Market Commentary July 2022

Dafferns Wealth

June was the month in which the war Vladimir Putin thought would last 100 hours passed its hundredth day – with all the attendant problems for food supply and the global economy.

In the UK, Boris Johnson won his confidence vote by 211 votes to 148 – but the dark mutterings continued as the Conservatives lost heavily in two by-elections, while the Prime Minister subsequently jetted off to the G7 conference in Germany.

As is now customary, June was another month which brought bad news on inflation. All the leading industrial nations saw inflation move steadily upwards – accompanied, inevitably, by rises in interest rates. There was no shortage of gloomy economic forecasts, with the World Bank warning that less developed countries in Europe and East Asia could face a ‘major recession’.

June wasn’t a good month for world stock markets: there were one or two bright spots, but the majority of the markets we cover were down, in some cases quite markedly. Even those falls, though, were nothing compared to the slump in the values of cryptocurrencies: Bitcoin was – at the time of writing – down 38% in the month.

As always, let us look at all the news, and the impact it had on world stock markets.

June did not get off to the most cheerful start in the UK, with a former member of the Bank of England’s Monetary Policy Committee suggesting that interest rates should rise by 3% to counter inflation. The Federation of Small Businesses (FSB) warned that 500,000 SMEs could shortly go bust over what the FSB chairman described as a ‘ticking timebomb’ of production prices’.

The SMEs will not have taken much cheer from a forecast by the OECD, predicting that the UK will have the weakest growth in the developed world next year, forecasting zero growth and taking the Chancellor to task for not doing more to promote growth.

The glass continued to be half-empty, with inflation up to 9.1% in the 12 months to May from 9% in April – the fastest rate of growth for 40 years. The Bank of England responded by lifting interest rates to a 13-year high of 1.25%, an increase of 0.25%. The Bank seems resigned to inflation reaching 10-11% later this year, which will inevitably bring more rate rises. As the cost of living crisis continued to bite, there were anecdotal tales of shoppers setting spending limits at supermarket tills and petrol forecourts.

With the cost of fuel increasing almost daily, Lesley O’Brien, director of Freight Link Europe, called for ‘radical Government intervention’. Pointing out that ‘pretty much everything you buy comes on a truck’, she said that the cost of running just one lorry had risen by £20,000 over the last year.

Unsurprisingly given this ‘cocktail of problems’, as City AM dubbed it, UK consumer confidence continued to fall. Having hit a new low of minus 40 in May, research firm GfK’s index fell again to minus 41 in June – presumably not helped by three days of rail and tube strikes.

Let us try and redress the balance with some good news. As the Covid restrictions ended, the Office for National Statistics reported a surge in tourism. In April last year, there were 81,000 foreign visitors to the UK; this year the figure was 2.1m, spending £1.7bn – 14 times the amount spent 12 months ago.

More ONS data showed that UK exports to the EU reached their highest ever level, as the bloc continued to import liquid natural gas (LNG). Exports to the EU reached £16.4bn in April 2022.

Trade Secretary Anne-Marie Trevelyan met representatives of the Gulf Cooperation Council to begin talks on a trade deal which could be worth £33bn, making the GCC potentially the UK’s seventh largest trading partner.

In good news/bad news, Government borrowing was £14bn in May, down £4bn on the same month last year – but inflation meant that interest payments on Government debt were £7.6bn, up £3.1bn on May last year and the highest figure recorded for the month.

Whether you view the last item in the UK section as good or bad news probably depends on your view on the environment. The BBC reported that the Prime Minister is likely to give a new coal mine in Cumbria the go-ahead, mining coal under the Irish Sea as the UK looks to be more ‘energy secure’.

There was no good news/bad news conundrum for the FTSE-100 index of leading shares in June. Beset by the worries we have outlined above, it dropped back 6% to end the month at 7,169. The pound dropped against the dollar again, and closed 4% down at $1.2161.

As always, we must preface the section on Ukraine by saying that by the time you read this section – written on the morning of July 1st – it may be out of date. On the one hand, the pace of the war seems to have slowed as the Russian forces grind forwards in the Donbas. On the other, there are the sudden, unexpected strikes such as that on the shopping mall in Kremenchuk, as the G7 leaders met in Germany.

As we have commented above, the war has now lasted for more than 100 days. The common acceptance now is that the war will last for far longer, with both NATO and the G7 pledging to support Ukraine ‘for as long as it takes’.

Perhaps the most worrying development of the month was Russia’s decision to transfer nuclear-capable weapons to Belarus ‘within months’. Meanwhile, Finland (which shares an 830-mile border with Russia) and Sweden both look set to join NATO – a move for Putin to file under ‘unintended consequences’.

