November market commentary

August started with US Speaker Nancy Pelosi visiting Taiwan. We comment on China’s reaction below and we also describe the environmental and economic challenges facing the country.

With domestic crises brewing at home, some commentators have noted the convenience of an external crisis for the CCP (Chinese Communist Party). “The position of the Chinese government and people on Taiwan is consistent,” President Xi Jinping said in a phone call to Joe Biden. “Those who play with fire will perish by it.” Taiwan claimed that China’s military exercises were simulating a ‘full attack’ on the island and China/US relations do not appear likely to improve any time soon. “Hope is not a strategy,” one commentator warned.

The headlines in August continued to be dominated by possible energy shortages and inflation. ‘Winter is coming’ as they frequently warned on Game of Thrones and there were certainly plenty of grim predictions. Fortunately the month ended with some light (possibly) at the end of the tunnel, with gas prices falling as Germany appeared to be on course to meet its storage targets.

In the UK August was the last full month of Boris Johnson’s Premiership, now replaced by Liz Truss who beat Rishi Sunak in the final ballot of members.

The month ended with a crisis of ‘unimaginable proportions’ as the monsoon rains and melting glaciers brought widespread flooding to Pakistan. At the time of writing a third of the country Pakistan which is bigger than both France and Spain was estimated to be under water.

As always, let’s look at all the news in more detail…

UK

Boris Johnson entered 10 Downing Street in July 2019 and in December of that year secured an 80 seat Commons majority on a promise to ‘get Brexit done’. No-one then would have forecast a global pandemic or Johnson leaving Downing Street just over three years later and Liz Truss arrives in No10 to face a raft of problems.

At its meeting on August 3rd, the Bank of England’s Monetary Policy Committee voted by 8-1 to raise interest rates by 0.5% to 1.75%, the biggest increase for 27 years. Worryingly it warned that the UK was likely to fall into recession this year and that inflation was now “set to go above 13%”. Governor Andrew Bailey acknowledged the impact this would have but said that if the Bank didn’t raise rates inflation would be “even worse.” The inflation figure for July was 10.1%, up from 9.4% in June and the highest rate for some 40 years, driving what the BBC described as “the fastest fall in real pay on record”. Despite this, most analysts agreed that the Bank of England will raise rates again, with some forecasters expecting inflation to hit 18% next year. With sanctions on Russia pushing trade with the country to a new low, figures showed that the UK’s trade deficit for the second quarter was £27.9bn; a new record.

The Office for National Statistics confirmed that the economy had contracted by 0.1% in Q2. Unsurprisingly UK consumer confidence dropped to a new low, so there’ll be plenty of problems for the new PM to address. Not least of these will be those facing the UK’s small businesses, which are reported to be ‘scrapping hiring plans’ in the face of economic uncertainty. To compound the problem many companies, especially in the hospitality sector, are saying they are likely to go out of business if the planned rises in energy costs go ahead. The month ended with Ofgem announcing an 80% rise in the energy cap.

Was there any light in the gloom? UK car production grew for the third consecutive month. The heatwave boosted UK retail and helped it to recover some of the ground lost earlier in the year and store closures are now running at their lowest level for seven years.

In the circumstances the UK’s FTSE-100 index of leading shares didn’t fare too badly. Like most of the markets we cover in the Bulletin worries about inflation and energy pushed it lower, but it was only down by 2%, closing the month at 7,284. The pound was firmly in ‘good news for exporters, bad news for holidaymakers’ territory, falling 5% against the dollar to end August trading at $1.1610.

Ukraine

We reported last month on the deal struck with Russia to allow grain ships to leave port, and the month started with the first ship leaving the southern port of Odesa. A week later four more ships carrying grain and sunflower oil left Ukrainian ports through the UN-brokered safe maritime corridor. The departures  from Odesa and Chornomorsk gave rise to hopes of export stability, with millions in countries that are dependent on Ukraine’s exports now facing famine conditions. Whether the deal will hold is anybody’s guess.

