What happened in the markets in July? To put it simply: nothing. Almost.
This is neither a novelty nor a bad sign. Rather, this is a confirmation and continuation of what has been happening in recent months. Until now, in fact, 2019 has been characterized by great caution, timid rises and timid falls; none of which have brought any great benefits or, fortunately, great losses. July, was no different from any other month this year: + 0.74% the Italian index FTSE MIB and only moderate growth (between 2 and 3%) for the American Nasdaq and S&P indices.
What does this period of calm mean?
Again, we’ll put it simply: it means that the economy itself is still ok and has the potential to grow and solidify, but that investors do not fully trust the whole international picture.
Old and new uncertainties
The old ones ...
As mentioned before in this column, there are three distinct global issues of a political (and consequently economic) nature that are not letting the markets sleep easy. The first is the trade war between the US and China, the second is the Brexit issue, and the third is the political instability within Europe.
... and the new ones
Whilst waiting for clear signs of a solution to the three big issues that have been taking place for months, stock traders look elsewhere for a signal that the waters are moving.
In particular, these are the three unknown quantities.
1. The possible extension of the commercial war: no longer just the US vs China, but also the USA vs Europe.
For the moment, this is a threat rather than a reality. However, if the US president really does seek a consensus for the forthcoming 2020 elections, should he decide to use the same strategy for Europe that he has with Chinese goods, then the consequences could be heavy, especially for us European consumers.
Customs duties imposed on European goods traveling to the USA (and vice versa) would translate into higher prices for the consumer, and this in turn would translate into a further stretching of the consumer’s Euro and would result a real dip in sales.
The lower sales, in turn, would mean lower earnings for companies, which would generate lower investments and less work. The overall result of this domino effect would be an overall contraction of the economy. However, if all this does not happen (as we hope) the sigh of relief would result in a new and more vigorous momentum for trade and production.
2. Post-Mario Draghi
In a few months, as you probably know, Mario Draghi will end his tenure as ECB president. His successor will be the French Christine Lagarde. No one knows which direction the latter will give to the European economy, even if everything leads us to suppose that it will want to continue in the growth stimulation operations put in place by Draghi with Quantitative Easing and interest rate cuts. Many of the markets movements in the coming months will depend on these decisions.
3. The Fed cut interest rates. Why?
In the coming months, a 0.25% cut in the cost of money is expected from the Federal Reserve, the US central bank. Why? In theory, cutting rates is a measure used to restore oxygen to distressed economies. Yet the US economy is growing steadily, with a GDP of +2% (for comparison, Italian GDP is currently growing at 0.1% annually), low unemployment, and domestic production doing well.
So why this decision? Is it a preventive measure, to avoid trauma in the event of a hard brake? Or is it a measure of further momentum, put in place to take full advantage of the positive wave the US is currently riding?
The direction the markets will take in the coming autumn will very much depend on what will happen as a result of this.
Whilst waiting for the answers to these questions to materialise, it is well worth taking some time to take a look at what is currently happening in the other corners of the world.
Despite everything, Boeing resists
Despite the dramatic disaster of the 737MAX, whose software malfunction caused two terrible accidents (the Ethiopian Airlines flight in which 157 people lost their lives, and the Lion Air flight in which 189 people were lost) and the subsequent recall of all 737MAX aircraft already sold and / or ordered, the American aircraft manufacturer, didn’t actually suffer large losses on the stock exchange. It only lost -11%. Why?
The answer is simple, and lies in the almost total lack of market competition. There are essentially 2 aircraft manufacturers in the world: Boeing (American) and Airbus (European). This set-up has resulted in a duopoly in which there is little space or opportunity for other players to take advantage of either company’s crises or mistakes.
Netflix goes wrong
There’s no chill in the accounts at Netflix. For the first time since the company’s inception (which was initially as a door-to-door DVD delivery service), and especially since it started producing its Netflix Original series (starting with House of Cards in 2013), it’s profits are in trouble. It has seen a hat trick of reductions: subscribers, earnings, and Original series productions.
Furthermore, whilst there have certainly been some Netflix Original winners (Orange is the New Black, Stranger Things, House of Cards etc.), many have seen a crueller fate, and have either been cancelled or unilaterally ignored totally by the viewing public.
Of course, this is still a more-than-thriving company, but the decrease in subscriptions and content could be a bad sign for the future, especially in view of the fact that new competitors (such as Disney) will be entering the market in the near future .
The big question: Facebook Libra
Libra is Facebook’s new cryptocurrency. It's been hotly anticipated by both it’s supporters and its naysayers. There are those who hope that the new cryptocurrency can give new impetus to the blockchain and electronic currencies sector, which still seems to be finding its way after its sudden 2017 boom, and then subsequent collapse. However, there are those who fear that the entry of Facebook to the currency sector could create an even more opaque environment than there is already.
Furthermore, for months now, Facebook has been under constant attack by those who question its user data management and privacy, which, according to Libra’s opponents, would make Facebook completely unfit to manage money.
All this fierce debate centred around a currency which, as of yet, has not been given the green light could mean that, perhaps (although we will know more in the coming weeks), it may never do.