I am constantly amazed by the endless explanations telling us — after the fact what just happened in the markets. Later today, I will look at some of these explanations but before hand, a few words on the Narrative Fallacy and Hindsight Bias. These two cognitive foibles help to explain why the after-the-fact explanations that occur following…
Philip G Cerny and John Airs respond to the Labour peer and former transport secretary’s article denouncing Chris Grayling’s handling of Virgin Trains East Coast
Andrew Adonis makes excellent points about rail nationalisation (Grayling’s rail bailout echoes the grave errors of New Labour, 8 February). However, this is not just about outsourcing in general. It is about the longstanding contrast in economic theory between public goods and private goods, as developed by Paul Samuelson in the 1950s, and between specific and non-specific assets, as developed by Oliver Williamson in the 1970s, both leading to Nobel prizes. Public goods and specific assets are inherently indivisible – monopolistic, non-competitive and unprofitable, characterised by structurally determining economies of scale, especially if they cannot exclude particular customers. This is particularly true of what are called “natural monopolies”. Private goods and non-specific assets can be efficiently provided by the market, but public goods cannot. Here the public interest requires regulation and state control. The problem is where to draw the boundary between the two categories, as many sectors are mixed. The answers are found in neither neoliberalism nor socialism as such, but in a well-regulated social capitalism. Privatisation has unfortunately been applied far too often in sectors characterised by public goods and specific assets. Rail is a key example. Philip G Cerny Professor emeritus of politics, University of Manchester
• Andrew Adonis has Momentum friends and expresses the “need to be clear whose side we are on”. Good, but why do I feel the whole tone of his otherwise excellent piece implies a reluctance to endorse Corbyn and McDonnell as legitimate leaders of a renewed Labour party? The deep-seated resistance of party comrades like Adonis makes harder the struggle to shift the ideological zeitgeist. John Airs Liverpool
After the latest plunge in US markets drove them into correction territory, Wall Street has got off to a better start, as indicated by the futures earlier.
The Dow Jones Industrial Average is currently up 310 points (although not all the constituents are trading yet), while the S&P 500 opened up 1% and the Nasdaq Composite added 1.1%.
It may be too early to buy the dips, and more wild swings are possible, sayd Jasper Lawler, head of research at London Capital Group:
US benchmark share indices falling into correction territory (down over 10% from record highs) has ignited concern the bull market has ended. There has been a spike in volatility, which has resulted in a blow-up in low-volatility strategies and a sharp dive in negatively correlated US index ETFs. The question is whether this is the technical trigger for wider market contagion or just a long overdue “healthy” pullback for an over-extended market.
We would make the point that the stock market can deviate massively from economic fundamentals in the short term. Fear of rising bond yields can easily produce a bear market (down 20% from 52-week highs) despite a healthy global economy. In fact, that is usually how it happens because the stock market is a future-discounting mechanism. Another argument for a bigger move lower is that much of what has helped keep the stock market moving higher is momentum, which is now reversing. We would liken the outlook for the US stock market to making a tackle in sports, “the bigger they are the harder they fall.”
Here’s a reminder of the falls we’ve seen through the bull market, from analyst Barry Ritholtz:
This market fall is a dose of reality after “greed ran unchecked”, says Mark Dowding, co-head of investment grade at BlueBay Asset Management:
The equity market reversal this week, may well serve to be a healthy event. Greed was running unchecked in January and so markets were due a dose of reality, or else the party risked getting out of hand.. this is no bad thing at all and may well serve to make life easier for investors over time.
There could be worse to come for the pound following today’s falls, suggests Jeremy Cook, chief economist at WorldFirst:
Every single bit of optimism afforded to the pound on the back of Governor Carney’s comments on interest rate increases and upgraded growth and wage forecasts has been lost this morning following the comments from Michel Barnier that the transitional period is ‘not a given’. For sterling, nothing is more important in the short term than a transitional deal that extends the UK’s membership of the Single Market and Customs Union. The CBI has been vocal on the need for clarity for its members and small and medium sized businesses who we speak to every day have echoed those sentiments.
So far, the broad swings in equity and volatility markets that have made headlines this week have not been felt in currency markets but if they do there are a fair many more currencies that would be seen as a ‘safer’ bet than sterling given the political atmosphere.
The market falls appear to be getting worse in Europe, as the Dow futures lose much of their earlier gains.