August brought the long-expected fightback from Ukraine, with explosions hitting Sevastopol in the Crimea and Ukraine beginning its push to take the area around Kherson, one of the first cities to fall to Russia. President Zelensky warned that the war was now entering a “nastier” phase and, as heavy fighting continued around Kherson, defence analyst Michael Clarke commented that the current phase of the war was “make or break for Ukraine’s credibility as an ally worth military backing from the West. Ukraine has to show it can do better than just lose the war slowly. This [the attack on Kherson] is a NATO-style offensive, so it is a clash of military thinking, as well as a clash of arms”. Against this background Boris Johnson visited Ukraine again for the last time as Prime Minister and the UK and Ukraine announced the start of talks over a digital trade agreement.

Europe

August was another month in Europe when the headlines were made by energy supplies or the potential lack of them. It got off to a rather morbid start with Svend-Joerk Sobolewski, the Chairman of Germany’s Cremation Consortium talking of an unprecedented energy crunch in the sector and warning that, “You can’t switch off death”. You suspect that Vladimir Putin may simply have said, “Watch me” and there were similar grim warnings all around Europe. The Swiss police chief openly discussed social unrest from winter fuel shortages. In Poland homeowners were queuing for coal in the middle of August.

If the shortages are as bad as feared the damage to Europe’s economies will be significant. By the end of the 2nd quarter, Germany was only reliant on Russian imports for about a quarter of its gas needs but that quarter is what powers the industry of the EU’s largest economy.

There was some respite at the end of the month, with City AM reporting that gas prices had ‘fallen sharply’ amid reports that Germany was on course to meet its gas storage targets for October but Russia has since shutdown the flow through the Nord Stream 1 pipeline into northern Germany indefinitely. 

There were problems of a different kind in Norway, where the country’s sovereign wealth fund (the state-owned investment fund built up thanks to the country’s oil surpluses) made a record loss of £144bn in the first half of the year. The fund is valued at over a trillion pounds and managed a negative return of 14.4% from January to June, with its technology holdings falling by 28%.

It was a rather more successful period for the French taxman who, using artificial intelligence developed by Google, raised an extra €10m (£8.56m) in revenue by spotting swimming pools which the owners had ‘forgotten’ to declare, thereby avoiding higher property taxes. Having been tested in nine French regions, the AI is unsurprisingly going to be rolled out across the whole country.

So were Europe’s leading stock markets as happy as a French tax collector in August or as gloomy as a German undertaker? Sadly it was the latter. With Germany’s DAX index down 5% to end the month at 12,835. The French market was down by the same percentage, closing at 6,125.

US

We often start the US section of the Bulletin with a report on the previous month’s jobs figure – a longstanding bellwether of the US economy. In July the US added 528,000 jobs, with the unemployment rate falling from 3.6% to 3.5%.

The report from the Labor Department was far stronger than had been expected, with recent data showing the economy continuing to shrink. The consensus forecast had been 250,000 causing some right-wing commentators to question whether the The Biden Administration was ‘massaging’ the figures ahead of the mid-term elections.

There was certainly some gloomy news around. Electric vehicle start-up Rivian laid off 6% of its 14,000 strong workforce. Figures for June showed the US housing market suffering its biggest monthly decline since the 1970s, and the largest single-month increase in homes listed for sale for 12 years. One estimate suggests that 1 in 6 US households are in arrears with their energy bills.

The month had begun with US Speaker Nancy Pelosi’s visit to Taiwan much to the annoyance of the authorities in Beijing who described it as “malicious provocation”. Pelosi offered her “unwavering commitment” to Taiwan’s democracy and by the middle of the month the US and Taiwan had announced formal trade negotiations. One aspect of Pelosi’s trip which went largely unreported was her meeting with the chairman of the Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chip maker and a company on which the US is heavily dependent. In a perfect world the US would like TSMC to establish a manufacturing base in the US – and stop making advanced chips for Chinese companies.

The month ended with reports that The Biden Administration was ready to ignore China’s live-fire exercises following Pelosi’s visit and ramp up arms sales to Taiwan. It will, apparently, ask Congress to approve an estimated $1.1bn (£940m) arms deal that will include 60 anti-ship missiles and 100 air-to-air missiles.

There was some good news for the US on inflation, which cooled more quickly than most experts had predicted thanks to the rise in interest rates. July’s figure was 8.5%, down from 9.1% in the previous month. That said, grocery inflation hit its highest level since 1979, while the ‘food at home’ index which covers cereals and bakery products was up 13.1% from July 2021.

