March Market Commentary
Not the election of Donald Trump, not the US/China trade dispute. Not even Brexit. In all the time we have been writing this Monthly Bulletin, no single issue has so completely dominated a month’s news – or threatened to have such serious consequences – as the outbreak of Coronavirus in China.
That was how we started the Bulletin in February 2020. Exactly two years later, you could delete the last few words, insert ‘Russia’s invasion of Ukraine’ and the same introduction would be equally valid. Perhaps even more so.
Ukraine is a thread which runs through this month’s Bulletin. It directly impacts the sections on Europe and Emerging Markets and stock markets all around the world were hit by the initial shock of Vladimir Putin’s decision. Clients have been understandably worried, and many have contacted us.
We have therefore added a special section on the events in Ukraine to this month’s Bulletin. It was written at 3pm on Tuesday March 1st. We hope you’ll understand that the practicalities of getting the Bulletin to you mean some specific comments may be outdated by the time you read it. More so than in any other month, every comment we make should be read with the ‘at the time of writing’ caveat in mind.
Unsurprisingly, most of the stock markets we cover in the Bulletin were down in the month, although some did make gains and the UK’s FTSE-100 index held its ground. As always, let’s look at all the detail, beginning with our special section on Ukraine.
The first three weeks of February were full of stories about the Russian build-up on Ukraine’s border and speculation about the possibility of an invasion.
As everyone reading this Bulletin will now know, all the grim predictions were borne out. On February 24th – almost eight years to the day after it began the invasion of Crimea – Russia invaded Ukraine. World stock markets fell sharply on the news, although, as we will see below, some recovered lost ground and the greatest damage (in percentage terms) was done to the Russian market, which remained closed on Monday February 28th and Tuesday March 1st. The price of oil went in the opposite direction, rising about $100 a barrel, inevitably meaning higher petrol prices.
Many clients phoned or e-mailed us, asking what the invasion meant for their savings and investments. At the time of writing, stock markets appear to be keeping their nerve. The international condemnation of Russia grows every day. The United Nations Security Council passed a resolution condemning the Russian action: perhaps significantly both China and India abstained in that vote.
Readers will be aware that large numbers of countries have closed their air space to Russian aircraft and a raft of sanctions have been – and will be – imposed. In retaliation, Russia has said it will impose sanctions of its own and, most worryingly, put its nuclear forces on the second of four stages of readiness.
One of the many sanctions has been the exclusion of Russian banks from SWIFT (evidenced on Monday as Russians were unable to pay their Netflix and Spotify subscriptions).
Several clients have asked us what SWIFT is and why it is important. Let us try and answer that. SWIFT stands for [the] Society for Worldwide Interbank Financial Telecommunication. Headquartered in Belgium, it serves as an intermediary and executor of financial transactions between banks worldwide. So ‘kicking Russia out of SWIFT’ – as was immediately demanded – will have serious consequences.
However, it should be noted that Russia does have an alternative to SWIFT, known as SPFS – [the] System for Transfer of Financial Messages. The system was developed by the Russian Central Bank after the Crimea invasion in 2014 and is used by Russia to trade with China, India and other countries.
‘Kicking Russia out of SWIFT’ could mean that smaller countries still wanting to trade with Russia would be forced to use SPFS – and ultimately move more of their trade away from the West towards the Russia/China/India trading bloc. China has a similar system, known as CIPS, which stands for the Cross-Border Inter-Bank Payments System.
As we write on Tuesday afternoon, the grim news is that a 40-mile long convoy of Russian troops and equipment is heading towards Ukraine’s capital Kyiv. Fierce fighting is going on in other major cities, Russia appears to be bombing indiscriminately and, according to US Secretary of State Antony Blinken, “human rights abuses are mounting by the hour”.
Our thoughts are with the people of Ukraine, and any of our clients who have family or friends in the country.
House prices had a good start to the month in the UK, with Nationwide reporting that the housing market had enjoyed its strongest start to the year since 2004, with the average cost of a house 11.2% higher than last year at £255,556.
