September 2022 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: the next Bulletin will be reporting on a new Prime Minister, Liz Truss, who was announced earlier today.

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 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…

As we have mentioned above, we will be reporting on the UK’s new Prime Minister, Liz Truss in the October edition of this Bulletin. 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. He is succeeded of course by Liz Truss, who will walk into 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.

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. But 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 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.

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.

Hopefully though, 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.

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.

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 Labour 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 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 with Evergrande finding itself 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 – 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…


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