Quotidian Investments Monthly Commentary – July 2019
In the dog days of early summer global stock-markets potter gently towards the mass exodus of market makers and traders that marks their long August holidays in the sun.
At the risk of sounding like a broken record, the issues that have continued to motivate the direction of equity markets are the ongoing negotiations towards execution of a China/USA free trade agreement, the prospect of interest rate cuts (particularly in America) and the success or otherwise of second quarter corporate results which began to filter through from mid-July onwards.
In the UK specifically, Brexit continues to dominate the equity trading agenda but its piquant denouement appears now to be relatively close at hand.
Just two hours before the US markets closed on 31st July the Federal Reserve delivered its long-awaited interest rate cut (the first rate cut since 2008). Analysts had created an unrealistic expectation of a half-point decrease and were disappointed when the decision was actually a drop of 0.25%. Despite it having been made clear that there will likely be further rate cuts later this year, the immediate knee-jerk reaction by ever-pessimistic and short-term thinking market makers was to mark down equity prices in the final hour of trading before they conveniently went off on their holidays. Irritatingly, that action moved the Fund from positive into negative territory (albeit marginally) for the month of July.
On 31st July 2019 the FTSE100 index closed the month at 7546.80, an increase of 1,63% in the month of July itself and it now stands at 12.17% for the 2019 calendar year to date. By comparison the Quotidian Fund’s valuation at the same date shows a fall of -0.50% for the month of July and the Fund is now up 20.72% for the 2019 year to date.
A multiplicity of economic statistics from around the world were released in July and they paint a very confusing (not to say contradictory) picture. In the USA, figures produced by the Philadelphia Federal Reserve suggest that its economy is heading for recession but those numbers are in direct contrast to the US Manufacturing Index which has just reached a one-year high and so points to a US upturn.
In Europe, the European Airfreight Index fell to minus 7.9% in June and similar data from the Pacific Rim is even worse (the Asian Airfreight Index dropped to minus 8.6%). These suggest a steep contraction in the volume of trade and economic activity in those areas.
Singapore’s export values fell by 17.3% last month and Japan’s export index has fallen to a 7 year low.
Strangely but more encouragingly, the Baltic Dry Index in the UK (which is a reliable proxy for and a leading indicator of future manufacturing and construction activity) has soared upwards by 75% since the tepid Theresa May announced her resignation. Two pieces of good news for the price of one there then.
Reverting to Europe, the economies of Germany, France and Italy are firmly in the grip of recession. In a speech on 25th July, Mario Draghi (President of the European Central Bank) announced a further contraction in the euro-zone’s economy and stated that “the euro-zone outlook is getting worse and worse”. Coming from the man who essentially runs the EU’s finances this is a surprisingly honest and damning indictment of the entire EU project.
Having wound down the financial stimulus programme at the end of 2018 (which was the only thing that had been papering over the cracks for the past few years) Draghi signalled that a fresh round of money-printing will be launched in September. This clear evidence of continuing EU economic failure and fiscal weakness must be exploited by the new team of UK Brexit negotiators in place of the pathetic, unfocused and timid approach of the past three years. Hopefully the UK should then be able to leave this failing quasi-communist bloc before its own economy is dragged down too. We are highly encouraged by the much more positive, assertive and refreshing approach thus far shown by Boris Johnson and his team.
Despite the abundant evidence of EU economic failure, in her opening speech to the EU parliament its new president, the financially unqualified, untalented but very well-connected Ursula von der Leyen, announced that she will create an EU state that “will take control of every aspect of our lives”. When she said ‘our’ she, of course, meant ‘your’. The EU’s bureaucratic elite will remain entirely unaffected by their own monetary folly. So much for democracy, personal freedom, personal choice and freedom of opportunity. Ursula the Unready may have replaced Juncker the Unsteady but the same outdated and myopic mindset continues. One only has to recall the decline and demise of the old Soviet Union or remember the novels of Huxley and Orwell to see how all this will end.
Accounts issued by the UK Treasury in July for the year ending 31st March 2019 showed that the UK’s annual contribution to EU coffers was now running at an eye-watering £15.5 billion (a substantial increase from the already painful £12.9 billion it had been in the previous year). This huge increase makes it abundantly clear that the more successful the UK economy is, the higher our contribution becomes in order to support the financial incontinence of all the EU’s economic and policy failures. Far from rewarding success, this ever-increasing contribution is a financial penalty and disincentive for effort.
The financially incompetent Mrs Von der Layen would do well to learn that when one buries one’s head in the sand it inevitably leaves another part of one’s anatomy fully exposed. The UK should thank its lucky stars that it will be well clear of the fiscally damaging fall-out when the EU eventually implodes under the weight of its own hubris.
As mentioned earlier, the Baltic Dry Index is a reliable gauge of the health of the global economy. It measures the cost of chartering a cargo ship and so tends to be used as a proxy for the volume of goods being moved around the world. By extension, it thus gives a strong measure of the overall level of economic activity.
Since Mrs May eventually tendered her resignation on 24th May the Baltic Dry Index referenced above has risen from a reading of 1066 on 24th May to 1868 today (an uplift of 75%). We take that as an indication that things are not as sluggish as many investors, pessimistic analysts and investment managers seem to believe.