In economic news, Ukraine’s central bank lifted interest rates to a seven-year high (at 25%, no less), and mulled bringing in an extra import duty on non-essential goods.

Another month in Europe, another tale of inflation and worries about gas supplies. But the headlines in June were reserved for French President Emmanuel Macron, as the General Election delivered a result which saw French politics fragmented.

Less than two months after winning a second term as President, Macron – who had called on voters to deliver a ‘solid majority’ – lost control of the French National Assembly. This came following a strong performance by both a left alliance and the far right, as his centrist coalition lost dozens of seats. Le Monde described the result as a ‘stunning blow’ to the President, and there now appears to be little prospect of any major reforms in his second term.

Back with the ‘normal’ news, German inflation increased again in May – up to 8.7% as it accused Gazprom of pushing up prices. No such worries for Denmark at the beginning of the month: it refused to pay in roubles, so Russia promptly cut off its supply of natural gas. Italy fared slightly better, merely complaining that Russia had cut its gas supplies ‘by a half’.

Meanwhile, some commentators are questioning the political strains a prolonged period of inflation will put on Europe. Will the North continue to pay for what it sees as its more profligate Southern neighbours? Will the European Central Bank bail out individual countries, or will it opt for overall stability? The longer inflation continues at its current level, the tougher the decisions the ECB will have to make. Finding compromises that satisfy all the member countries will not be easy.

It was a poor month for Europe’s major stock markets. The German DAX index recorded our first double-digit fall of the month as it dropped 11% to 12,784. The French stock market was down by 8% to close June at 5,923.

As all our readers know, the pandemic brought a fundamental shift to working from home. Many companies – Apple among them – have faced real challenges as millennial staff have threatened to resign rather than come back to the office.

But at Tesla, boss Elon Musk stated that everyone would now be required to work 40 hours a week in the office. ‘Otherwise,’ declared Musk, ‘you can pretend to be working somewhere else.’

By the end of the month, Musk had even more to worry about, as he reported that new Tesla factories in Berlin and Austin, Texas were ‘losing billions of dollars’ due to battery shortages and supply disruption in China. Describing the new factories as ‘money furnaces,’ Musk said, “It’s like a giant roaring sound, which is the sound of money on fire.”

It wasn’t just Tesla – figures for May showed a dramatic slowdown in the sales of all the major car manufacturers, with Toyota reporting May sales in the US down 27% on a year-on-year basis and both Honda and Mazda reporting falls of more than 50%.

Clearly a slump in the motor industry – dubbed ‘auto-Armageddon’ by one reporter – has knock-on effects in other parts of the economy, but the jobs figures for May were surprisingly good. The economy added 390,000 jobs, against a general forecast of 325,000. There had been suggestions that poor job figures could see a temporary halt to interest rate rises: that now looks unlikely.

Unsurprisingly with inflation and worries about a possible economic downturn, the American people are pessimistic about their financial prospects. A poll for the Wall Street Journal found that 83% were worried about the economy in general, with 35% saying they weren’t happy with their economic position – the highest levels of dissatisfaction since the survey began 50 years ago.

With energy and food price rises pushing US inflation to 8.6% in May – the highest rate since 1981 – and plenty of commentators suggesting that ‘real’ inflation for consumers is well above the official figures, you suspect the WSJ won’t have to wait another 50 years to break its record.

As expected, the Federal Reserve raised US interest rates in June, lifting them 0.75% (the biggest rise for 30 years) to a range of 1.5% to 1.75%. To compound the gloom, there were suggestions of a similar rise in July. The International Monetary Fund duly forecast that US growth would ‘cool’, but said it expected the country to avoid a recession.

In company news, the month started with Marriott Hotels leaving Russia after 25 years of trading there – and it ended with Nike also heading for the exit door, closing stores and ending agreements with local partners.

Unsurprisingly, US stock markets were down in the month. The Dow Jones index fell 7% to 30,775, while the more broadly based S&P500 index was down 8% to 3,785. That meant the S&P was down by more than 20% in the first half of the year – its worst performance since 1970.

Far East
As long term readers will know, China has a long and proud tradition of meeting its economic forecasts. There have always been sceptics willing to question the country’s figures: June gave them another string to their bow as a high-ranking CCP official in Jiangsu province was accused of ‘falsifying economic figures for personal promotion’.

One piece of data which did appear genuine was that for Chinese new car sales: 1.35m vehicles were sold in May, a 30% rise on the April figure, but still 17% down on a year-on-year basis as many parts of the country slowly recovered from the recent lockdowns.