Enjoying a rather less successful start to the month were Prime Minister Boris Johnson – hit by a wave of resignations at No. 10 in the wake of the ‘Partygate scandal – and Chancellor Rishi Sunak.
The Chancellor came in for widespread criticism over ‘astronomic’ levels of Covid loan fraud: £4.3bn has already been written off and you suspect that the final bill for the taxpayer will be far, far higher. There will also be defaults, with some estimates suggesting that as much as £20bn will be lost to companies unable to pay back their loans. City AM, for example, gloomily reported that ‘most UK hospitality firms are on the brink of collapse’.
Despite all this, February had its share of good news, chief amongst which was the news that the UK economy had rebounded with growth of 7.5% in 2021, despite falling back in December due to the Omicron variant. It was the fastest rate of growth since 1941 – albeit after a fall of 9.4% in 2020 – with Rishi Sunak saying the economy had been “remarkably resilient”. The Office for National Statistics reported that the number of people on UK payrolls rose by 100,000 between December and January to 29.5m, with City AM saying that demand for office space was once again ‘soaring’.
The Department of Trade announced that the UK had moved into the second and final phase of accession to join the CPTPP free trade area, an £8.4tn trade bloc. The UK could apparently be a member of the bloc by the end of the year.
What of the less good news? UK inflation – fuelled by rising clothing costs – reached 5.5% in January, up from 5.4% in December and the fastest rate of growth for 30 years. In a bid to keep a lid on inflation, the Bank of England increased the base rate to 0.5% – although four of the nine members of the Monetary Policy Committee voted for an immediate increase to 0.75%.
Rather than inflation, though, it was increases in the cost of energy prices that were on most people’s minds. Very clearly energy prices are going to rise: it was announced that the cap on energy prices will rise by £693 from April, but given the current situation in Ukraine, there must surely be further increases in store. Bank of England Governor Andrew Bailey (as you’ll see below, a man who didn’t have the best of months) said that ‘life won’t get any easier until 2023’.
The UK’s beleaguered high street enjoyed a temporary reprieve in January as retail volumes increased by 1.9% after a 4% drop in December: but later in the month it was revealed that 17,000 chain store shops had closed in 2021.
Russia’s invasion of Ukraine saw £77bn wiped off the value of FTSE-100 stocks on Thursday 24th as the market had its worst day since June 2020. However, by the end of the month, the FTSE had dropped just six points, closing February at 7,458. The pound ended the month trading at $1.3407, unchanged in percentage terms against the dollar.
The month in Europe started with some prescient rumblings. Approval for the Nord Stream 2 gas pipeline was put on hold, with the EU ‘doing everything it can to ensure that Russia cannot use natural gas as a weapon’.
At the time of writing, approval for Nord Stream 2 is suspended indefinitely, but that represents a huge potential problem for Europe. Almost a quarter of the EU’s petroleum oil imports come from Russia, but the proportion of gas is significantly higher at between 40% and 50%, depending on which report you read. (The balance largely comes from Norway and Algeria.)
Wholesale prices of gas have been rising sharply of late, and former Russian President Dimitri Medvedev was quick to point out that they could rise even further in the very near future.
Away from the conflict for a moment, the Italian parliament re-elected Sergio Mattarella as President, in a move widely seen as opting for the status quo and preserving the country’s pro-EU stance.
The EU continued its onslaught on ‘big tech’ with suggestions that agreement could be reached as early as April as it looks to clamp down on companies such as Google and Apple. The rules – proposed by EU anti-trust chief Margarethe Vestager – have led to suggestions that Facebook could stop operating in Europe. As we report below, even without the EU threats, the company did not enjoy the best February on record.
February wasn’t a great month for Credit Suisse either, as a huge data leak revealed the hidden wealth of several clients of the bank. Data on 18,000 accounts holding more than $100bn (£74.5bn) was leaked, amid suggestions that some clients had been involved in drug trafficking and money laundering.
That was not the end of the banking sector’s problems. We have commented above on the Russian banks being excluded from SWIFT.
