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....
Central bank rhetoric has changed and options for withdrawing quantitative easing are on the table. At the end of last month, Mario Draghi, president of the European Central Bank (ECB), notably announced “reflation” was taking hold in Europe, signalling an eventual end to the ECB’s multi-year rate cutting and bond buying cycle.
As usual, central bankers caveat their prognostications and are likely to return with further accommodation if asset markets show any significant weakness. Indeed, Draghi was forced almost immediately to ‘clarify’ his remarks, emphasising as ever his focus on long-term stability and a gradual winding down of any monetary policy. This didn’t change the reaction in fixed interest markets, as yields increased on European government bonds in particular and the euro currency rose.
Government bonds are heroically expensive, which will inevitably become a problem as interest rates finally start to turnaround from their long-running downward trajectory. Spreads on corporate bonds are still tight and several European issues are trading on negative redemption yields. On that basis, they are ridiculously expensive and default risk can only rise from here, also making high yield potentially less attractive. Is the yield premium adequate? There is also significant concern over liquidity risk, despite central bank buying and regulatory stress testing.
Meanwhile, Western equity markets are due a correction, although new highs before then in both the FTSE and the S&P 500 are a distinct possibility. Short-term fluctuations in sterling are likely to drive UK stock market movements. In the US, some volatility has returned, triggered not only by the Federal Reserve continuing to unwind its own QE, but also by jitters over North Korea and how Trump will deal with the situation there. And although the first attempt to impeach Trump, which got underway yesterday, is considered a long shot, the possibility that he won’t serve out his term is real. Impeachment proceedings would create no small amount of uncertainty, which could end up being the catalyst for a stock market tumble.
Japan had a reasonable June, with equities continuing their rise since the start of the year, although the market won’t be immune to any sell-offs in the US and Europe. Asia Pacific and emerging markets were volatile, but finished the month up in local terms – perhaps reading signs of US currency weakness and fewer interest rises from the Fed than expected, which is generally considered good news for economies that borrow in US dollars, as their debt becomes easier to pay off in their own local currency.
Demand for gold continues to be strong and sentiment is returning, with new gold markets opening in Shanghai and Dubai. It has continued its rally from January lows, buoyed by uncertainty. A move above the 2016 high at US$1,375 would be very good news for the gold bugs; a break above $1300 would be a good start.
Commodities generally will not see a sustained trend change until the global economy shows more signs of life, although in the short term expect geopolitically induced rallies. Oil above US$50 a barrel would mean shale producers start turning on the pumps again, which will increase supply and keep the upside price in check. For now, Brent is sitting back around the US$48 mark.