Uncertainty is high, political risk is high – in fact this is the first time in post-war history that there has been any material political risk in the US in the shape of a ‘home-grown demagogue’. There is concern about global growth, the oil price is still yet to recover – and this is impacting corporate investment.
Yet global equities are at 11-month highs. Last week it was confirmed that the US economy grew at a significantly slower pace than expected in the first half of 2016 (expanding at an annualised rate of 1.2 per cent in the three months ended June). Wall Street economists had forecast 2.5 per cent in the second quarter. This resulted in an increased certainty that any interest rate rise can be kicked further down the road, which led to the bullish market.
The post-Brexit world of the UK shows similar trends. According to the Markit/CIPS UK Manufacturing PMI®, UK manufacturers’ output contracted at its fastest pace for three years in July as the impact of increased business uncertainty on the domestic market started to bite. Unsurprisingly, manufacturing employment decreased for the seventh month straight in July, with the rate of job loss being second-sharpest for almost three-and-a-half years. Good news though: figures released last week show the UK economy grew by 0.6% in the three months to the end of June… BUT, April was by far the strongest month, with May and June showing a significant softening.
Early on Monday, the pound slipped 0.4 per cent against the dollar and is now down 12 per cent since the vote on 23 June. This decrease has been a boon for London tourism and has somewhat supported manufacturing by buoying exports.
Having said all of this, at the time of writing the FTSE 100 is up well above the 6,500 mark, largely pulled up by the miners. Unsurprisingly, the largest fallers are the house builders, and Morrisons has fallen more than 3% on news that it is slashing prices. Despite all the macro and political uncertainty that is out there, equities have been remarkably stable.
All of this economic data comes as the Bank of England’s Monetary Policy Committee (MPC) prepares to issue its latest interest rate-setting decision on Thursday. Every man and his dog expects the MPC to cut interest rates from 0.5% last month to a new low of 0.25% – but that is what everyman thought last time. Perhaps the dog will push the MPC over the line. Some are advocating a ‘keep calm and carry on’ approach, but the minutes from the last meeting left a rate rise open. Andy Haldane, BoE Chief Economist, said recently he ‘would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison’ – evidently unconvinced by The Shawshank Redemption. The risk is obviously inflation, which is forecast to rise above 3% next year.
The MPC might also announce further QE, and extension of the BoE’s Funding for Lending Scheme. They have also left room for other surprises, but your guess is as good as mine as to what that colour that rabbit might be and out of which hat it will come.
So it appears that monetary policy and stimulus is keeping our house of cards standing. With low interest rates looking set for some time to come and with the grim reaper of inflation sitting on our shoulders, the outlook for savers and investors is ever more depressing. You can expect to hear a lot of yield, yield, yield over the next few months; those SyndicateRoom investors that got in on the 3i share placement did well with a yield of over 4%.
I hope that you all have a great week.