The Federal Reserve’s apparent confirmation that a rate cut is on the cards helped markets to break a psychological barrier this week. The S&P 500 popped its head above the 3,000 mark for the first time on Wednesday after Jerome Powell, the Fed’s chairman, said “uncertainties about the outlook have increased”.
As so often in recent years, bad news for the economy is good news for the stock market. The uncertainties to which Mr Powell referred included lacklustre global growth, quiescent inflation and the outcome of the Brexit process. These, combined with the impact of President Trump’s trade wars, are likely to have tipped the Fed’s hand into cutting interest rates when the Federal Open Market Committee meets at the end of the month. Investors seem to think so; although the S&P 500 finished a fraction of a point off 3,000 on Thursday, it was up 0.3% for the first four days of the week.
Some of the economic gloom to which Mr Powell alluded was evident in Europe. The European Commission revised down its Eurozone growth forecasts for GDP in 2020, by a tenth of a percentage point to 1.4%. It also reduced its inflation forecasts for both 2019 and 2020 by the same amount, to 1.3%.
Germany now appears to be edging towards a manufacturing recession, with events in June and May’s 0.3% growth in industrial production unlikely to offset the hefty contraction in April.
The UK goes its own way
Many global markets failed to share Wall Street’s exuberance this week. The FTSE World Europe Ex UK index had lost 1.0% by Thursday’s close. And in the UK, the FTSE 100 was down 0.6%, extending a loss-making run over six sessions straight. Healthcare stocks were prominent fallers on Thursday after the US government retreated from a proposal to lower medicine prices; this would have been positive for the pharmaceuticals sector because it would have affected middlemen rather than the drug-makers themselves. Healthcare companies now face the prospect of being directly affected by new price-cutting proposals.
Economic data in the UK was fairly robust, however. The UK economy expanded by 0.3% in May, and industrial production was up 1.4% from April and up 0.9% from a year ago. The country’s trade deficit fell to £2.3 billion. According to the Office for National Statistics, the boost to GDP was largely due to car manufacturers restarting production after a temporary shutdown timed to coincide with the original Brexit date.
Japan and Korea get chippy
In China, meanwhile, the CSI 300 had fallen 2.8% by Thursday’s close. Japan’s Topix was down too, although hopes of a US rate cut had prompted a substantial rebound by the end of the week.
In a twist to the trade-war tale, the Japanese government has restricted the export to South Korea of three key materials needed for semiconductor production (fluorinated polyamides, hydrogen fluoride and photoresists, since you ask).
Korean manufacturers of smartphones and memory chips have three months’ supply on hand, but a protracted dispute will push costs up (and profits down). The restrictions have not gone down well with South Korea; its trade ministry has accused Japan of breaching the World Trade Organisation’s regulations. Perhaps surprisingly, the attractions of using trade as an instrument of foreign policy seem to be increasing beyond America’s shores.
This week’s corporate news made for some grim reading on the jobs front. Deutsche Bank announced the loss of 18,000 jobs as it exited equity trading and hived off €75 billion of its assets into a distressed-asset unit (or ‘bad bank’). That represents more than a quarter of its total assets. Deutsche puts the cost of its restructuring at €7.4 billion and expects to post a sizeable loss in its second-quarter results. It is disappointing (and costly to the European economy) that, 10 years after US banks cleaned out their stables following the financial crisis, the major European banks are still there with their shovels.
Meanwhile, steel giant ArcelorMittal announced that its South African operation is to cut 2,000 jobs. And plane and train manufacturer Bombardier is laying off around half of the workforce at its Thunder Bay railway-car plant in Ontario – amounting to 550 redundancies.
It was left to Pepsi to inject a little fizz into the glum corporate headlines. The drinks-maker beat expectations in its second-quarter earnings, with strong performance from its snack and sparkling-water segments.
And finally …
Pets can cause problems with the neighbours. It’s easy to understand how quibbles about smells, hair and ‘leavings’ can escalate - and especially if they come on an elephantine scale.
So spare a thought for an eighteenth-century Edinburgh baker who had to contend not with a pooch, poodle or parakeet, but with a prodigious pachyderm. A recently discovered letter from one Adam Kerr to Edinburgh’s Guild Court describes how his bakery was inundated with water and dung in 1705. The source? A full-grown Indian elephant that his Dutch neighbour, Abraham Sever, kept upstairs in Fishmarket Close, just off the Royal Mile.
Perhaps Kerr’s complaint got the Guild Court to acknowledge the elephant in the room. The next year, it packed its trunk and embarked on a tour of the north of Scotland. On the return leg, however, the poor beast made it no further than Broughty Ferry, near Dundee, where it died in a ditch.