
We’ve written several times in the Bulletin about the potential impact of the war in Ukraine on Germany, given that it imports so much oil and gas from Russia. The country has, however, been frantically – and expensively – buying gas on the world’s markets and Scholz was able to tell German MPs that “energy security for this winter is guaranteed.”
German engineers have also built – in record time – the country’s first import terminal for liquified natural gas (LNG). The final part of the strategy has been to extend the life of three nuclear power plants, and – which must sit uncomfortably with Scholz’s coalition partners, the Greens – re-open five power plants which burn lignite, a low-grade coal.
November ended with the EU agreeing in principle to a price cap on Russian oil – as it seeks to limit Putin’s revenues and curb the cost of living crisis – but with member states unable to agree on the exact pricing level. At the time of writing the cap was due to come into force on December 5th.
Along with the majority of the stock markets we cover, November was a good month for Germany’s DAX index, which rose 9% to 14,397. The market in France was up 8% to end the month at 6,739.
It says much for modern news gathering that there is a war in Ukraine – but that November saw far more column inches devoted to Elon Musk’s travails at Twitter. As you will remember, the world’s richest man recently completed his $44bn (£36bn) takeover of the company. It already seems clear that it will go down as one of the most expensive mistakes in business history or – if Musk can reverse the ‘massive’ drop in revenues – one of the biggest successes.
November saw threats to fire half the staff – dubbed ‘Red Wedding Day’ in homage to Game of Thrones – advertisers leaving and dark warnings of bankruptcy. Musk wasn’t alone among the billionaires though: Mark Zuckerberg was also forced to fire 11,000 staff at Meta (formerly Facebook) as the company continued to pour billions into the metaverse. Amazon was also reported to be preparing job cuts among office staff with sales slowing due to worries about a possible economic downturn.
In the wider US economy, 261,000 jobs were added in October, described by analysts as a ‘solid’ performance despite higher borrowing costs weighing on the economy. The unemployment rate rose very slightly to 3.7%.
Those borrowing costs are likely to go still higher, with November seeing the Federal Reserve raise interest rates by another 0.75%. This marked the sixth consecutive rise this year, a cycle not seen in the US since the inflation-fighting days of the early 1980s. Unsurprisingly, mortgage demand was reported to be at ‘Depression levels.’
There was, though, some good news in the middle of the month. Stock markets around the world went higher as figures for October showed that inflation in the US had risen by just 0.4% – well below analysts’ expectations. Encouragingly, ‘core inflation,’ a measure of underlying price pressures in the economy, was up by just 0.3%. The month also ended with good news for retailers: ‘Cyber Monday’ (the Monday after Thanksgiving) saw record sales of $11.3bn (£9.27bn) and tentative hopes that consumers might be more willing to spend.
November in the US also brought the mid-term elections. It had been widely predicted that the Democrats would get a ‘drubbing’ and be swamped by the Republican Party’s red wave. In the event, the red wave proved to be little more than a trickle: currently Republicans control Congress while Democrats control the Senate.
Who was largely held to be to blame for the Republicans’ disappointing results? Fingers were pointed in two directions: the party’s uncompromising stance on absorption, and the campaigning of one Donald J Trump, with candidates endorsed by the former President not doing as well as expected. This did not, though, stop Trump declaring that he will be running for President in 2024.
As you would expect from the above, November was a good month for US stock markets. The Dow Jones index was up 6% to close at 34,590: the more broadly-based S&P500 index rose 5% to 4,080.
As we mentioned in the introduction, the big story of the month was the spike in Covid infections in China and the consequent lockdowns.
The month started with a week-long lockdown around the world’s largest iPhone factory in the central city of Zhengzhou: this could significantly impact production ahead of Christmas, with Foxconn producing four of Apple’s five latest handsets.
Similar lockdowns were seen in other major cities across China, with the leadership seemingly set to ‘double-down’ on its present Covid strategy – ‘dynamic clearing’ as it is rather ominously called.
Away from Covid, there were some contradictory stories from China in November. Virtually all the economic data was disappointing. The latest data from Chinese customs showed that exports and imports had both contracted in October. The falls were only small (0.3% and 0.7% respectively) but it was the first time both had contracted since May 2020 as inflation and rising interest rates curbed global demand.
Demand for loans was down in China – always a sign of a weakening economy – and the Purchasing Managers’ Index was down to 48, from the 49.2 recorded in October, showing that factory activity is falling. Retail sales figures were also disappointing.
The Government was quick to blame all the economic ills on the Covid restrictions – as it has consistently done. Plenty of commentators, though, suggested that the real reason for China’s problems was the continuing slump in the housing and property markets.
Despite all this, a report from Goldman suggested China had been ‘quietly if aggressively’ ramping up imports of crude oil by as much as 2.5m barrels per day (bpd) in anticipation of an eventual full re-opening of its economy, which Goldman believes will be in the second quarter of next year.