However, it is generally accepted that Russian banks owe European banks around $50bn (£37bn). Monday 28th saw sharp falls in several European banks’ share prices over fears that exposed lenders could also be hit by the sanctions. Banks in Italy and Austria are generally held to be most vulnerable.
Both the major European stock markets were down in the month, with Germany’s DAX index falling 7% to 14,461. The French stock market dropped back by 5% to close the month at 6,659.
There was plenty of bad news to start the month in the US, with Goldman Sachs predicting ‘four to five rate rises’ in the coming year, and cutting its growth forecast for both the first quarter and the full year. The ‘Atlanta Fed’ (more correctly, the Federal Reserve Bank of Atlanta) forecast that the US economy would grow by only 0.1% in the first quarter.
That was shortly followed by the news that the US national debt – which has tripled since 2010 – had reached $30tn. That is equivalent to £22.4tn and, for most of us, is a number that’s simply too big to comprehend.
The ‘triple whammy’ was completed when the pundits gloomily agreed that the January payroll figures “would be a bloodbath”. There were confident predictions that the US economy would only have added 133,000 jobs in the month.
…Which just shows what the ‘experts’ know. The US economy added 467,000 jobs as it shrugged off the Omicron variant. The unemployment rate did inch up from 3.9% to 4% but that was due to more people looking for work.
This news came as the Association for Advancing Automation (A3 as it likes to be called) announced that 2021 was a record year for robots joining the American workforce. A3 said that companies across the US spent $2bn (£1.49bn) acquiring 40,000 robots. To save you doing the maths, that’s $50,000 (£37,000) per robot.
Mark Zuckerberg, boss of Facebook, may not have been looking for work, but he was certainly looking for an answer, as the company saw the first ever fall in Daily Active Users in its 18-year history. That led to the company stock market value dropping by $230bn (£171bn) in one day, a record for a US company. Fortunately, Mr Zuckerberg found the answer he was looking for, duly deciding that it was all TikTok’s fault.
Back in the ‘old economy’, Ford announced that it was to spend up to $20bn (£14.9bn) accelerating its move to the ‘new economy.’ The company says it will spend the money on speeding up the switch to electric vehicles, with CEO Jim Farley declaring that Ford “wants to challenge Tesla’s dominance in EVs.”
In keeping with the general trend, Wall Street was down in February. The Dow Jones index fell 4% to 33,893 whilst the more broadly based S&P500 index fell 3% to close the month at 4,374.
February was – for once – a relatively quiet month in the Far Eastern section of the Bulletin. There has long been criticism of China – especially from the previous occupant of the White House – for its policy of keeping the yuan artificially low, thereby making its exports more competitive. It was the same story in February: with China fixing the yuan much lower than analysts had been expecting, in a move widely seen as a bid to boost an economy which has been flagging over recent months.
We have commented above on Russia and China’s alternatives to SWIFT. China is also pressing ahead with its digital yuan. Concerns were expressed in the US that the digital currency could ultimately be used as a surveillance tool.
There were also worries that China could be building a significant lead over the West in sectors such as artificial intelligence and machine learning, with China markedly increasing its research output in this area. According to one study, China surpassed the combined AI/ML research of all the major European countries combined as long ago as 2008.
But will it still be current leader Xi Jinping overseeing that growing dominance in AI? Xi came to power in March 2013, with the Constitution at that time stipulating that the president could serve no more than two consecutive terms. That term limit was removed in 2018, leaving most observers to conclude that Xi would be ‘president for life’.
Recently, a 40,000-word article criticising Xi’s mistakes was allowed to go viral in China, and doubts are now starting to emerge about a third term for Xi. The decision on his future will be made – or rubber stamped – at this autumn’s Party Congress.
Japan reached an agreement with the US on removing the Trump-era tariffs on around 1.25m metric tonnes of steel imports a year. The move is aimed at eliminating ‘unfair practices’ in the global steel market which is – inevitably – dominated by China.