We have commented below on the drought affecting China, and the US was similarly hit. Two-thirds of the country is now estimated to be affected by the drought, as water levels drop to unprecedented lows in the country’s lakes and reservoirs. California is one of the states affected, and its farmers have been forced to abandon tomato fields. The state accounts for 25% of the world’s ketchup production – meaning that the price of your tomato sauce could soon skyrocket.

Definitely not skyrocketing during August was Wall Street. Both the US indices we cover in the bulletin were down by 4%, with the Dow Jones ending August at 31,510 and the more broadly-based S&P 500 closing at 3,955.

Far East

As we have just mentioned, the month started with Nancy Pelosi’s visit to Taiwan and predictable anger from Chinese leaders but, in truth, the Chinese authorities had far more than just Nancy Pelosi to worry about in August.

We have detailed before the problems facing the Chinese property sector in general and Evergrande in particular and August had no sooner started than Evergrande was a billion dollars worse off. The company announced that one of its subsidiaries had been ordered to pay 7.3bn yuan ($1.08bn £930m) for failing to meet its debt obligations. This came two days after the company had outlined plans to restructure its debts; roundly criticised by many commentators for a lack of clarity.

Bloomberg reported that China’s top 100 developers saw new home sales fall almost 40% in July, so the outlook for the property sector is not going to improve any time soon. The malaise wasn’t, though, confined to the property sector. A string of new figures released in the middle of the month showed China’s economy continuing to struggle with the effects of Beijing’s ‘zero-Covid’ policy. Figures for factory output, business investment, consumer spending and youth employment were all disappointing, prompting China’s central bank to launch a 0.1% cut in interest rates to support the economy.

The problems look set to continue with China badly hit by drought in August. Combined with a heatwave, water levels have dropped significantly, forcing Toyota and Contemporary Amperex Technology, the world’s largest battery maker, to close their factories in Sichuan province. With a population of 80m Sichuan is a major manufacturing hub but is heavily reliant on hydropower.

To put some numbers on China’s water crisis, the country uses 10bn barrels of water a day which is roughly 700 times its daily oil consumption but decades of economic and population growth have pushed northern China’s water system to unsustainable levels. According to one report, at the end of 2020 per-capita water supply around the North China Plain was 50% below the UN’s definition of ‘acute water scarcity’. China has clearly acknowledged the problem for some time: in 2003 it launched a ‘South the North’ water transfer project, intended to use water from the Yangtze to replenish the north of the country. Officials in Sichuan have now deployed two giant ‘cloud-seeding’ drones in a bid to stimulate rainfall.

As you might expect with all the problems, China’s Shanghai Composite Index fell back in August, dropping 2% to end the month at 3,202. The Hong Kong index was down by 1% to 19,954 but the markets in Japan and South Korea went in the opposite direction. Both markets ended the month 1% higher, at 28,092 and 2,472 respectively.

Emerging Markets

As regular readers know, the Bulletin is written from the notes we compile through the relevant month. Since Russia invaded Ukraine we have far more notes in this section of the Bulletin, an indication, perhaps, of the increasing role on the world stage of countries like India.

Let’s start there, with news of a record trade deficit. India’s trade deficit for July was $31bn (£26.5bn) as high import prices – driven by global inflation – met falling demand for Indian exports as major economies in the West slowed. We have commented above on the impact of heatwaves and drought, and India could be particularly badly hit. The country is the world’s biggest exporter of rice and the prolonged drought has seen planting areas for the crop decrease by 13%.

Russia is clearly finding the money to continue the war in Ukraine but sanctions are hitting the country’s GDP, with one study quoted in City AM suggesting that the Russian economy was 4% smaller than a year ago. A new report from the Kyiv School of Economics predicted that the Russian economy will shrink by 9.5% for this year as a whole with up to 4m Russians set to lose their jobs. Ukrainian studies on the Russian economy should be taken with a pinch of salt and we should wait to see what the winter will bring.

With Belgium’s Energy Minister warning that Europe faces ‘five or ten awful winters’ without a cap on natural gas prices, Hungary decided to blink first with energy group MOL paying the necessary transit fees to re-start flows of Russian oil. Russia has, apparently, enjoyed a 38% boost to its energy earnings this year, with higher gas and oil prices pushing earnings to $337.5bn (£288bn).

