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Market Bulletin (23/11/2015)

Market Bulletin (23/11/2015)

Atlantic rift?

What usually matters most to markets about central banks is not so much where they are, as where they are headed.


A quick scour of major central banks around the developed world reveals similarly subdued interest rate levels: 0.1% in Japan, 0.05% in the eurozone, 0.5% in the UK and 0.25% in the US. Yet while they may all be huddled at a similar point on the interest rate spectrum, central bankers are facing in very different directions. The Bank of England recently indicated that its rate freeze may endure until 2017, while minutes released last week showed that the European Central Bank had considered introducing easing measures back in October.


The US, on the other hand, has given every indication that it will raise the Federal Reserve rate in December. Minutes of the October Federal Reserve meeting, published last week, were widely viewed as pointing in that same direction.


Other significant voices are sounding supportive of such a move. In the same week, the president of the Federal Reserve Bank of Boston highlighted the number of cranes currently hoisted over the Boston skyline, a possible indicator of over-investment – a rate rise could stem any such excesses.


This divergence between central banks reflects to some degree the different trajectories and timelines of the recoveries in the US and Europe, although the tendency of other central banks to ‘wait on the Fed’ may also be at play.


Yet simple divergence this is not, as indicators released last week have made apparent. The US economy still faces headwinds, and while the S&P 500 rose 3.35% last week, it only re-entered positive territory for the year in October, showing a slower growth rate even than that of America’s somewhat sluggish economy. US housing starts reached a seven-month low in October (although the medium term remains positive), while retail data was disappointing; in recent days Macy’s, Urban Outfitters and Nordstrom all reported disappointing third-quarter results.


In Europe, meanwhile, despite some economic headwinds, the Paris attacks and the ongoing terror alert in Brussels, there are a few signs of an improved outlook, among them rising consumer confidence.


ECB easing ahead


The aftermath of the Paris attacks dominated European headlines last week, raising all kinds of questions about policing, surveillance, defence and migration policies. Yet it was largely other developments that directed markets, indicating that stock trading has not been knocked back too heavily by the terrorist attacks.


On Thursday, the Greek parliament voted to pass a reform bill that secures €2 billion in EU bailout support to recapitalise Greece’s largest banks, but it came at a significant cost to Prime Minister Alexis Tsipras, reducing his party’s majority.


“Our view has always been that Greece was never really a major issue – at the end of the day, Europe will support Greece as long as they strictly follow the reform programme that was agreed, slightly bizarrely, both before and, again, after the referendum,” says Stuart Mitchell of S. W. Mitchell Capital.


“The Greek population still overwhelmingly want to stay in the euro but they also believe that Tsipras can get them the best deal. ‎Tsipras has been hinting at possibly reneging on some of his signed commitments. He has, however, backed down in order to allow the recapitalisation of the banking system,” says Mitchell.


Meanwhile, accounts of an October meeting of the European Central Bank (ECB) were published on Thursday, which showed that the bank was already considering quantitative easing measures even then; while in a speech on Friday, Mario Draghi talked of both an interest rate cut and more quantitative easing at the December meeting. The FTSEurofirst 300 rose 3.23% over the course of the week.


Amid the worries about growth, there were positive financial and economic developments too. The Dutch government began its privatisation of ABN AMRO and is expected to raise €4 billion for its 23% stake – a bit cheap, perhaps, but still another piece in the jigsaw of restoring stability and trustworthiness to Europe’s financial sector.


Perhaps most encouraging were European Commission figures released on Friday which showed consumer confidence (albeit before the Paris attacks) less negative than expected.


In another European twist, the UK, which has been largely posting positive economic news in recent months, had a less encouraging week. The latest industrial trends survey conducted by the Confederation of British Industry showed UK manufacturers expected production to decline in the next three months. It was also announced that all UK coal plants will close within ten years.


Worst of all for the supposedly debt-averse Conservative administration, public sector net borrowing (banks aside) was £8.2 billion in October, far higher than October’s £7.1 billion and more than £2 billion above the results of a Reuters poll of expectations.


A retail sales dip in October reflected an especially strong September more than anything else, and a 1.9% rise in earnings in the year to April was more positive than it sounded, thanks to minimal inflation.


The FTSE 100 rose 3.54% over the week, aided by engineering company Smiths Group announcing a change to its company pension scheme, good results for Taylor Wimpey, and rumours that Imperial Tobacco may be taken over. Last Monday it was announced that Cable & Wireless would be sold to Liberty Global, although the Monday stock bounce was largely forfeited by Friday; the telecommunications company dates back to the 1860s and is one of just four remaining founders of the thirty which in 1935 created the FT 30, Britain’s oldest surviving index.


Tokyo blues


Japan’s central bank has been given fresh latitude after official data published last week showed that the Japanese economy is now in technical recession. However, industrial data suggests this has more to do with companies running down inventories than a decline in end-user demand. Given its ageing population, which continues to tilt the economic balance away from earnings and towards retirement liabilities, technical slips into recession in Japan are likely to be regular – and shouldn’t cause alarm.


The central bank of Japan chose to leave rates on hold last week and will continue to buy government bonds at the same annual pace in order to keep rates down, as it aims for its 2% inflation target. Meanwhile, the Nikkei 225 rose 1.44% over the course of the week, its fifth weekly rise in a row.


Across the East China Sea, Beijing’s central bank could celebrate another step on the road to turning the renminbi into an international currency, as the International Monetary Fund recommended adding the currency to its ‘special drawing rights’ currency basket. Although it will not cause immediate and significant inflows, it does both raise the currency’s profile and underpin its stability – it also has the effect of committing Beijing to further financial market reforms.


There were signs last week that China’s retail pick-up was continuing, as retail sales rose 11% in October and car sales jumped 13.3%. While urban fixed-asset investment grew just 10.2% in the first ten months of the year (a 15-year low), the retail figures offer particular encouragement for an economy seeking to shift its growth model to one that places greater emphasis on services and consumer retail.


A more serious concern for Beijing came in the form of recommendations made to the G20 last week that banks should hold far higher levels of buffer capital to provide protection in tough times – Chinese banks’ reserve capital levels fall very far below the recommended levels.

  1. W. Mitchell Capital is a fund manager for St. James’s Place.

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