“Debt is the fatal disease of republics, the first thing and the mightiest to undermine governments and corrupt the people.”

Wendell Phillips

UK observers could be forgiven for interpreting the current market weakness as concern over Brexit: another day, another raft of challenging headlines to cope with. 

But the malaise in markets is much broader and deeper than our parochial concerns about withdrawing from the European Union. Meanwhile, although personal sector debt is much better under control since 2009, the rising level of UK Government debt still leaves us exposed to major downturns, notwithstanding eight years of austerity.

This week we look at some of these wider influences, and the challenge they present to international stability.

Last week the FTSE-100 closed at 6,952.86, well below 7000, below levels seen in May 2015, and not far off the 6724.60 which it reached just before Christmas 1999: nearly 19 years ago. It’s recovered slightly following EU approval of the Withdrawal agreement: but if the 10% recent fall in share prices leaves you feeling despondent, spare a thought for the Chinese - whose market has fallen 20%. Or for the price of oil which has come back over 25%. Or for the tumbling fortunes of Bitcoin holders, which is the lead subject for This Is Money this week. Even the tech giants are seeing serious erosion of their massive market capitalisations (Daily Telegraph 21/11/18: ‘Tech giants in $1 trillion wipeout as rout widens’).

There are some major adjustments to structural imbalances going on at present and, just at the moment, Europe is not one of them: it may be soon. The biggest challenge is Trump’s trade sanctions against China (Evening Standard 23/11/18: ‘City feels the heat as Trump’s trade war triggers the great fall of China’).

For the past two decades the China-US trade imbalance has become more and more pronounced. I recall presentations from Capital Economics several years ago concluding that ‘something must be done’, as the tsunami of imports pushed huge amounts of US dollars across the Pacific; only to be repatriated in the form of Chinese ownership of US Government debt.

It may therefore seem logical to call a halt to this, but there will be some major consequences - as we are seeing in the Chinese market.

But the United States will not be immune from this disruption, particularly because Donald Trump has chosen to apply a massive fiscal boost to the US economy just as it reaches the top of its economic cycle (Daily Telegraph 8/11/2018: ‘Trump’s $1.5 trillion deal with the devil has failed … now the fireworks’). No doubt that helps his feel-good factor, but it also massively increases the need for debt sales: just as the major supplier of that finance - China - is feeling the pain.

So, as the price of bonds falls back in the United States, interest rates are rising to attract in the cash and tackle inflation: stock markets react by falling in price, so that the same earnings can generate a higher yield. Those higher US interest rates spread easily into the UK, particularly if £Sterling remains under pressure as a result of Brexit incoherence.

Meanwhile demand for oil is not so high as forecast, and suppliers are being boosted by US waivers being given for purchases from Iran. So oil prices are back down below $60 a barrel. Hold onto your hats – we’re in for volatile times ahead, and that’s before multiple European issues start raising their heads: such as Brexit, Italian debt and potential Eurozone collapse.

All in all, observers may well conclude that the UK stock market is surprisingly sanguine in the face of these tectonic forces, but it’s worth bearing in mind that it is nearly December - and markets are historically quite well supported as the end of the year approaches. Here’s a useful research paper which analyses seasonal effects on the market over the past three centuries, to prove the point.

So if market shocks are being counterbalanced by seasonal goodwill, perhaps there is much worse to come in the New Year. With UK national debt at not far off £2 trillion and still rising, that’s worth bearing in mind if you’re about to take a serious decision on which way to vote in the UK Parliament ..


Gavin Oldham

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