Oil giant Saudi Aramco took one look at Russia’s earnings and simply said “hold my beer” as it reported profits of $48.4bn (£41.4bn) for the second quarter of 2022, a 90% year-on-year increase and, according to Bloomberg, the biggest quarterly profit for any company.

Despite the continuing war in Ukraine, droughts and inflation, August was a good month for the three emerging markets we cover in the Bulletin. the Indian stock market rose 3% to 59,537: Brazil’s market was up 6% to 109,523. And despite the comments about the Russian economy shrinking, the Moscow stock market was up 8% in August to close at 2,400.

And finally…

August, of course, was traditionally known as the ‘silly season.’ With politicians taking their summer break, journalists used to struggle to fill their column inches, hence the appearance of stories that normally wouldn’t come anywhere near the front pages.

For the ‘And finally…’ section of the Bulletin it is, of course, the silly season all year round. August 2022 wasn’t a vintage month, but it certainly held its own. In 2013, in the early stages of Bitcoin’s development, Newport IT engineer James Howells ‘mined’ 8,000 Bitcoins. They were stored on the hard drive of his computer. When Mr Howells upgraded his computer he forgot the Bitcoin and threw the old hard drive away. Fast forward nine years and the hard drive is resting in a Newport landfill and the Bitcoin are now worth £150m. Mr Howells is pleading with the local council to be allowed to dig up the landfill, saying he’ll give 10% of the proceeds to turn Newport into a cryptocurrency ‘hub.’ Sadly the council say excavating the landfill would pose an unacceptable ecological risk.

No such hi-tech nonsense for an Italian man who decided on a more traditional route to riches, digging a tunnel to burrow into a bank near the Vatican. Sadly the tunnel collapsed, and firefighters spent eight hours digging him out. The unnamed gentleman is now recovering in hospital with the local carabinieri waiting patiently…

Inevitably inflation has featured prominently in this month’s Bulletin and even this section can’t escape it. A store in the US beset by rising prices and even-faster-rising crime decided to lock up one product in plastic theft-prevention cases. Shoppers in New York said they had ‘never seen anything like it’ as they handed over their $3.99 (£3.40) in return for a tin of Spam.

Sadly, many people’s traditional method of consolation, chocolate, has also been hit by inflation. It is, of course, a sign of getting older that all chocolate bars seem to be half the size they were when you were a child. Now the Christmas tub of Quality Street has gone the same way, with Nestle reducing the size of the tubs from 650g to 600g. Cartons are also down in size from 240g to 220g meaning there’s even less chance of finding a green triangle…

Introduction 

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. 

UK 

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. 

Ukraine 

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. 

Europe 

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. 

US 

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…’ 

Introduction
It looked for a long time that the main headline for this commentary would be the opening salvos in a trade war between China and the USA. The International Monetary Fund published a bullish report on world trade, saying that global growth will hit a 7 year high of 3.9% this year – giving a stark warning at the same time that trade risked being ‘torn apart’ by a protracted trade war.

But then came the news of North Korean leader Kim Jong-un’s, historic visit to South Korea and his meeting with President Moon Jae-in. There followed a bromance which would have been impossible just a few months ago, and a commitment to rid the Korean peninsula of nuclear weapons. The meeting would have been unthinkable at the beginning of the year when North Korea was boasting of being able to reach the US mainland with its rockets: now Pyongyang says it will invite US observers to witness the shutdown of its nuclear site in May.

By the end of the month even the China/US threats and counter-threats seemed to have receded a little and most of the major stock markets which we cover made up losses suffered early in the month on fears of a trade war. There was, however, one significant fly in the ointment as the price of oil continued to climb: Brent crude went past $72 a barrel in light of the continuing troubles in Syria and the instability in the region.

UK
Let’s start the UK section with some really good news: 2017 was a record year for the UK wine industry, as figures showed 64% more bottles of UK-made wine reached the market than in 2016. The Wine and Spirit Association said the industry was reaping the benefits of ‘huge’ investment over the last decade.

…But if April brought good news for wine, it brought yet more bad news for retail as the wet Easter proved a washout for the UK high street, following the bad weather which kept shoppers at home in March. Carpetright announced the closure of 92 stores – and you have to think that the merger of Asda and Sainsbury’s, announced at the end of the month, will ultimately lead to store closures and job losses. There have been plenty of warm words from both sides but it is hard to see that the merger can be good for jobs or, in the long term, for consumers as the number of big supermarket groups in the UK reduces from four to three.