The FTSE 100 is now down 61 points or 0.86%, while Germany’s Dax has dropped 1.7% and France’s Cac 1.6%.
The pound is coming under pressure on the latest Brexit developments.
A post-Brexit transition deal is not a given, according to the EU’s chief negotiator Michel Barnier after the latest set of talks.
If these differences persist, a transition is not a given. If these disagreements were to persist there would undoubtedly be a problem. I hope we will be able to resolve these disagreements in the next round.
The sooner the UK makes its choices, the better.
But economies and markets do not necessarily go hand in hand, says Justin Urquart-Stewart of Seven Investment Management:
Fundamentally the market jet stream has changed. Thus get used to more weather fronts buffeting the indices. Underlying economies still fine. Economies & Markets do not usually walk in step
The UK economy grew by 0.5% in the three months to January, according to the National Institute of Economic and Social Research.
The think tank said this was the same as the official figures for the final quarter of 2017. Up until now surveys had suggested a slowdown at the start of the year.
We estimate that economic growth was steady at 0.5 per cent in the 3 months to January. Activity picked up in the second half of 2017 after a period of subdued growth in the first half of the year. The recovery was driven by both the manufacturing and the service sectors, supported by a buoyant global economy, while construction output continued to lag.
We are forecasting GDP growth of close to 2 per cent this year assuming a soft Brexit scenario. At this speed the economy could start to overheat unless the Bank of England withdraws some of the stimulus that it has injected by raising the policy rate. Our forecast assumes a 25 basis point increase in May and then every 6 months until Bank Rate reaches 2 per cent by mid-2021. If instead, Brexit talks fail, the UK economy will in our view suffer a marked slowdown with damaging longer term consequences.
The Dow futures are off their best but are still indicating a higher open on Wall Street after the latest plunge. But the futures have not been the best guide to what happens. Craig Erlam, senior market analyst at Oanda, said:
US futures are trading slightly in the green ahead of the open on Friday, a day after stock markets once again tumbled leaving indices in correction territory.
As we saw on Thursday, this isn’t necessarily indicative of calm returning to the markets. The Dow recorded declines of more than 1,000 points for the second time this week, having never done so before, despite futures prior to the open being relatively unchanged on the previous days close.
Markets haven’t been too concerned about the prospect of a shutdown since the start of the year despite two having now taken place so I don’t expect to see any boost now that a deal has been reached. This is merely just another self-inflicted risk that’s been temporarily averted.
Bank of England deputy governor Ben Broadbent seems relatively relaxed about the recent stock market falls.
In his tour of BBC studios, he told the Today programme:
Equity markets go up and down, you have a correction of this size roughly every 18 months on average, so it’s not terrifically unusual….If you’re suggesting that this is somehow parallel to what happened in 2007, then I would say no.
I think there are some very big differences and as I pointed out, the equity markets, particularly in the US, have risen a lot over the last 12 months and indeed, even today, we are roughly back where we were a couple of months ago.
Here’s a useful chart of the UK trade figures:
Trying to figure out the #trade figs is a messy business – but hopefully this chart helps! Substantial net imports of erratic components meant net trade in goods dragged on GDP in Q4. Excluding oil and erratics, net trade in goods prvided a boost to GDP. pic.twitter.com/Cso31JnZHm
European markets remain fairly calm, although of course that may all change once Wall Street reopens. David Madden, market analyst at CMC Markets UK, said:
European stocks are lower this morning, but are holding up relatively well when you consider the magnitude of the declines in Asia overnight and in the US last night. Investor are clearly nervous in this part of the world, and there are still concerns things could turn sour again. The erratic moves that have taken place in the US are unsettling investors here, and the sentiment in Europe could change when trading in New York resumes.
Here’s the British Chambers of Commerce on the day’s UK data. Its head of economics Suren Thiru said:
The sharp deterioration in the UK’s net trade position in December was disappointing and means that trade is likely to have been a drag on UK growth in the final quarter of the year. This deterioration reflects a significant increase in imports in the quarter, more than offsetting the rise in exports.
Although there was a surprise pick-up in construction output, the sector remains a concern and together with the widening in the UK’s trade deficit and weakening industrial output indicates that economic conditions are becoming more sluggish. While many exporters are benefiting from stronger growth in key trading markets, imports continue to grow at a solid pace with businesses continuing to report little in the way of import substitution despite their high cost. If this trend continues as we expect, the contribution of net trade to UK GDP growth over the near term is likely to be limited at best.