Even in the Far East, though, the Russian invasion had the final word. Japan’s former Prime Minister Shinzo Abe suggested that, given global tensions, the country should start ‘nuclear sharing’ discussions with the US.
On the region’s stock markets, China’s Shanghai Composite index took no notice of the invasion, rising 3% to close the month at 3,462. The South Korean index was also up, gaining 1% to 2,699. Japan’s Nikkei Dow followed the general trend by falling 2% to 26,527 while the market in Hong Kong was down 5% to 22,713.
Regular readers of the Bulletin will know that the three markets we cover in this section are India, Russia and Brazil. As Russia launched its invasion of Ukraine, the Moscow stock market dropped dramatically in the face of the likely sanctions. Having ended January at 3,530, the index closed Friday February 25th at 2,470 – down 30% on January 31st.
As we have noted above, the Moscow stock market was closed on Monday and is also closed on Tuesday March 1st with the trading suspended due to the ‘emerging situation’.
The rouble also fell sharply against all major currencies, with the Bank of Russia more than doubling the interest rate from 9.5% to 20% in a bid to support the country.
Elsewhere in Emerging Markets, it was once again a story of digital currencies, with India’s finance minister announcing that the country will launch a digital version of the rupee as early as this year. As we have mentioned above, China is already trialling the digital yuan.
Mind you, the Indian finance minister has more on her plate than the launch of a digital currency. Although the country’s unemployment rate fell to 6.57% in January, it remains higher than other emerging economies. The country is now aiming to create 6m jobs over the next five years as it battles the problem of the so-called ‘nowhere generation’ of young people.
Inevitably, the month ended with more fallout from the invasion. It was reported that India was exploring a way to set up a payment mechanism with Russia to soften the knock-on effect of any Western sanctions. In particular, the Government is concerned that supplies of fertiliser could be disrupted by sanctions, threatening India’s enormous farming sector.
The Indian stock market ended the month down 3% at 56,247. In Brazil – where the President Jair Bolsonaro has spoken of Brazil and Russia as “practically brother nations” – the market was up by 1% to end the month at 113,142.
While the news about Ukraine has rightly dominated this Bulletin, you’ll be pleased to hear that February did – like all months – have its lighter side.
Bakery and takeaway chain Greggs has often featured in ‘And finally’ and they were to the fore again as they announced a fashion link-up with Primark. More details will be announced ‘nearer to launch date’, but apparently a hoodie will be available with ‘it’s a pastry thing’ written along one arm. We doubt that many clients will be able to resist…
Staying in the bakery department, we’ve previously highlighted the long-running spat between M&S and Aldi over the Colin the Caterpillar cake (or Cuthbert the Caterpillar in Aldi’s case). The two companies have now reached an out-of-court settlement: the details are confidential, but it is strongly rumoured that Cuthbert may be having the bakery equivalent of plastic surgery.
Also very nearly in need of something to conceal his identity was Andrew Bailey, Governor of the Bank of England, who called on workers to show restraint in their demands for pay rises. Mr Bailey earns £575,000 a year and was swiftly dubbed the ‘plank of England’ by the Daily Star.
Still, on a salary like that, Mr Bailey should still be able to afford a few jars of Marmite, the savoury spread invented by German scientist Justus von Liebig in 1902. Unilever – which also makes Ben and Jerry’s ice cream and Hellman’s mayonnaise – said it was facing £2.95bn of extra costs in 2022, and Marmite lovers would have to pay their share.
But however many jars of Marmite Mr Bailey can afford, 74 customers of Northern Powergrid could almost have afforded a lot more. Following the power cuts caused by Storm Arwen, Northern Powergrid sent out compensation cheques – with customers in Halifax and Newcastle spectacularly winning the postcode lottery. One gentleman in West Yorkshire received a cheque for £135 – and duly complained that it wasn’t enough.
Going the extra mile for customer service, Northern Powergrid promptly sent him a cheque for £2.3tn. Our hero declined to cash it. “I thought it wasn’t realistic,” he said. With insight like that Andrew Bailey’s successor won’t be hard to find…