We have commented above on the IMF forecast for world trade: that same forecast included a prediction that UK growth this year would be 0.1% higher than originally thought at 1.6%. HSBC also predicted that UK exports would rise this year by their fastest rate since 2011.

Other numbers for the UK made mixed reading: a slowdown in construction and the effects of the ‘Beast from the East’ meant that UK growth in the first quarter of the year was just 0.1% – the lowest figure since 2012. Mortgage lending was also down, as figures for March showed it falling 2.3% to £20.5bn.

There were some positive figures: wages finally climbed above inflation as the year long squeeze on pay showed signs of ending earlier than expected, and unemployment fell to 4.2% – its lowest level since 1975. And London was voted the world’s top financial centre, finally climbing above New York for the first time in five years.

The vote was presumably taken without reference to TSB: April ended with TSB taking the phrase ‘banking chaos’ to a whole new level. The bank upgraded its systems – inevitably in order ‘to improve customer service’ – and ended up seemingly giving customers access to anyone’s account except their own.

Fortunately, there was no such chaos for the FT-SE 100 index of leading shares. After some lacklustre months, it rose 6% in April to end the month at 7,509. As so often happens, the pound went in the opposite direction, falling 2% to end the month trading at $1.3754.

Brexit
Throughout April, the debate raged about whether the UK should stay in some sort of customs union with the EU after March next year. Doing so would avoid a ‘hard border’ between Northern Ireland and Eire – but would severely limit the UK’s ability to do trade deals with countries outside the EU.

It would, sadly, be possible to write an entire 2,500-word commentary on the various models of customs union – or partnerships – that are currently being discussed: we will attempt to do it in less than 200.

The first option – favoured by the Brexit supporters and known in Whitehall as ‘Max Fac’ (short for Maximum Facilitation) would see the UK and EU agree to minimise all checks, using smart technology and building on best practice from around the world (for example, the USA and Canada do not have a customs union). This means that there would be a border between the UK and the EU, but it would be as light touch as possible.

The second option is a hybrid model – the Customs Partnership – which rests on the EU recognising UK customs checks as equivalent to their own, so that goods entering the EU at say, Rotterdam, could in theory travel on to the EU without further checks.

This appears to be Theresa May’s favoured option, but has been described by hard right Tory Jacob Rees-Mogg, as ‘cretinous’ while the International Trade Secretary Liam Fox, has come out firmly against any form of customs union. With eleven months to go until March 2019, the debate will undoubtedly rumble on: but we have reached the 200 word limit, we promised. Don’t worry, the politicians will undoubtedly still be discussing it next month…

Europe
April was a busy month for French President Emmanuel Macron, who made a high-profile visit to Washington and, earlier in the month, made a speech in Strasbourg calling for ever-closer union between the EU’s member states and, as the EU faced up to the loss of the UK’s contribution, more tax and revenue raising powers for the EU.

Many commentators perceived this as Macron’s bid for the de facto leadership of the EU, with German Chancellor Angela Merkel widely seen to be in a weaker position following her eventual coalition agreement with the Social Democrats. German dominance no longer a safe bet, ran a headline in City AM.

Away from the corridors of power and in the banking halls, the European Central Bank announced it would leave interest rates unchanged, despite the pace of growth in the Eurozone starting to slow. There was bad news from Deutsche Bank, which announced ‘significant’ job cuts as it scaled back its corporate and investment banking operations. Christian Sewing, the new CEO of Germany’s biggest lender, said that the cuts were ‘painful but unavoidable’ as the bank reported a sharp drop in first quarter corporate and investment banking revenues.

Fortunately, there was no pain on the German stock market, as the DAX climbed 4% in the month to end April at 12,612. The French stock market had an even better month as it rose 7% to 5,520 – and there was even good news from Greece, with the Athens stock market up 10% to 858.

US
All the attention at the beginning of the month focused on the war of words – and potential trade war – between the US and China. It ended with the historic meeting in Korea and South Korean President Moon Jae-in suggesting that Donald Trump be awarded the Nobel Peace Prize.

