Japanese markets spiked on Friday, following Prime Minister Yoshihide Suga’s announcement that he will not run for re-election.
Suga has been prime minister since last September and was in charge during the Olympics in Tokyo – which have been blamed for a tide of COVID-19 cases far exceeding previous waves in the country. This has caused his approval ratings to plummet as the year has progressed.
Japanese markets have also had a disappointing 2021 so far. In contrast to European and American markets, many of which are trading at record highs, the Nikkei 225 and TOPIX indices peaked earlier in the year and have been gradually drifting downward since.
However, with the ruling Liberal Democratic Party due to hold an election later in September, stocks had been recovering over the week in anticipation of a potential new leader. This growth accelerated immediately following Suga’s announcement. The TOPIX ended the week at a record high, while the Nikkei grew 4.5% to reach its highest level since June. US markets ended the week on a slightly disappointing note after 235,000 jobs were added to the world’s largest economy, compared to predictions of over 700,000.
Key factors behind the slowdown were fewer new government jobs being added compared to previous months, and the hospitality and leisure sector figures not growing. The latter may well have been influenced by the ongoing spike in COVID-19 numbers.
The data wasn’t all bad news, however, as unemployment fell over the month, while average earnings received an unexpected boost of 0.6% month-on-month, or 4.3% year-on-year. Prior to this, American stocks had been inching higher. Initially this was helped by momentum from Federal Reserve Chair Jerome Powell’s speech at the end of the previous week, and was continued as investors anticipated the end-of-month jobs data.
While both the S&P 500 and the Nasdaq posted relatively muted figures on Friday morning, overall both indices were up for the week, as they moved further into record territory. Looking ahead, Ian Shepherdson, Chief Economist and CEO of Pantheon Macroeconomics, suggested August’s jobs figures may be the start of a period of slower jobs growth. He said: “September likely will be weak too, and we’re becoming nervous about the prospects for a decent revival in October, given that behaviour lags cases, and cases are yet to peak. “Before Delta, we were looking for one million-plus payroll gains in the fall, but that’s now going to be a real struggle, suggesting that Chair Powell will be in no hurry to be pushed into tapering while the labour market picture is so uncertain. We think the announcement comes in December, but the FOMC could easily be forced to wait until January.”
US jobs figures influenced UK and European markets. In the UK, the FTSE fell 0.4% on Friday, for example. Despite this, the FTSE 100 finished just about in positive territory for the week.
The FTSE 100 did see some potentially short-lived joiners to the index: supermarket Morrisons and aerospace engineering firm Meggitt have both seen their share price increase dramatically recently as a result of takeover bids. If these takeovers are successful, they would then be delisted, however.
Last week also saw the EU reveal inflation data for the euro in August, which reached 3.0%, compared to an expected 2.7%. This led to calls from some to end the EU’s Pandemic Emergency Purchase Programme (PEPP) and halt further monetary easing. However, Mark Dowding of BlueBay noted: “It seems policy is still firmly driven by the executive board, and last week’s comments from chief economist Lane – while appearing to suggest that PEPP purchases may slow following the monetary policy meeting in September – reinforced that the overall policy stance will remain very accommodative.”
Last week, reports emerged that Downing Street is set to announce a tax rise to cover the cost of social care reform. According to various news outlets, the prime minister plans to increase National Insurance contributions to raise approximately £10 billion a year.
Further reports over the weekend stated the government is expected to announce an increase of about 1% as early as this week.
National Insurance payments are taken from employees’ earnings and self-employed people’s profits, and are also paid by employers. They are not paid by those in retirement. The rumours have generated some controversy because the Conservative Party’s 2019 election manifesto promised no tax rises. Some critics have also argued that the plans would be unfair, given that pensioners don’t pay National Insurance contributions.
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Read this interview with Edward Robertson from Somerset Capital Management, manager of the St. James’s Place Global Emerging Markets fund since early 2020, to learn how investors can think about China. Among other things, he discusses the market’s recent concerns about Chinese regulation, how to invest responsibly in emerging markets, and the current inflation debate.
“The battle against the coronavirus takes a vast amount of energy, and I don’t feel it is possible to carry on with that and fight the upcoming election for the party leadership.”
Japan’s Prime Minister Yoshihide Suga announces that he will step down this month.
BlueBay and Somerset Capital are fund managers for St. James’s Place.
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