The Lowdown on Markets to 17th March 2017
World Markets at a Glance
In this week’s issue
- The Federal Reserve Bank raises rates by 0.25% but remains dovish on future rate hikes.
- In the UK the Bank of England votes to keep interest rates unchanged.
- In Europe the financial markets act favourably to the results of the Dutch Elections.
- Theresa May prepares to invoke Article 50 whilst Scotland wants a second referendum.
- In the FX market sterling gains some ground against the US dollar after the Fed report.
- Markets are still in a bullish mood, but are becoming increasingly priced to perfection.
“Financial markets react positively to the Feds decision and election results”
A busy week for central bank policy announcements, and an important European election result, saw the financial markets react fairly positively with global equity markets gaining further ground whilst US treasuries put on a strong showing after the Federal Reserve Banks decision to raise Interest rates.
Prior to the start of the week there was some nervous investors around thinking that perhaps with the Federal Reserve Banks interest rate announcement, the National People’s Congress meeting in Beijing, an uncertain outcome from the Dutch elections, and the dreaded “triple witching hour” in the US, [derivatives contracts expire], might all be too much for the markets to digest and thoughts of a nasty correction were very evident.
However, with the Fed raising rates by just 0.25 basis points, followed by a clear message that they were in no hurry to tighten monetary policy, all helped to steady nervous investors concerns, also China managed to tighten their monetary policy gently with no real affects. Then in Holland the Dutch populists did worse than was expected in the election, whilst in the US the “triple witching hour” passed with little apprehension, seeing no real pick-up in volatility and leaving the financial markets in a positive buoyant mood.
“A busy week for central bank policy announcements”
Arguably, it was the Feds future monetary policy actions that the markets were most focused upon, given that it was the language that the Fed chair, Janet Yellen, communicated to investors, and the outside world, that might influence the direction that both the equity and bond markets might take over in the coming months. And clearly, her intent was always to give the markets, and its investors, a reassuring impression that whilst the Fed have now entered a period of monetary tightening that they were fully in control of the current US economic landscape.
However, understandably there are still many problems that could create directional change, such as geo-political uncertainties, surprising European election results, the invoking of Article 50 by the UK government and subsequent “hard Brexit”, or the recent fall in the price of crude oil. Nonetheless, the message was fairly clear that the Fed were likely to take their time over the next couple of years and to raise interest rates carefully implying that we might see a further two interest rate hikes this year and possibly a further three in 2018.
But of course, for some time now the markets have been very focused upon the Fed, and how they might implement their monetary tightening programme, after such an extended period of very low interest rates. This became known in the market place as the “Fed put”, however, it is quite possible that with the outcome of the US presidential election, and the promise of future tax reforms by the newly appointed president Donald Trump, that we have indeed moved on from the “Fed put” to the “tax cut put”, which might now influence the markets more over the coming months.
“In the UK the Bank of England voted to keep interest rates unchanged”
Equally in the UK the Bank of England voted to keep interest rates unchanged at their current level of 0.25 per cent, however, for the first time in eight months their decision was split, with one of the nine members voting to raise rates, perhaps a sign that some hawkishness is now entering the walls of the Old Lady of Threadneedle Street. Clearly, we will need to see further signs of a pick-up in wage growth, and or inflation, for the committee members to consider raising interest rates in the UK.
Obviously, the outcome of Brexit is still uncertain, and now there is the added concern over Scotland and the question of a second Scottish referendum for independence. However, traders have begun to price in a first UK interest rate hike, which is likely to be in the early part of 2019. Interestingly enough this is the same year that the Bank of England Governor, Mark Carney, is proposing to step down from his post, and it was widely thought that the deputy Governor, Charlotte Hogg, would be his natural successor.
But of course, last week’s news that she has resigned from her position, due to conflicts of interest, made it impossible for her to continue. Therefore, we must now wait and see who will actually take over from Carney when the time comes. Curiously, this resignation will now leave the MPC with no female members, given that Kristian Forbes, one of the external members, and the dissenting voter at the recent MPC meeting, has also announced that she will be leaving when her term expires at the end of June.
Equally, if the Bank of England do begin to raise interest rates in 2019 it will not only co-inside with a change of leadership within the Bank of England but could also have a detrimental effect on the following year, given that in May 2020, their will need to be a general election in the UK, unless of course, the prime minister calls for an earlier UK election.
“We must now wait and see who will actually take over from Carney”
However in the meantime we are still waiting for the Prime Minister, Theresa May, to invoke Article 50 which will begin the proceedings for the UK’s exit from the European Union. Nine months has now elapsed since the Brexit vote and in that time we have seen the leading UK stock-market, the FTSE 100 Index, hit numerous highs. What market watchers and investors are now mindful of is how will the market, and more importantly sterling, react over the next couple of years whilst the government negotiates new trade deals and hopefully a successful exit strategy from the EU.
Unfortunately, there is likely to be other outside influences over the short-term that could affect the domestic market and sterling given that we have already experienced an 18 per cent devaluation of the pound since the Brexit result back in June 2016. In fact, sterling is now considered quite cheap by some traders, given the underlying health of the UK economy, but regrettably, with so much doubt still surrounding the outcome on trade, immigration and future UK GDP, the short-term direction for the pound is still rather uncertain.
Finally, in respect to the events of last week, sterling actually traded higher against the US dollar as the Fed’s rather dovish comments on future interest rate hikes saw the green back falter against a basket of leading currencies. This in turn, saw emerging market equities forge ahead, extending the recent relief rally caused by a subdued dollar, cheap valuation and the prospects for better-than-expected corporate earnings over the coming months.
“Sterling actually traded higher against the US dollar”
In Europe, the markets gained ground on the news that the result from the Dutch election meant that Mark Rutte’s Peoples Party for Freedom and Democracy [VVD] managed to cling on to power from Geert Wilders Populist Party for Freedom [PVV]. This meant that the pre- election concerns of a populist victory subsequently evaporated calming jitters in the markets that had been building up over recent months.
Similarly, in the UK we saw the FTSE 100 Index end the week at a record high, although gains were capped by a renewed bout of strength for sterling which acts as a headwind for many of those UK companies that are heavily exposed to overseas earnings. Conversely, the FTSE 250 Mid-Cap Index has been gaining ground the large cap index and is now out-performing the FTSE 100 so far this year.
And in respect to Wall Street, US equities were largely unfazed by the Feds move to raise interest rates with the S&P 500 Index moving very close towards its record close whilst US Treasuries reacted positively towards the central bank’s announcement.
Clearly, the markets are still in a bullish mood, but are becoming increasingly priced to perfection; therefore, there is very little room for disappointment or surprises whether economic, monetary or geo-politically. Understandably, with interest rates, and sovereign bond yields, still looking equally unattractive in respect to future returns, any meaningful pull-back in global equities is likely to lead to a further period of renewed enthusiasm for this asset class
Peter Lowman Chief Investment Officer
Peter Lowman Chief Investment Officer Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .