Market Commentary August 2022

Dafferns Wealth

As many readers know, this Bulletin is written from notes we compile throughout the month. One of the most interesting aspects of this is the occasional feeling of ‘was that really this month’ as we start to write the Bulletin.

So it was this month. The race to replace Boris Johnson seems to have been going on forever. In fact it was only on Tuesday July 5th that Chancellor Rishi Sunak resigned, citing ‘fundamental differences’ with Johnson over the economy. With Sajid Javid resigning on the same day, Boris Johnson’s downfall became inevitable, and so the race to succeed him began.

Sunak was the early favourite – and he appears to have been well-prepared, with the ReadyforRishi domain registered in December last year – but while the race will continue for the next few weeks, he is widely expected to lose out to Liz Truss, the current Foreign Secretary and the MP for South West Norfolk.

Away from Westminster, the war in Ukraine continued, inflation maintained its upward path and – if you like your glass half-empty – there were plenty of gloomy forecasts.

Goldman suggested that the world was ‘on the brink of a rather severe recession’. The International Monetary Fund echoed this, saying that ‘the world may soon be teetering on the edge of a recession’, with growth stalling in the UK, US, China and Europe. The IMF cut its 2023 forecast for UK growth to just 0.5%, down from the 1.2% it had predicted in April. Small wonder that the CBI is calling on whoever is our next PM to prioritise tax cuts and business growth.

July also brought us the sad death of former Japanese Prime Minister Shinzo Abe, shot while out campaigning. The month ended with the war of words between China and the US escalating further, with US House Speaker Nancy Pelosi seemingly determined to visit Taiwan.

Despite the gloom, July was an excellent month for world stock markets. Only two of the markets we cover in the Bulletin were down in the month, with some showing significant gains. As always, let’s look at both the news and the numbers in more detail.

July didn’t get off to the best of starts in the UK. Business bosses were reported to be at their most pessimistic since the start of the pandemic: entrepreneur James Dyson cast doubt on the UK’s stated ambition to be a ‘science superpower’ and as the cost of living continued to rise, consumer confidence was ‘back down to lockdown levels’.

Meanwhile, a report on the BBC said that more than 7,000 pubs had closed in the last ten years – and having battled their way through the pandemic, those still open were struggling to cope with ‘rising energy costs and soaring prices’.

As we report elsewhere in the Bulletin, inflation continued to do its worst. The UK was no exception, with price rises for fuel, eggs and milk pushing inflation to 9.4% in June, up from the 9.1% recorded in May. These increases are pushing Government borrowing costs to new levels: interest paid by the Government in June was £19.4bn – a new record. Total borrowing in the month was £22.9bn, up £4.1bn from a year earlier, according to figures from the Office for National Statistics.

The Bank of England duly ‘vowed’ to bring inflation under control, but right now, its target rate of 2% looks like a very small dot on the horizon. We report below on a larger-than-expected rate rise in the US, and few people would bet against the next rise in the UK being 0.5% rather than the ‘traditional’ 0.25%.

Rising inflation and interest rates will obviously continue to pour fuel onto the cost-of-living fire, with ‘Brits facing a painful spike in energy bills’, according to a report in City AM. They suggested that up to £25bn of discretionary spending could be lost in the ‘cut-back economy’. Inevitably, the subscription economy – which previously delivered everything to your door in exchange for a monthly subscription – will come under real pressure.

Let us find some good news – which wasn’t quite the needle-in-the-haystack you might think. The ONS reported that after shrinking in March and April, the UK economy rebounded in May, growing by 0.5%. Amazon – which was confident of record sales on Prime Day – announced that it was creating 4,000 new jobs in the UK and lithium battery maker AMTE Power announced an investment of £190m to build a new factory in Scotland. The firm cited the UK’s ‘strong heritage of innovation’ as the reason for its choice.

And despite all the tales of queues and delays at the nation’s airports, IAG, the owner of British Airways, posted its first profit since the pandemic. The company made £245m in the second quarter – compared to a loss of £809m in the same period last year – and said it had seen a significant increase in the number of flights and passengers.

As we reported in the introduction, July was generally a good month for world stock markets and the FTSE-100 index of leading shares didn’t disappoint. The FTSE was up 4% to close the month at 7,423. The pound ended July more or less unchanged against the dollar, trading at $1.2176.

The resignation of Boris Johnson – an event apparently mourned in Kyiv and celebrated in Moscow – and the subsequent election for our next Prime Minister took up much of July’s column inches. News about the continuing war in Ukraine was therefore less freely available than in previous months, so let us try and fill in some of the blanks.

The month started with Ukraine claiming that it was accurately targeting Russian command posts in the east of the country, although that didn’t stop the Russian war machine grinding on, with suggestions that Russia may be moving towards a more general mobilisation and ‘expanded’ aims for the war.

In Ukraine, President Zelensky fired his chief prosecutor and security chief, and followed that by ‘firing dozens of officials’ in the security services for ‘treason and collaboration’.

There was some light in the darkness when it was reported that Russia and Ukraine had agreed a deal to allow exports of grain to re-commence – but this was thrown into doubt the very next day following a Russian missile attack on Odessa, which reportedly destroyed a Ukrainian military vessel and a number of US-supplied Harpoon anti-ship missiles.

We have commented previously on Russian looting of grain in Ukraine. July brought reports that it was also looting steel destined for the UK and Europe, with one suggestion that Russia could have stolen steel worth up to £500m that was destined for the UK.

Ever since the Russian tanks rumbled across the Ukraine border on February 24th people have wondered if Vladimir Putin would use gas supplies as a weapon against Europe.

July was the month when the answer appeared to be ‘yes’, with the BBC reporting that ‘Europe prepares for Russia to turn off the gas’. The month ended with Gazprom stopping supplies to Latvia, having earlier reduced its gas supply to Germany. Gas prices jumped, with many German states and cities taking immediate steps to cut consumption. Hanover was one example, turning off the hot water and heating in public buildings, as mayor Belit Onay said the ‘imminent gas shortage’ meant he needed to cut energy consumption by 15%.

Bank UBS suggested that power rationing was ‘inevitable’ in Germany this winter: quite what impact that will have on the German economy – traditionally the economy which drives the rest of Europe – is anybody’s guess. Figures for May showed that Germany had recorded its first trade deficit since 1991: imports climbed 2.7% to over €125bn (£105bn) in the month, giving Germany a trade deficit of €1bn (£840m).

German gas and utility provider Uniper, the largest importer of Russian gas in the country, was reported to be in talks with the government over a €9bn (£7.56bn) bailout.

In financial news, the euro dipped below the dollar for the first time in 20 years, with the European Central Bank’s hesitation in raising interest rates taking much of the blame. The ECB duly raised rates by 0.5% – the first rise for 11 years – as it sought to tackle Eurozone inflation which reached 8.9% in July, up from 8.6% in June.

Unsurprisingly, Brussels cut its forecast for EU growth. While expectations for this year remained unchanged at 2.7%, the European Commission cut its forecast for next year by a full percentage point to 1.5%.

In politics, Italian Premier Mario Draghi offered his resignation, which was rejected by the President. But after a week of turmoil, Mr Draghi finally succeeded in resigning after 18 months in office. Elections will take place this autumn with far-right leader Giorgia Meloni currently being tipped to win.

Despite the worries about inflation, gas supplies, a cold winter – and even colder showers in Hanover – July was a good month for Europe’s two leading stock markets. Germany’s DAX index was up 5% to 13,484: the French market performed even better, gaining 9% to close the month at 6,448.

July was a month when good news was hard to find in the US. The S&P 500 index had closed June at 3,785 – down 20.6% in the first six months of the year, the worst performance in that period since 1970. As we will see below, it did recover a significant amount of the lost ground in July.

The experts were generally anticipating the US adding 268,000 jobs in June, with their fingers firmly crossed that the numbers would be not too strong (stoking up inflation even further), nor too weak, thereby hinting at a recession. In the event, the numbers were on the ‘strong’ side, with the US economy adding 372,000 jobs in June.

The inflation figures arrived a week later, with US inflation at 9.1% in June, the highest figure since November 1981. Rent, new and used cars, motor insurance and medical care led the way, with the inflation figure higher than most economists had expected.

This meant that an interest rate rise was almost inevitable. The dollar duly rose against other countries – as we have mentioned above, taking it above the euro. The interest rate rise arrived at the end of the month with the Federal Reserve lifting rates by 0.75% to a target range of 2.25% to 2.5%.

In company news, Elon Musk was much to the fore. Tesla sales were reported to be ‘booming’ in China, but the world’s richest man pulled out of a deal to buy social media platform Twitter – which must have the lawyers on both sides rubbing their hands.

Netflix said it had lost a million subscribers, Walmart issued a profits warning and AT&T admitted that many customers were struggling to pay their phone bills – all a consequence of the cost of living crisis. Despite this, both Amazon and Apple posted better-than-expected sales figures.

The month ended with the US economy technically going into recession. It shrank by 0.9% in the three months to June, the second successive quarter in which the economy had contracted – the technical definition of a recession.

Wall Street, though, was having none of it. The Dow Jones index gained 7% in July to close at 32,845. The more broadly-based S&P 500 index did even better: it was up by 9% to close the month at 4,130.

Far East
July brought a heatwave to the UK: it also brought one in the Far East – and perhaps gave an indication of the problems countries like Japan and China will face in the future.

The month began with reports that Japan was facing a looming energy crisis, as an economy which is dependent on imports for 90% of its oil and gas battled against a weak local currency, the fallout from the invasion of Ukraine and a heatwave. As Japanese people rushed for the air conditioning, the Washington-based think tank the Centre for Strategic and International Studies said the combination of factors was ‘putting a significant pressure on Japan’s energy security, making this one of the most serious energy crises Japan has had’.