It is to be hoped so – the month ended with widespread dissatisfaction over the lockdowns continuing. Protests spread from Beijing to Shanghai, Nanjing and several other major cities.
There was also bad economic news in Japan, as the rising cost of living hit consumer spending growth. Gross Domestic Product fell by 1.2% in the third quarter of the year, as people reined in spending and the weak Yen made imports more expensive.
Despite the gloom though, the region’s stock markets enjoyed an excellent month. Hong Kong – rebounding from recent sharp falls – put in a stellar performance with the Hang Seng Index climbing 27% to 18,597. China’s Shanghai Composite Index ignored Covid worries and rose 9% to 3,151 while the market in South Korea rose 8% to 2,473. Japan’s Nikkei Dow index was much more restrained, gaining just 1% to close the month at 27,969.
Another month in the Emerging Markets section where most of the headlines were about Russia, with Bloomberg forecasting that the country will face a ‘prolonged recession.’ Confidential documents apparently contradict the upbeat messages coming out of the Kremlin, with worries about key economic sectors facing a sharp drop in output and further damage done by a potential ‘brain drain.’
The drop in output may already be happening, with Russian news agency TASS accepting that oil production could drop to 9m bpd in December as the EU embargo comes into force. This is apparently 14% down on the June to October production average.
Unsurprisingly, rumours of unrest in the Kremlin – and a possible coup against Vladimir Putin – continued to swirl. If you choose to believe the rumours, Putin has ‘stashed’ £12.3bn in cash and gold in ‘underground warehouses’ in the Central African Republic. We shall see…
One thing that may not be needed in India is an underground warehouse, as the country’s central bank rolled out the second phase of testing a digital rupee. After successfully running a pilot programme at the wholesale level, the Reserve Bank of India has announced it will test the digital rupee in a retail setting.
November also brought news that India is investing heavily in a bid to become one of the world’s leading countries in both the production and use of drones. “Drones can be significant creators of employment and economic growth,” said one official. “India has the potential to become a global drone hub by 2030.”
November also, of course, saw the start of the World Cup in Qatar. It didn’t make headlines on the sports pages, but Qatar Energy signed the longest term contract in the history of the liquid natural gas industry, agreeing to supply LNG to Chinese state energy giant Sinopec for 27 years.
What of the three stock markets we cover in this section of the Bulletin? The Indian market had a good month, rising 4% to 63,100. Despite Bloomberg’s warning of an impending recession, the Russian market was unchanged in percentage terms, gaining just eight points to 2,175. Brazil’s was the only market we cover which fell in November, dropping back by 3% to end the month at 112,486.
Another interesting month for the ‘And finally…’ section of the Bulletin. Not vintage, but November turned in a solid performance.
We begin at the Six Bells pub in Bridgend where landlady Michelle Knight has taken to pinning her energy bills to the wall, in a bid to explain to regulars why she’s had to cut down on the number of beers available. Fewer barrels apparently equals a more efficient cooling system.
Definitely in need of a drink – especially after they knocked Premier League Brentford out of the Carabao Cup – were League Two strugglers Gillingham, who had to walk to the ground. “We got to a quarter of a mile from Chiswick Roundabout and got stuck,” said boss Neil Harris. He revealed that the players had to “climb over barriers and help each other over fences” as they walked the final part of their journey. Presumably that will now be a regular part of the Gills pre-match routine…
Sadly no longer watching any sport is former Pennsylvania State Representative Anthony ‘Tony’ DeLuca. Mr DeLuca unfortunately died on October 9th at the age of 85, but that didn’t stop him being re-elected in the recent mid-term elections in the US. ‘We’re incredibly saddened by the loss of Tony,’ tweeted the Pennsylvania Democrats, ‘But we’re proud to see that voters continue to show their confidence in him.’
A week later, a poll revealed which nation’s voters believe their country is run by politicians with far less ability than Mr DeLuca. ‘Do you believe your country is on the wrong track?’ was the question. ‘Yes’ was the answer from 86% of Polish voters, closely followed by the UK (83%) and Belgium at 81%. The countries where the public are most happy with their politicians? India, Switzerland and Mexico.
We leave you this month with some reflections on scale. In the early years of the Bulletin – and not that long ago – the default unit of currency was the million. Company profits were in millions: so was Government borrowing. Then – as we have consistently seen this year – the default unit became the billion, especially when the Government was borrowing money. Now we’re seeing the emergence of the trillion. Climate reparations are being asked for in trillions. The US national debt is estimated at $31tn (£26tn). Columnists speculate on whether Jeff Bezos or Elon Musk will be the planet’s first trillionaire.
‘Trillion’ sounds just a couple of notches up from ‘million.’ But consider this: a million seconds in just over 11 days. A billion seconds is just over 31 years. A trillion seconds is 31,700 years. Now apply that scale to money. It makes you think, doesn’t it…