We have mentioned the possibility of the UK opening a new coal mine. Both China and India are pressing ahead with plans to increase coal production, with demand and prices increasing as the world recovers from the pandemic. Between them, the two countries have announced plans to increase domestic coal production by 700m tons per year. To put this figure into perspective, total coal production in the US is around 600m tons.

June was a month which brought plenty of news about Japan – although little of it was good. The country grudgingly re-opened to tourists, although still with strict rules in place: tourists must be part of a package tour and wear masks in all public places, including outside.

More importantly, the Japanese Yen tumbled to a 24-year low, with many hedge funds reported to be ‘betting against’ the currency, arguing that the central bank’s policy of quantitative easing has not worked and that the country would not be able to keep interest rates low for much longer.

The month ended with the country sweltering in the worst heatwave recorded since records began in 1875 – and warnings of a looming power shortage as everyone reached for the air conditioning.

The Japanese stock market was blowing slightly cold in June as it dropped 3% to 26,393. The South Korean index tumbled 13% to 2,333 – but finally we have some positive news to report: China’s Shanghai Composite Index rose 7% to 3,399 while the market in Hong Kong was up by a more modest 2% at 21,860.

Emerging Markets
As regular readers know, the three major emerging markets that we cover in this section of the Bulletin are Russia, India and Brazil. As you’d expect, Russia again had the lion’s share of the headlines in June, as it became India’s second largest oil supplier – replacing Saudi Arabia and second only to Iraq.

Very clearly, the Russian oil industry has not ‘collapsed’ – as many politicians claimed it would – under the weight of sanctions. The BBC suggested that Russia had earned $97bn (£80bn) from energy exports since it invaded Ukraine. Despite this, the end of June saw Russia default on its foreign debt for the first time since 1918, as it missed a $100m (£82m) payment to international creditors. Russia claimed that it had the money to pay – but couldn’t get the money to the creditors because of the sanctions.

Putting Russia to one side for a minute, there were two interesting stories which are, perhaps, portents of the future.

We have just had the meeting of the G7 (which was the G8 before Russia was removed in 2014). This brings together the leaders of the US, UK, France, Germany, Italy, Japan and Canada. In June, Vyacheslav Volodin, the speaker of the Russian Duma, used the term ‘the new G8’. This bloc comprises Russia, China, India, Brazil, Turkey, Mexico, Iran and Indonesia. As Volodin noted – ominously for the West – the new G8 is already over 20% ahead of the G7 in GDP terms.

At the other end of the scale, there was tangible evidence of the impact rising fuel prices could have. There were suggestions that Pakistan’s economy ‘could collapse’ under the weight of rising energy costs and inflation, with 40,000 factories supposedly under threat in Karachi, the country’s commercial capital.

All the three stock markets we cover in this section of the Bulletin were down in June. India was down 5% to 53,019: the Russian stock market dropped 6% to 2,205 while the Brazilian index fell 12% to close June at 98,542.

And Finally…
The ‘And finally…’ section of the Bulletin has had its share of heroes over the years. June added another one to the Hall of Fame, as YouTuber Colin Furze was awarded retrospective planning permission. What for? A tunnel under his back garden, connecting his house to his shed. Mr Furze first built an underground bunker in 2015 – ‘the ultimate man-cave’ apparently – and eventually plans a network of tunnels connecting his kitchen pantry, the bunker and his shed.

There was no word on what Mrs Furze thought of it all. And perhaps we shouldn’t laugh: Mr Furze has 12m subscribers on his YouTube channel, which might earn him a bob or two…

One businessman in Japan may soon be on the phone to Mr Furze. Having lost an entire city’s data, he could well need an underground hideaway. As you do, he went out on a Tuesday night bender in the city of Amagasaki. He took his bag with him, in which was a USB drive containing personal information on the city’s 465,177 residents. You can guess the rest: drunk, woke up on the street, bag missing… And you suspect that Amagasaki may shortly have 465,176 residents…

Meanwhile, legislators in New Zealand decided to tax ‘cow and sheep burps’ (and other natural emissions, presumably) in a bid to cut down on greenhouse gases. The price of a pint in London was reported to have gone past £8 and someone in the Metaverse paid $80,000 (£65,600) for a pair of virtual trainers. That’s right – trainers which don’t exist in real life, but which allow your avatar to look cool.

The cheapest pint in the country was reported to be in Lancashire, and cost £1.79. You try telling those canny folk up North to spend sixty-five grand on a pair of trainers that don’t exist…


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