By the end of the month, the same problems were evident in China as a persistent heatwave pushed power demand to record levels in some areas, leading to rolling blackouts. Bloomberg quoted He Yang, director of China’s National Energy Administration, who said increased power consumption would continue into August (traditionally the peak period), with demand already breaking records in July.

The main news in the Far East, though, was the assassination of former Japanese Prime Minister Shinzo Abe, someone we have featured many times in the Bulletin. On the back of Mr Abe’s death, his centre-right party gained a ‘supermajority’ in elections to Japan’s upper house.

In economic news, China’s economy contracted by 2.6% in the 2nd quarter thanks to its zero-Covid policy and the long lockdown in Shanghai. However, at the end of the month, President Xi Jinping – speaking at a meeting of the CCP Politburo – confirmed the policy would remain in place. Wuhan subsequently locked down over 1m people over four cases of Covid.

One of the more interesting developments in China was the ‘homeowners’ revolt’. We have written previously about the problems of the property companies such as Evergrande (which saw its CEO and Head of Finance resign in July) and it was reported that some property companies’ bonds are now trading as low as 35 cents on the dollar.

That is perhaps unsurprising, with Chinese homeowners increasingly refusing to pay their mortgages on properties which remain unfinished long after the due date. In some cases, these protests have turned violent, and there are obvious problems looming for both the banks and the property companies if the trend continues.

Another problem which seems to be brewing is youth unemployment. Previously thought to be the preserve of countries like Greece and Spain, unemployment among 16 to 24-year-olds in Chinese cities has now reached 19.3% – more than twice the comparable rate in the US.

July was a mixed month on the region’s stock markets. Both Japan’s Nikkei Dow index and the market in South Korea were up by 5% to 27,802 and 2,451 respectively. China’s Shanghai Composite index fell 4% to 3,253 while the market in Hong Kong tumbled 8%, to close the month at 20,157.

Emerging Markets
We have detailed Russia’s threats to turn off Europe’s gas supplies above. What July unquestionably brought us was signs of much closer ties between Russia, India and China, with both the latter countries increasing their spending on Russian oil in the March to May period, and India explicitly rejecting a call from the EU and US to boycott Russian oil.

The month also brought a three way meeting in Iran, with Vladimir Putin making his first foray outside Russia since the conflict in Ukraine started. He met the Presidents of Iran and Turkey and, according to reports, there were three items on the agenda: oil and gas; wheat and grain – and missiles and drones.

It was reported that Iran’s oil revenues had increased by 580% in the first four months of its year (which begins on March 21st), thanks to Russia’s invasion and the sanctions on Russia. Despite the sanctions, you suspect that whatever oil and gas Russia doesn’t sell to Europe will find a home in India or China – with Putin continuing to benefit from the increased prices.

As regular readers will know, we have written previously about Russia and China – backed by Brazil, India and South Africa – launching a global reserve currency to challenge the dollar. As Russia and China continued to strengthen their economic ties, Vladimir Putin announced: “The issue of creating an international reserve currency based on a basket of our [the BRICS countries] currencies is being worked out.”

On the stock markets, July was a very good month for India, with the market there rising 9% to close the month at 57,570. The Brazilian market regained some of the recently-lost ground with a 5% rise to 103,165. The Russian market, in contrast, barely moved, gaining just nine points to end the month at 2,214.

And finally…
Those of you that know your Shakespeare will remember the lines from Hamlet: ‘There are more things in Heaven and Earth, Horatio/Than are dreamt of in your philosophy.’

So it is that the ‘And finally…’ section ignites the boosters this month and heads off into deep space, and the apparently ‘colossal, untapped’ wealth waiting for us in the asteroids.

The asteroid ‘Davida’, which has a diameter of 326km, has apparently been identified as the most valuable asteroid in the belt between Mars and Jupiter, with a resource value estimated at very nearly 27 quintillion dollars. In simple numbers, the value of Davida is $26,990,000,000,000,000,000 – with the asteroid containing nickel, iron, cobalt, nitrogen, ammonia and hydrogen.

Before we all rush off to the asteroid belt to beat the current cost of living crisis there is, of course, a warning. Astronomers have detected a ‘strange and persistent’ radio signal from a galaxy far, far away that appears to be flashing in a pattern similar to a heartbeat. The signal lasts for up to three seconds – which researchers say is around 1,000 times longer than the average radio signal from space. Maybe we’re not the only ones with designs on Davida.

Coming down to earth with a bump were the franchisees of Vkusno i Tochka (Tasty and that’s it) which has taken over the Russian restaurants formerly known as McDonald’s.

They’ve run out of fries: a shortage of the right type of potatoes means that there will be no fries until the autumn. So if you’d like a burger, it may be tasty, but that’s very much it as far as the fries are concerned…

Definitely not coming down to earth (for a long time, you suspect) were the England women’s football team. As most readers will know, they beat Germany 2-1 to win the Euros. They also emphatically gave us the best headline of the month.

Retailers reported that they were fast running out of Lionesses’ football shirts as the final approached, with thousands of fans left disappointed. Or as City AM put it, ‘the kit hits the fan…’

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