Market Bulletin (21/03/2017)
Political commentators have their stock of regular metaphors, but few win as many column inches as the Ides of March, the date of Julius Caesar’s assassination. Last week the commentators could take extra delight in the Dutch election, starting shot of a widely-feared series of national elections around Europe, falling on the same date. Yields on government bonds in the Netherlands remained high early in the week, as they did in France, which faces a presidential election in a few weeks.
Yet if 15 March was supposed to mark the political tide turning against the EU in Continental Europe, the election result did the opposite, delivering a better-than-expected outcome for the party of the current prime minister, which beat Geert Wilders’ Eurosceptic Party for Freedom by 13 seats. As a result, media and markets alike quickly moved on, and by the end of the week it was central banks that held investor attention.
In the US, the Federal Reserve raised interest rates by 0.25%, only the third such rise since the financial crisis. Since Janet Yellen had done such a good job of signalling her intentions to markets, when the moment finally came, attention was largely focused on the ‘dot plot’ instead – the chart which shows Fed expectations of future rate hike timings. This explains how a supposedly hawkish Fed announcement was in fact treated by the markets as dovish, because the ‘dot plot’ implied just two further hikes in the year ahead, fewer than the three that many were anticipating. The dollar slipped slightly, but the US economy is in a fundamentally strong position.
“The rate rise was very much telegraphed to the market and another two are telegraphed to the market this year – the Fed fund rate increase was not a surprise,” said Sheldon Stone of Oaktree Capital Management. “In fact, the high yield bond market rallied, as did equities, so I think there was a sense that she might be that little bit less likely to make a third increase – which some people had spoken about.”
If bonds were largely stable, equities sent slightly more mixed messages. The S&P 500 ended the week up 0.43% but the smaller Russell 2000, which comprises smaller companies, and supposedly offers a nice gauge of the policy outlook for business, actually slipped into the red for the year midweek. Part of the slip was caused by sagging energy stocks, which have lost some of their early-year momentum on signs of excess capacity.
Nevertheless, the US is currently enjoying enviable economic growth. The current expansion is the third longest on record, job hiring has never improved unchecked for so long, unemployment is below 4.7% and inflation is reaching the target level. Besides, many investors maintain a positive view on the broader US business outlook, due to Donald Trump’s expected policy moves.
“We are in a very interesting time in the US, with the most pro-business admin we’ve seen in decades, and that has consequences, I’d argue generally positive for the [higher-growth parts of the] credit markets,” says Stone. “So I worry less about the Federal Reserve’s actions and I think more about the potential of tax cuts, regulatory environments becoming a little bit more business-friendly. Those to me are the factors that could influence our markets.”
Central banks appear to be retreating from their post-crisis largesse beyond America’s shores too. Last week Mario Draghi, governor of the ECB, said in a speech that the need for further accommodative action by the bank was subsiding. Undoubtedly, this marks a change in tone, and potentially the start of an educative process whereby he prepares the market for less QE and, ultimately, for rate rises.
In the UK, a similar shift may be underway, as the Bank of England left rates unchanged, but one member of the committee voted to raise them, perhaps pointing to the ultimate direction of travel. Despite its mandate, the Bank of England has said that it is willing to see inflation overshoot the below-2% target, which may be good for the economy and encourage spending, but will inevitably hit cash savers hard. The FTSE 100 ended the week up 1.1% at a record high, although the Eurofirst 300 actually enjoyed the stronger week, rising 1.5% to a 15-month high.
In the event, the UK rate decision hardly dominated the headlines last week, and it wasn’t even the biggest story about the bank itself. Instead, last week it was the turn of the UK’s leading number twos to suffer. At the Bank of England Charlotte Hogg, recently appointed as deputy governor, stepped down after it emerged she had failed to reveal a conflict of interest in her four years at the bank. (Her brother is a senior executive at Barclays.)
Meanwhile, in Westminster, Philip Hammond had to suffer a humiliating government U-turn on his proposed NICs changes for the self-employed, following a backbench outcry. Economic figures continued to offer welcome news for the government, as unemployment unexpectedly fell to 4.7% in the three months to January; but it was not enough to divert the focus from the chancellor having to cancel his most significant announcement in his first Budget.
Indeed, it took his boss, Theresa May, to wrest attention away from her junior, in the form of a public war of words with Nicola Sturgeon, after the first minister announced the Scottish Parliament would vote this week on whether to hold a second Scottish independence referendum. Some onlookers were amused to hear Theresa May, in addressing the Scottish independence question, warn that leaving a union with your largest export market would be economically risky. Yet there were reports that, privately, the prime minister believes such a vote is inevitable – she just wants it to happen after the UK’s exit from the EU.
Yet far more immediate deadlines loom for prime minister and populous alike in the coming weeks. Theresa May defied expectations that she would trigger Article 50 last week, but must do so by the end of March in order to keep to her pledge. Meanwhile, the last few days of the current tax year will offer savers and investors their final opportunity to use up several valuable allowances that would otherwise be lost.
Nevertheless, if the past is anything to go by, plenty of people will fail to make the most of the opportunities. Recent research by MetLife showed that 66% of ISA holders save only into Cash ISAs, even though just 10% of them are happy with the rate they receive.
A similar story appears to be playing out in property. Despite the rapid rise in property prices in recent years, which has pushed a far higher proportion of UK residences over the nil-rate band for Inheritance Tax (IHT), those liable to face the tax are failing to use important allowances. In a recent study, Canada Life found that just a fifth of respondents over the age of 44 with assets of more than £325,000 said they had gifted money using their annual gifting exemption of up to £3,000; a third said they had no intention of doing so. Yet with the IHT threshold now frozen at £325,000 per individual until at least 2021, and inflation on the rise, inaction is set to become still more costly. The Ides of March might make for good headlines, but 5 April is the one to watch.
Oaktree Capital Management is a fund manager for St. James’s Place.
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