Joachimsthal (or Jáchymvok, as it has been known since 1945) in Bohemia doesn’t feature much in financial news these days, but its linguistic progeny certainly does. The ‘thaler’ (from the word ‘Joachimsthal’) was launched as the currency of Bohemia exactly 500 years ago, providing the etymological root of the word ‘dollar’. After winning their independence, the American Revolutionaries were hardly going to stick with ‘pound’.
Investors in 2018, on the other hand, seem to prefer sterling, which on Thursday even broke through $1.43. The continuing dollar sell-off last week pushed the greenback down to its lowest level (against the usual six-currency basket) in three years. There was much debate over why the dollar should be falling in value just when both Treasury yields and US interest rates are rising, but the proximate cause appeared to be political.
The World Economic Forum is supposed to provide an opportunity for leaders in politics and business to hobnob expensively and reaffirm a vague commitment to liberal internationalism – the economic kind. Last year Xi Jinping, the Chinese president, fulfilled the globalisation brief in his speech; as this year did Narendra Modi, India’s prime minister. Yet at Davos, the one sure-fire way of stealing the show is to buck the globalist trend.
The US certainly began by leaning that way. Steve Mnuchin, the trade secretary, came out in favour of a weaker dollar, before defending a much tougher policy stance in trade relations. “This is not about protectionism,” said Mnuchin. “This is about free and fair reciprocal trade.” His speech came hard on the heels of an announcement by the White House that the US was imposing tariffs on imported washing machines and solar cells, with more expected to follow.
“What we’re seeing is not only India but also China being expansionist and trying to broaden their dealings with the rest of the world,” said Chris Ralph, Chief Investment Officer at St. James’s Place. “Meanwhile, the Trump administration is putting up tariffs against industries outside their country and that’s resulting in a more closed society. But obviously the US as an economy is big enough to trade with itself and so doesn’t need such big links with the external world.”
On Friday, it was the turn of the president himself to address the Alpine gathering. Expectations were not high, which made the assembled crowd all the more delighted to hear Donald Trump talk about a US that was “open for business” and ready to trade with the world, albeit on “fair” terms. He even contradicted Mnuchin by speaking in favour of a strong dollar.
The US growth rate remained strong (if marginally less so) in the fourth quarter, while the IMF raised its 2018 global growth forecast to 3.9%. (It was notable that 57% of the 1,300 CEOs polled in Davos last week expect global growth to rise this year.) Corporate earnings rose in the US, as energy, industrials, technology and consumer discretionary companies all overshot expectations: Sky, Netflix and Caterpillar were highlights. Retail figures came out strong. Amazon’s own US sales accounted for 4% of those figures, and last week the online giant opened its first checkout-free physical store.
Apple, the world’s largest listing, has had less to celebrate in 2018. Ireland’s slowness to recover €13 billion in unpaid taxes from the company is costing Apple a further $1.7 billion (due to new US rules on foreign earnings), adding to the $38 billion it must pay for combined foreign earnings. Yet analysts are still forecasting that Apple will report its best quarterly earnings ever for the fourth quarter. The S&P 500 ended up 0.28% at another record close. At 399 days and counting, the index has now clocked its longest period without a 5% one-day drop since records began in 1928.
Putting on the Pounds
As the greenback swooned, so sterling soared to its highest level against the dollar since the referendum, helped by a surprise dip in unemployment, as well as by rising gilt yields. The rally in sentiment towards the UK was, conversely, felt in a fall in the FTSE 100, where non-UK companies suffered in sterling terms. The index ended the week down 0.36%. Consumer staples companies suffered particularly hard, among them BAT and Reckitt Benckiser, as retail data revealed a December sales dip, and only a mildly positive January. Only the miners, such as Anglo American, gained ground, thanks in part to rising commodity prices; the same trend helped UK dividends in 2017 towards their fastest growth rate in five years. Meanwhile, the UK economy grew 0.5% in the fourth quarter – not a bad rate, although 2017 as a whole was the economy’s worst year for growth since 2012. The IMF downgraded the UK’s 2019 growth prospects.
In the Commons, Theresa May faced the possible prospect of a Eurosceptic rebellion over her plan for a two-year EU exit transition period. Jacob Rees-Mogg, a leading Conservative Eurosceptic, warned that a transition period would involve the UK being a “vassal state”, and advised instead extending membership by two years. On Thursday, Philip Hammond was reprimanded by the prime minister’s office after he called for the UK to diverge only “very modestly” from the EU after Brexit. The next day, David Davis published details of the government’s plan for the transition period, and said the UK wanted to retain a say over EU law-making during transition. Meanwhile, a survey published by the Confederation of British Industry showed that most companies are preparing for a no-deal Brexit, and Mark Carney, Governor of the Bank of England, told Davos that UK rate decisions would depend on Brexit negotiations.
The government is facing pressure in other areas too – not least in funding. The current NHS winter crisis has already attracted plenty of calls for extra money. Last week, the foreign secretary, who famously promised an extra £350 million a week for a post-Brexit NHS, called publicly for the prime minister to increase funding for the service. Asked about the request, the chancellor’s opening statement was suitably territorial: “Boris Johnson is the foreign secretary.”
Chancellors are, of course, forever on the hunt to increase revenue and cut costs. Last week’s news that savers withdrew £5.4 billion using pension freedoms in 2017 can therefore hardly have passed Hammond’s attention, as the figure was £1 billion more than in the previous year. Whether all those taking advantage of the opportunity have the expertise to protect their financial futures – and avoid the usual tax and planning pitfalls – is another question.
It also emerged last week that the current cost to government of pensions tax relief for employers was £950 million higher in 2016/17 than originally estimated. There is no immediate political agenda to chip away at pension tax relief but, when economic conditions worsen or budgets start to deteriorate, chancellors are capable of moving quickly.
Draghi(ng) his feet
One of the regions to have effected the most impressive recovery in recent months has been the eurozone. Yet growth brings its own pressures, and those were plainly apparent in the minutes (published last week) of the December meeting of the ECB. While Mario Draghi is reluctant to increase the pace of the Bank’s withdrawal from quantitative easing, it seems many of his fellow board members have a strong sense of urgency. Some even want him to name an end date for the programme – a risk he is unlikely to take. A rising euro helped push the Eurofirst 300 down 0.36% for the week.
Meanwhile, in Berlin the SPD voted to approve coalition talks with Angela Merkel’s centre-right party, but only by a relatively narrow margin. The SPD members will still have a final vote on the coalition agreement in the coming weeks.
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