A decade after Lehman Brothers failed, what do managers think about banks?
On Monday 15th September 2008, I remember walking into the office, not knowing quite what to expect....
The cat has truly arrived among the pigeons has it not? We may not be able to trust opinion polls nor the bookies ever again. There has been much gnashing and wailing—and let us make it clear that we are not talking about the football—but we must now hope that our elected representatives make a good fist of the mandate the electorate have given them.
Leading with a Brexit wrap, we take a look at the key events you need to know about in July.
Reactions from the continent have ranged from those of certain European Union (EU) bureaucrats and camp followers who would have the UK punished for taking such an un-European attitude, to a much mellower tone from Angela Merkel, who patently understands that we take a goodly percentage of German exports and putting up trade barriers would count as a shot in the foot, if not both.
The EU’s exports to us are already more expensive courtesy of a falling pound and higher tariffs would just exacerbate the issue. Currency weakness will on the other hand make our exports more competitive and this is the potential way out for the UK economy, just as it was after Norman Lamont lost his battle with George Soros in 1992.
Sterling has been the main casualty thus far and it may have further to go against the US dollar. However judging by the falls in European markets, the euro hardly finds itself in a position of strength either, which is also a reflection of the difficulty the powers that be are having in getting some traction into EU economic growth.
Another sector that has taken a bashing is financials, and European banks in particular. Deutsche Bank has seen all-time lows and trading in Barclays and RBS was suspended for a while. The European Central Bank (ECB) in “whatever it takes” mode have changed the rules for bond purchases by looking at a country’s overall debt level rather than size of the economy. As a result, Italian and Spanish bonds are at new low yields. So too are UK gilts, as the Bank of England governor Mark Carney joins the ECB president Mario Draghi’s fan club.
Bond Armageddon has therefore once again been postponed, it would seem, as the central banks continue to prop up the markets. Any rate rise form the US Federal Reserve (the Fed) looks to have been put on hold until perhaps 2017; however, we must remain ever vigilant. Other major concerns pre-referendum were the Chinese ‘devaluation’, which has been proceeding stealthily while attention has been drawn elsewhere, and, allied to it, the continuing strength of the US dollar with potential repercussions for emerging economies and commodity producers.
The FTSE 100 index ended the month pretty much where it was on the eve of the referendum, courtesy of the high proportion of US dollar earners among its stocks. The mid- and small-cap indices, reflecting the domestic UK economy, fared less well. Weaker sterling will impact the UK economy by making its import prices higher, but this may eventually benefit our exporters.
Fuel prices were already on the up courtesy of Brent hitting US$50 a barrel and this will have been exacerbated by sterling’s slide. On the trade front, at time of writing 11 countries have started or want to start negotiations with us: the US, Canada, South Korea, Ghana, Mexico, Iceland, Switzerland, New Zealand, Australia and last but not least Germany. The US, India, New Zealand and Australia have all cited the difficulties they have experienced negotiating with the now 27 nation trading bloc and look forward to a swift deal with the UK.
Bank of England governor Mark Carney has suggested he will join European Central Bank president Mario Draghi in doing whatever it takes – i.e. quantitative easing (QE) of some description. It has never worked, except to shore up the banks in the initial stages of the great financial crisis, but maybe that’s what he is worried about.
The US markets took a beating too immediately post June 23rd, but have staged a recovery and there is a not unreasonable probability of the S&P 500 making a new high. The improving strength of the US dollar will attract further inflows, which won’t all go into US government bonds (treasuries), seeing as they are on historically low yields.
The electioneering has taken a back seat for the time being, but we are approaching convention time when the presidential candidates will be anointed and then the battle will be re-engaged. For those with an eye for a bargain, the bookies are pricing Trump to win at the same odds as a Brexit vote on June 22nd…
European markets have not recovered their poise as well as the FTSE 100 or S&P 500, suggesting that the grindingly slow recovery will be further hampered by exit machinations. The Spanish elections were inconclusive as voters were sick to death of electioneering and unsure of the implications of the Brexit result.
However over in France Marine le Pen will have no such reticence and, with the country’s current leader François Hollande the least respected president of all time, it is likely that France will be the next pressure point. If the Italian banks don’t get in on the act first, that is.
By all normal rules, the yen should be flat on its back given Japan’s negative interest rates and bond yields, but so far this year it has appreciated against the US dollar by 20%. The Bank of Japan were in the market at Y100/$ and this has been a help in the country’s equity market as a result. There are some extraordinarily cheap stocks on offer and we would not be surprised to see a decent rally from here.
China’s slowdown is still a concern as is the ongoing devaluation that is exporting deflation to the rest of the world. However this market and those across Asia and the emerging world have generally done a lot better; India has been especially strong.
Gold has shown its risk off characteristics no more so than in sterling terms and an exposure to mining stocks this year would have paid off handsomely. The oil price has continued to tick up with Brent sticking closely to the US$50 a barrel level. At these prices, US shale starts to become economical again, but of course increased supply should just keep a lid on prices.
A combination of risk-off, the prospect of more quantitative easing and the postponement of a US rate hike has driven global bonds yields to all-time lows, pretty much everywhere. With US dollar strength back on the agenda, US government bonds are still trending up after 30-plus years!
In the UK, the 10-year government bond yield is at less than 1%. Companies including B.A.T. Industries (British American Tobacco) and Brown Forman (the makers of Jack Daniels) have successfully tapped the sterling corporate bond market for a cool £3.7 billion, despite threats from S&P to downgrade the UK’s credit rating. The concern for the UK is a reduction in inward investment with which to repay debt tranches as they mature.
The domestic economy would need to contract to balance the books, but comments from General Motors that they are likely to increase car production in the UK lends some encouragement to the view that the long term prospect for the UK may not be as bad as some of the more negative forecasts have indicated.