Market Bulletin - Record breakers
In a highly dovish package of measures, the Bank of England lowered rates to record lows and promised increased funding, as indicators pointed to a significant slowdown in the UK economy.
At the ancient Olympics in Greece, doves were released at the opening ceremony. The modern Olympics dispensed with the tradition after the 1988 opening ceremony in Seoul, when the lighting of the Olympic Cauldron ended in disaster for several of the doves.
Monetary doves were very much in evidence in London last week, however, as the Bank of England (BoE) cut the headline interest rate to an all-time low of 0.25%. In fact, the lowering of the Bank Rate was probably the least important item in the package of new measures. The Monetary Policy Committee also voted to introduce a new £70 billion bond-buying programme (£10 billion of it for the purchase of corporate bonds) and a £100 billion funding scheme for banks, turning the announcement into the largest BoE stimulus package since the financial crisis. It added that it expected to cut rates further later in the year. Markets were delighted and the FTSE 100 briefly hit a 12-month high.
“The combination [of measures] should give the real economy the breathing room and stimulus it needs to help ensure we do not see two [consecutive] quarters of negative growth in 2017 or 2018 – but of course nothing is guaranteed,” said Chris Bowie of TwentyFour Asset Management. “This [package] is more than we expected and it is very positive for all GBP [sterling] credit assets, not just those assets that will be directly purchased. It is a confidence shot in the arm for plucky British households and companies alike.”
Gilt yields fell still further – to 0.63% on the ten-year note and just 0.06% on the two-year. Yields were already at record lows, and had taken corporate debt yields down with them. Among the companies to take advantage of the cheaper rates last week was Vodafone, which issued $800 million of 33-year debt – a record maturity for Vodafone issuance – the Monday before the BoE announcement.
Not everyone will be smiling, however. Pension funds had warned the BoE earlier in the week that that the lowering of gilt yields via increased quantitative easing would put final salary schemes still further into the red, as well as reducing the income available from an annuity. It represented yet another blow for cash savers too, pushing deposit rates to all-time lows – given the BoE’s inflation expectations, the measly 0.25% on offer may soon be cancelled out by price rises anyway.
It was a different story for UK-listed stocks. Both the FTSE 100 and FTSE 250 rose following the BoE announcement, offering yet another reminder that, while equities are never risk-free, they form a crucial part of a well-diversified portfolio. The FTSE 250 ended the week up 0.7%, and comfortably above the 2016 high it reached on the day before the referendum result.
The business news leading up to the BoE package, however, and the statement accompanying it, did not make for happy reading. Earlier in the week, Markit Purchasing Managers’ Index (PMI) results were published for construction, manufacturing and services. Taken together, the survey results showed their biggest single dip in 20 years, falling to their lowest rate since the financial crisis. On Friday, a Markit/REC jobs publication reported that the rate of contraction in job creation had fallen to its lowest level since 2009, while permanent salaries had risen at their slowest pace in three years.
Noting the PMI results, the BoE offered predictions for the UK economy: growth of 0.1% in the third quarter followed by a flat six months. It forecasts that the UK will slip to within a hair’s breadth of a recession, defined as two quarters of negative growth, but without crossing the line – it also expects 2.5% to be shaved off growth by 2019 compared to previous forecasts. In short, the bank has made its biggest forecast downgrade in 20 years. The BoE also expects the loss of 250,000 jobs across the UK, despite the stimulus package, a fall in house prices, and a spike in inflation. Governor Mark Carney indicated that the BoE had chosen to prioritise supporting growth over taming inflation.
Yet the extent of the BoE’s policy measures also highlights a growing concern among economists, namely that central banks are being forced to shoulder too much of the burden when it comes to stimulating growth. In this light, it was significant that, following the BoE announcement, George Osborne tweeted in praise of the decision, before adding that the measures “Must be matched by permanent supply side reform: lower biz taxes, free trade with EU & unambiguous message we’re open to overseas investment.” This may be partly an attempt to secure his legacy in the form of sticking to plans for progressively lower corporation tax, for “Northern powerhouse” infrastructure commitments, and for investment deals the former chancellor struck with China. But it also represents just one voice among a growing chorus of economists and politicians around the developed world who are calling for governments to take greater action to boost growth through fiscal stimulus and public investment.
Last week, the Japanese government appeared to be listening – perhaps no surprise, since its central bank has already pushed interest rates into negative territory, leaving its financial arsenal somewhat depleted. On Tuesday, the Japanese government approved what is effectively a $45 billion stimulus package for the current fiscal year. Welfare, infrastructure and small and medium-sized enterprises will receive the lion’s share of the new funds, as the government seeks to buttress recent central bank action with stimulus of its own as part of the ‘Abenomics’ economic programme. Yet the scale of the package disappointed many investors, and the Nikkei 225 ended the week down 1.9%.
Nevertheless, there were positive economic signs on both sides of the Atlantic, albeit outside the UK, indicating that the contagion effect of the UK’s Brexit vote might be quite limited, at least in the short term. The end of July Markit PMI reading for the eurozone showed a jump to 53.2, significantly above the 50 level that represents no change in activity levels. The reading suggests that the single currency area is continuing to grow even as the equivalent reading tells a very different tale in the UK – the UK’s Markit PMI for July clocked in at just 47.4.
European bank stocks had a more troubled week, despite bank stress-test results released two Fridays ago pointing to improved balance sheets. Earnings announcements were varied – ING and Standard Chartered both enjoyed strong second quarters, while Commerzbank suffered a dip in profits. Matteo Renzi, the Italian prime minister, recently announced a private sector rescue plan for Monte dei Paschi, Europe’s most stricken major bank. But confidence in the deal appeared low, as the stock declined over the course of last week. The FTSEurofirst 300 finished the week down 0.19%.
In the US, a fabulous payrolls report on Friday showed that 255,000 jobs had been created in July – far above expectations – after a week in which technology company results continued to buoy sentiment. User numbers are instructive here. In July, Facebook’s messaging app gained its billionth user – Facebook itself boasts more than three billion users – and Apple sold its billionth iPhone (or would have, if CEO Tim Cook hadn’t been waving it around on stage at a company conference). Last week, GSK and Alphabet (Google’s parent company) agreed a bioelectrics tie-up, offering a reminder of how technology companies are harnessing their expertise in an enormous range of different sectors. The NASDAQ index, which is dominated by technology stocks, last week came within a whisker of a record high following encouraging corporate earnings for the likes of Alphabet and Facebook. The S&P 500 was up by a marginal 0.38% last week, but July marked its fifth consecutive month of gains and saw it reach an all-time intraday high on the first day of August – Olympian heights indeed.
TwentyFour Asset Management is a fund manager for St. James’s Place.
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