Market Bulletin - Questions of union
A troubled last week before Easter still provided reasons for optimism about the global outlook.
After 58 years as de facto capital of the European Union and symbol of Europe’s postwar peace, Brussels last week suffered the worst terrorist attack in its history. Newspapers, politicians and markets were all quick to respond.
The price of gold, that favoured haven of investors in times of trouble, rose 1% on the day of the attack, while the FTSEurofirst 300 summarily dipped by a similar amount – despite a subsequent rally, the index ended the week down 1.9%.
Hearteningly, there were positive signs for Europe’s economy last week. The Markit Eurozone Purchasing Managers’ Index, which tracks private sector activity, rose from 53.0 in February to 53.7 in March. Moreover, corporate bond sales in the currency area reached €25 billion last week, around a third of the total across the full 12 months of 2015, according to Dealogic. The surge in issuance was put down to the stimulus announcement made by the ECB just a week earlier.
Included in the ECB’s package of measures had been a foray still further into negative interest rates – the overnight rate was dropped to -0.4% – and a special offer of financing to banks (through ‘long-term refinancing operations’ (LTROs)). Last week, Gonzalo Gortázar, CEO of Spain’s Caixabank, said that the policies were leading some banks to take excessive risks with the LTRO funding. The CEO of ING, a leading Dutch bank, said that his bank was diversifying into higher-yielding assets. His opposite number at Commerzbank warned that the ECB risked spurring just the kind of high-risk borrowing that helped foment the 2007–08 financial crisis.
Despite its distance in time, the effects of that crisis are still being felt; those effects include tighter regulation, reduced appetite for risk, and heavier penalties for bad behaviour. A Moody’s report published last week said that profitability at the UK’s largest five banks will be constrained in the coming two years by a combination of misconduct fines, compensation and legal fees. Such charges rose 40% last year to reach $15 billion, according to the report. There was, however, also good news from the banking sector: last week, RBS took another step towards full restitution when it paid the UK Treasury £1.2 billion to end a block on its ability to reinstate dividends.
The Treasury was doubtless glad of the money, after its own revenues took a very well-publicised hit, following what some media outlets billed George Osborne’s second ‘Omnishambles Budget’. The Chancellor’s planned disability cuts sparked not only the resignation of a senior Cabinet minister, but also a subsequent government climb-down, and loud criticism from the Conservative back benches.
Moody’s chose to focus on another of the Chancellor’s announcements – reduced UK growth expectations. The ratings agency said that the growth rate revision together with the rise in debt forecasts was “credit negative” for the UK. Public sector borrowing in February was £7.1 billion, significantly up from the £5.6 billion expected.
Tory divisions over Europe were exacerbated by the departing minister’s pro-Brexit stance. Some pro-Brexit colleagues said the Brussels attack showed the dangers of an open EU, and it was reported that more than 200 business leaders had signed up to ‘Vote Leave’. The combination of heightened Brexit fears, government disunity, and the Moody’s report were widely cited as the reasons behind sterling’s slip against the dollar last week. The FTSE 100 ended the period down 1.3%.
Yet if Tory blues reached a nadir last week, they could take heart that debt across the UK as a whole looks far, far better than it does in Scotland. Had Scotland voted to leave the union in the 2015 referendum, 24 March 2016 would have been the day that the Union Flag needed to drop one of its colours. (New Zealanders will doubtless be pleased; last week, their country voted to keep its longstanding flag, which features the British ensign in the top-left corner.)
As it happened, a report released by the Institute for Fiscal Studies last week showed that per capita tax revenues in Scotland had fallen below the UK average; as for Scotland’s fiscal deficit, it sat at 9.4% of GDP, a far cry from the UK deficit of 2.9%. Forecasts produced by the Scottish National Party ahead of last year’s referendum had assumed an average oil price of $113 a barrel; today, you can pick up a barrel of Brent crude for around $40.
As a polarised primary season rumbled on in the US, last week’s rising dollar and falling oil price were making themselves felt in equity markets. The S&P 500 finished down 0.7%, but it wasn’t all doom and gloom; indeed, fear appears to be on the slide. The VIX index, which measures volatility on the S&P 500, has now been below its long-term average of 20.0 for a month; fears of US and global recessions have begun to fade.
The fall in fear has not been matched by a concomitant rise in corporate confidence, however. In terms of IPOs (initial public offerings), the world has suffered its slowest start to the year since 2009. The listing of China Zheshang Bank in Hong Kong last week – the first worth more than $1 billion in 2016 – is unlikely to presage a turnaround; government-approved listings in China don’t struggle for buyers.
Two weekends ago, China’s central banker conceded that China itself has a debt problem – quite a step, given the constraints he operates under. Debt to GDP in China is now 230%, according to a Financial Times estimate. Zhou Xiaochuan said that “robust capital markets” provide part of the answer. True, but past form provides few reasons to expect rapid progress on that front.
Many commentators were more interested to know what private conversations Mr Zhou might have had at the G20 meeting in Shanghai last month. Rumours are increasingly circulating that central bankers and finance ministers may have informally agreed not to enter a currency war. Whatever informal agreement might have been made, last Thursday the People’s Bank of China went ahead with weakening the renminbi against the dollar by the greatest amount in two months.
Among those likely to suffer from the move is Japan, although the rising dollar offers some solace. Last week, inflation in the Japanese economy came in at zero as expected. The Nikkei 225 profited from a cheapening yen, ending up 1.7%.
Seven days and counting
The first full week after the UK Budget also saw the Chancellor’s plans for the new Lifetime ISA come under close scrutiny, with concerns being expressed about the administrative complications and possible increased costs that could come with the features and flexibility being proposed.
Whatever transpires regarding the introduction of the Lifetime ISA next year, it seems investors can be confident that ISAs will remain a key long-term financial planning tool. But with just six working days left in the tax year, time is running out to take advantage of this year’s ISA allowance, as well as the other tax-saving opportunities.
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