The UK data has been little help to the pound:
#GBPUSD was already off $1.40 before Dec factory data. Actually bounced as high as $1.3987 ahead of release. Now tests $1.3914/393 support that was formerly resistance ^KO pic.twitter.com/UX4Hh0pUN9
Back with the UK data, and economist James Knightley at ING Bank says the latest figures suggest fourth quarter growth could be revised downwards:
Softer December trade and production data coupled with downward revisions suggest the potential for fourth quarter GDP growth to be revised down to 0.4% quarter on quarter [from 0.5%]
UK industrial production fell 1.3% month on month in December, worse than the 0.9% consensus while there was a 0.1 percentage point downward revision to November. The December softness relates to the shutdown of the North Sea Forties pipeline for unplanned maintenance (oil and gas output fell 24.2% month on month) and should rebound in January, but it does suggest the risk of a very modest downward revision to fourth quarter GDP.
Here’s the latest view from Chris Iggo, chief investment officer fixed income at AXA Investment Managers, on the current markets:
Volatility is back and those that bet on it never coming back have had a tough week. Why is it back? It’s back because the macro fundamentals are evolving in a way that many of us have expected but some have denied. Growth is strong, inflation is not dead and interest rates are rising. This is spooking the bond market and the bond market spooks everyone else.
The veracity of the moves in equities are explained by the existence of structured trades, algorithms and leverage, but the reason that valuations are being challenged is because the discount rate is rising and is not going back down any time soon. Bond investors might start to be tempted to buy US Treasuries as we approach a 3% yield but the cat is out of the bag – we are in a higher yield environment than we have been for the last three years and that is a bit of a problem – not a terminal problem – but a bit of a problem for equities.
Back to the markets and the subdued performance so far in Europe despite the hefty falls on Wall Street and in Asia. City Index market analyst Fiona Cincotta said:
A renewed, deep, sell off on Wall Street and in Asia overnight ensured a heavy drop was on the cards for European bourses this morning….
Interestingly the selloff in Europe is less exaggerated than that in the US and that is because in Europe we continue to see dividend yields outpacing government debt yields. Meanwhile that dynamic is reversing at a rapid rate in the US which is not working in the favour of US equities despite solid economic data and a strong earnings outlook.
There has just been a spate of UK economic data, and it’s a mixed picture.
Industrial production fell sharply in December, hit by a shutdown of the Forties north sea oil pipeline.
The Dow futures are still indicating a positive start for US markets.
But US bond yields are on the rise again, which could throw a spanner in the works:
The worst of the squeeze was about a year ago and if you look at what happened to real household incomes during the second half of last year they were flat, and if you ask me what’s happening right now in the first quarter, they are starting to rise.
The squeeze from that depreciation is coming off, the path from higher important prices is probably at its peak and we are starting to see wage growth improve.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It’s a grim start to the day weatherwise in London and it looks like its going to be a grim start for European stock markets, as the sell-off which began in earnest a week or so ago looks set to continue.
It would appear that the brief respite for stocks seen in the middle of the week turned out to be the eye of the storm as once again rising bond yields prompted a further bout of selling across the board, not only in the US last night but in Asia again this morning.
Concerns about rising interest rates weren’t helped by an unexpectedly hawkish inflation report from the Bank of England yesterday, while the latest Chinese trade data suggested that the Chinese economy appeared to be ticking along nicely, even if the trade surplus did shrink quite sharply as a result of a big jump in imports.
December figures ‘pretty poor’ given weakness of pound since Brexit vote, City analysts says
Britain’s trade position with the rest of the world worsened in December as rising global oil prices pushed up the cost of importing fuel, while the continuing weak pound failed to lift sales of UK-made goods abroad.
The difference between the total value of goods and services imported to Britain and sold overseas widened by £1.2bn from November to £4.9bn in December, according to the Office for National Statistics. While there was an increase in goods export volumes, it came at less than half the pace of imports.
Match the comment with the President who said them (bonus points if you can judge if the advice was good or bad): President: A) Lyndon Johnson B) Richard Nixon C) Ronald Reagan D) Gerald Ford E) Jimmy Carter F) George H.W.Bush G) Bill Clinton H) George W. Bush I) Barrack Obama J) Donald Trump Comment:…