What next for UK markets?
Last week brought no shortage of drama. The general election produced an emphatic victory for Boris Johnson’s Conservative party, pumping up sterling and stocks, and denting UK government bonds — all signs of relief and risk-seeking now that some political clarity is at hand.
Now, fund managers are trying to figure out whether these market moves have further to run. Much depends on whether Mr Johnson uses his parliamentary majority to force through a divorce from the EU without a deal, or whether he faces down the hardline slice of his party that would prefer to leave without a safety net.
“European equities and UK equities have seen very substantial outflows over the last 18 months,” noted Niall Gallagher, investment director for European equities at GAM. “This has been down to a pervasive fear of politics and uncertainty driven by Brexit and more recently by the threat of Labour winning the UK election on a hard-left, anti-business platform. We now expect business confidence in the UK to bounce back with knock-on effects into Europe.”
Other analysts suggested that $1.35 is as good as it gets for sterling for now, given that a Conservative victory had been largely anticipated, and the currency is unlikely to break above that initial post-election high.
In the short term, investors will now get back to basics, including a focus on what has been a glum run of economic data. They also have the Bank of England’s rate-setting announcement to contend with on Thursday. Katie Martin
Can Japanese buybacks keep up the pace?
2019 has been a stunningly prolific year for share buybacks by corporate Japan — a boom that, for some, has become a proxy for improving attention to shareholder interests by companies and greater attention to stewardship by investors. The big question this week is whether December will, as seems likely, end the year with yet another record smashed.
The combination of shareholder engagement by foreign funds and gradually rising pressure from domestic investors has caused multiple records to fall. Buybacks announced between January and November were up 112 per cent year on year.
The monthly average of buyback announcements in the first six months of the year was $6bn. During the first four months of the second half, that average grew to $6.4bn. In November, not generally a huge buyback month, they hit $4.3bn, putting the level, with one month still to go, 105 per cent above the total buybacks for the 2018 calendar year.
We are half way into December and the total for the current month has already surpassed $4.6bn. This week will be critical: if buybacks continue to pour in over the next five trading sessions of the year, that may convince foreign investors to continue what has been a steady return to the Japanese market over recent weeks.
For much of this year, foreign investors — a group that represents about half of daily trading volume in Japanese equities — were net sellers. That has been reversed, in large part because of the buyback boom. If the momentum behind buybacks remains, so too might the foreign buy-in and the prospect that the Nikkei 225 will hold on to gains to remain above 23,000 when the year wraps up. Leo Lewis
How long can the US consumer prop up the economy?
The US consumer may still be humming along, but other facets of the world’s largest economy are struggling, particularly the manufacturing sector.
On Monday, the latest preliminary figures for the composite purchasing managers’ index (PMI), which tracks both services and manufacturing sectors, will be released by IHS Markit. The data point will give economists a small glimpse into just how healthy the US economy is and how long it can avoid grinding to a halt.
While immediate recession fears have ebbed somewhat, led in part by the fact that a favourite bond market recession indicator is no longer flashing red, there are growing concerns that the robust US consumer will no longer be able to shoulder the economy in the face of slowing business investment.
“US exports are unlikely to contribute much to the growth outlook. That leaves the consumer sector,” warned Stephen Gallagher, chief US economist at Société Générale. “Normally powerful, consumers are now facing slowing job growth. When, and if, consumer spending slows, recessionary forces would be unleashed.”
For this reason, and given the fact that he sees “limited scope” for fiscal or monetary measures to be enacted and stave off a downturn, Mr Gallagher forecasts that the US will enter a “mild” recession in the spring of 2020, with growth declining for two quarters. Colby Smith
