Market Bulletin - Point of no return
While global stocks and indicators remained steady, an exceptional interest rate environment pushed some UK savings rates ever lower.
History shows all too clearly the long-term disparity between cash returns and those generated by investing in the stock market. Last week the New York Times pointed out that, had you invested proportionately across US stocks on the day of President Obama’s inauguration in 2009, then you would have tripled your money since. Yet throughout that period, US interest rates have remained at 0.25–0.5%. Allowing for inflation, cash has in fact lost value.
Last week that same trend was highlighted by a NatWest communication to its Cash ISA customers. Those with holdings of less than £25,000 were informed that the interest rate on their accounts was to fall to just 0.01%. Yet even if, as reported, NatWest’s Cash ISA rate is the worst on offer, it is hardly alone in pushing rates towards the zero mark – 285 savings accounts have lowered their rates this year. In contrast, it is worth considering that the FTSE 100, which dipped by a marginal 0.3% last week, has risen by almost 9% over the course of the year.
Yet there is plenty of worrying evidence that the gaping disparity between cash returns and stock returns is still being ignored by many savers. Last week Citizens Advice reported survey results which showed that 29% of people who have taken advantage of the new pension freedoms to withdraw cash have simply transferred the funds into bank accounts. As a result, some pensioners are forfeiting the potential for better returns. Worse still, some are finding themselves hit with unexpected tax bills due to withdrawing too much. Steve Webb, former pensions minister, warned last week that those leaving transferred funds on deposit are storing up problems for the future.
“If pension savers… simply leave their money in an account paying little or no interest, they will see its real value decline year-after-year through inflation,” said Webb. “It is vital that anyone considering taking their money out of their pension pot has access to high-quality advice and guidance, which stresses the option of leaving the money invested.”
There were encouraging signs in the UK last week to add to the drip-feed of UK statistics being parsed for indications of how the economy is weathering the Brexit vote. A survey conducted by the Confederation of British Industry reported a rise in exports of manufactured goods to a two-year high, despite a slide in total orders. Persimmon, the UK’s biggest housebuilder, said viewings of new-builds had risen over the summer against the same period in 2015, while profits in the first half of 2016 rose 29%. Meanwhile, grocers saw a 0.3% rise in sales in the 12 weeks to 14 August.
Consumer spending has proved resilient in recent weeks, but business sentiment has not, and the pound has not recovered the significant ground it lost against the dollar or euro in the wake of the referendum. Much remains unclear, not least because, thus far, official economic growth figures only reach as late as the end of June, and because the nature of the UK’s exit remains to be worked out. Nevertheless, the manager of the world’s largest pension fund, Japan’s Government Pension Investment Fund, said last week that the Brexit vote and poor US jobs data in May had been the two principal reasons the fund had experienced a negative first quarter of the financial year.
Such concerns were less apparent in Continental Europe last week, and the FTSEurofirst 300 ended the week up 0.45%. On Monday, the leaders of Germany, France and Italy met to announce closer military cooperation, an announcement previously made impossible by British resistance, in a show of unity aimed at dispelling fears over any potential domino effect of the recent Brexit vote. EU members are divided on whether the best response to the Brexit vote is deeper integration – as a result, political risk remains heightened for both the EU and eurozone. But economic indicators provided compelling reasons for confidence last week.
While German business confidence fell in August, most indicators suggested the currency area has emerged from the immediate aftermath of the UK vote relatively unscathed. Purchasing Managers’ Index (PMI) readings for France and Germany showed a contraction in manufacturing confidence as expected but impressive growth readings in services confidence, while both the composite PMI for the broader eurozone and a European Commission economic indicator delivered especially strong readings.
By the end of the week, attention had turned to a meeting of many of the world’s leading figures in finance and economics in Jackson Hole, Wyoming. Once dubbed the “Davos of central bankers”, the fishing-rich venue was supposedly chosen in 1982 in order to attract the US Fed chairman of the day – a keen fly-fisherman. It has since become a talking shop for global economic and monetary policy.
This year’s opening speech by Janet Yellen was watched especially closely for hints at Fed policy plans. The Fed chair highlighted a series of payroll gains in the US, the strength of consumer spending, and the bank’s expectation of inflation gains, as she argued that the case for a rate hike had strengthened. Nevertheless, she omitted to specify a September rise, as some had hoped. The S&P 500 ended the week down 0.83%.
Some of this attention is understandable. The Fed’s medium-term rate plans remain unclear. Although formally committed to rate rises, the central bank has been clear to emphasise the slow pace at which it plans to proceed – and members of its rate-setting committee returned to rate inaction following its rate rise late last December, the first in nine years.
Moreover, the bank is facing increasing political pressure, both from Donald Trump, Republican presidential nominee, and from Fed Up, a protest movement that wants the Fed to hold down rates to enable some of America’s lowest-paid benefit from a rise in wages. The greater role played by central banks since the global financial crisis has led some to criticise their power – or at least the way they use it. Scrutiny is likely to increase, making it increasingly difficult for central banks to act independently of politics – or to take actions that could be seen as favouring financial markets.
Nevertheless, Haruhiko Kuroda, Japan’s central bank chief, must have felt some envy as he met with Janet Yellen in Jackson Hole. Last week statistics showed that Japan’s consumer prices have dropped for the fifth consecutive month, suggesting that neither extreme central bank measures nor Abenomics (the prime minister’s stimulus plan) have yet succeeded in normalising the country’s economic weather. With rates already in negative territory, Kuroda is now low on ammunition.
The Nikkei 225 dropped 1.1% last week, although there were hopes the central bank might soon step in to make asset purchases. But much of the downward shift reflected fears that Janet Yellen would hint at imminent rate rises. If she does raise rates soon, she is expected to do so slowly, and to do so alone. Rates are not expected to rise elsewhere in the developed world for some time yet.
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