Away from that potential plaudit, the US President had some troubling numbers to contend with. The US trade deficit widened in February to $57.6bn (£42bn) and there are suggestions that the US could have a trade deficit of a trillion dollars a year by 2020.

Jobs growth slowed in March, with just 103,000 jobs created in the month, and there were disappointing figures for the first quarter, as annualised growth slowed to 2.3%. Those figures are unlikely to be helped by suggestions that the US could get as many as four interest rate rises this year, as the Federal Reserve pursues a more aggressive line in a bid to keep inflation under control.

April was, however, a good month for both Alphabet (the parent company of Google) and Amazon as their sales and profits surged ahead. But it was a lot less fun for Facebook’s Mark Zuckerberg: he endured an uncomfortable month as he apologised for his company’s massive data breach at a Congressional hearing. Not a good month for Wells Fargo either, as the bank was fined a record $1bn (£730m) for failing to resolve investigations into car insurance and mortgage lending breaches.

What did the Dow Jones index make of it all? Virtually nothing. Having opened the month at 24,103, the Dow closed April up just 60 points at 24,163.

Far East
The news from the Korean border rather overshadowed China’s news in the month – specifically that the country had seen its economy grow at 6.8% in the first quarter, ahead of the government’s growth target for the year of ‘around 6.5%’ – although obviously, this figure would be under pressure from a prolonged trade war with the US.

In Chinese company news, Didi Chuxing, China’s equivalent of Uber, the world’s largest ride-hailing app and currently reckoned to be worth nearly £40bn, announced modest plans for world-wide expansion.

The Economist Intelligence Unit published an interesting article, listing the countries which were most ready for the robotics revolution: South Korea headed the list, with Japan and Singapore joining it in the top four. (The UK was in 8th place, just ahead of the USA.)

Obviously, the news of the détente between North and South Korea had a positive influence on the region’s stock markets. Only China – perhaps still worrying about a possible trade war – saw its stock market fall during the month, with the Shanghai Composite down 3% at 3,082. Hong Kong went in the opposite direction, up 2% to 30,808 and the South Korean market rose 3% to 2,515. Japan, free of the worry of North Korean missiles flying over its islands, saw the Nikkei Dow rise 5% to close April at 22,468.

Emerging Markets
US sanctions hit Russian shares said a BBC headline in the middle of the month, reporting that sanctions imposed by the US had hit the shares of companies controlled by Russian oligarchs, ‘as the Russian stock market tumbled in the wake of the sanctions.’ This followed the diplomatic crisis sparked by the poisoning of former spy Sergei Skripal and his daughter, and President Trump’s threats of tariffs on aluminium and steel.

Well, sanctions or no sanctions the Russian stock market had recovered by the end of month, closing April up 2% at 2,307. There was an even better performance from the Indian stock market, up 7% in April to end the month at 35,160 – and Brazil completed our Emerging Markets hat-trick as the market there rose 1% to close at 86,115.

And finally…
April was a good month for the ‘And finally’ section of the commentary – but we start with something that is probably best not read while you are eating breakfast.

NASA, America’s space agency has been looking for a material that can be transported into space and used for the spare parts that are inevitably needed on a long space mission. The idea is that the parts would be made using a 3D printer: but what material to use? The rocket scientists at NASA have decided that, well… human waste would be ideal. Transported into space and put to use: that’s an idea that Major Tom never discussed with ground control…

There had been widespread rumours of an exodus of London’s leading bankers after Brexit. Apparently, that is not now going to happen. A report in Politico said that the bankers’ wives – and one husband – had been to inspect Frankfurt, the rumoured new banking capital of Europe, and found it to be ‘dark, grey and dull’. So there you are: David Davis and Michel Barnier can huff and puff all they like – in the end it looks like bankers’ wives will decide the shape of Brexit.

Sadly, one wife who had rather less influence was the wife of Tanzanian gambler, Amani Stanley. So sure was Amani that his beloved Manchester City would clinch the Premier League title by beating Manchester United at home that he bet his wife on the result. All was looking good when City were leading 2-0 at half-time. Unfortunately, United stormed back in the second half to win 3-2 and Amani lost his wife for a week to his United supporting friend Shilla Tony. As yet there is no news on her husband’s gambling from Mrs Stanley…