By Simon Bishop, Corporate Hedging Director for APAC, Western Union Business Solutions
Financial markets are unpredictable beasts. But even taking that into account, how can key markets, like the benchmark US S&P 500, be positive for the year?
When we consider what the year has seen so far, renewed US-China tensions, civil strife across the United Sates and, of course, COVID-19, the fact that major markets are up for the year seems stunning.
And, of course, it is. But markets often act in stunning ways. In hindsight, we can explain why we have seen markets move like they have.
However, it is much more use to us to accept this is the nature of markets and to be prepared for moves like this – in both the short term and further out into the future.
One reason that observers use to explain the market’s rapid rebound is to suggest that the global recovery might be now quicker than previously anticipated.
The rationale, from this perspective, is that the economic outlook appears better than it did during the mid-March madness that saw the Dow Jones index fall almost 40 percent in less than six weeks.
This is true. But the likely outlook still remains dire.
The World Bank, on 8 June 2020, said a 5.2 percent contraction in global GDP in 2020 was likely – the worst result since the collapse in activity after World War Two.
In fact, the World Bank says this slowdown will likely be twice as bad as during the global financial crisis and the fourth-worst economic contraction in the last 150 years.
While the steepness of the decline remains alarming, the market’s recent rally might be due to hopes that it will be deep, but short-lived.
More money than ever
How big is the rally in markets? The US technology-focused Nasdaq 100 is up an incredible 48 percent since mid-March – and now at its highest level ever.
As the Nasdaq’s gains show, the move in markets has been incredible.
One of the main drivers has been the massive stimulus seen from central banks.
The initial response from the US Federal Reserve saw an increase of over USD3 trillion. In the first response to the global financial crisis, in 2008, the Fed’s balance sheet climbed by only USD1 billion.
The move from central banks wasn’t just massive – it was incredibly quick too.
In the last week of March, the Fed bought USD625 billion of securities to support the market. In November 2010 to June 2011 – during the so-called QE2 program – the Fed bought only USD600 billion.
Therefore, what took seven months in 2010, lasted only one week in 2020.
In terms of government spending, the response this year has also been colossal in comparison with the global financial crisis.
The US government’s assistance program in 2020 equates to around 11 percent of its annual GDP. During the GFC, government programs equalled 6 percent of GDP.
In the UK, the current response is more than double the response during the GFC. In Japan, fiscal stimulus is more than 10 times that seen during the last crisis.
Volatility begets volatility
Hopes for a quick recovery and the massive amounts of monetary stimulus from central banks and fiscal stimulus from governments might be the driver of the market’s rally. But what else is it telling us?
First, while big gains are seen as good for investors, these sudden gains are also a sign of increased volatility.
While this volatility is currently helping markets higher, increased level of volatility also signal increased levels of financial risk.
In short, volatility can be both the giver of gains – and the taker.
We should take these higher levels of volatility as a lesson – and a warning. Markets are likely to remain uncertain and unpredictable for the rest of the year. We should be prepared for anything.
There’s been no end to the commentators that have been stunned by the sharp movement in financial markets but rather than treating these moves as unusual, we need to expect heightened levels of volatility.
When managing financial risks, the last three months can be a powerful lesson. Markets are wild – and they might remain that way.
And looking to the rest of the year, we should remain prepared for anything.
Sterling holds above $1.39, rises vs euro after Sunak’s generous budget
By Joice Alves
LONDON (Reuters) – Sterling held above $1.39 against the dollar on Thursday and gained versus the euro after British finance minister Rishi Sunak unveiled an expansive annual budget designed to prop up the economy.
Sterling is the best-performing G10 currency this year, with investors expecting Britain’s speedy vaccination programme will help the economy to recover from its worst annual contraction in 300 years.
As the locked-down country prepares to re-open, Sunak delivered what he hopes will be a last big spending splurge to get the economy through the COVID-19 crisis.
The UK economy will return to its pre-pandemic size in mid-2022, six months earlier than previously forecast, Sunak said.
ING analysts said in a note to clients that the “generous budget” was well received and it was seen “to strike the right balance and support the spring recovery.”
Sterling edged 0.2% lower against the dollar to $1.3921 in early London trading,. Versus the euro, it gained 0.1% to 86.41 pence.
“Sterling is performing well …My sense is the budget measures bode well in the eyes of overseas investors,” said Neil Jones, Head of FX Sales at Mizuho Bank.
He said the measures and progress on vaccinations “add weight to the view the UK will stand at the forefront of the global COVID recovery”.
(Reporting by Joice Alves; editing by John Stonestreet)
FTSE 100 falls as high yields, inflation worries return to fore
(Reuters) – London’s FTSE 100 fell on Thursday, dragged by miners and bank stocks on concerns about rising bond yields and volatility in U.S. markets, while engineering company Meggitt fell after its annual profit halved due to the COVID-19 pandemic.
The blue-chip FTSE 100 index slid 0.5%, with mining stocks, including Rio Tinto, Anglo American, and BHP, leading the declines.
Resurgent worries about rising U.S. bond yields hit global shares as investors waited to see if Federal Reserve Chair Jerome Powell will address concerns about the risk of a rapid rise in long-term borrowing costs. [MKTS/GLOB]
Meanwhile, Bank of England policymaker Silvana Tenreyro said there was no good evidence that cutting interest rates below zero would, past a certain point, weaken Britain’s economy rather than boost it.
The domestically focused mid-cap FTSE 250 index fell 0.5%.
Ladbrokes owner Entain fell 2.0% after it held back declaring a dividend despite reporting a jump in 2020 earnings. It also said it was expecting online volumes to ease when shops re-open after surging during lockdowns.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V)
World’s biggest wealth fund puts Japan’s Kirin on watch list over Myanmar link
By Terje Solsvik
OSLO (Reuters) – The Norwegian central bank said on Wednesday it had put Japan’s Kirin Holdings Ltd Co on a watch list for possible exclusion from its $1.3 trillion sovereign wealth fund over the beverage giant’s business ties to Myanmar’s military.
Kirin on Feb. 5 said it would end its partnership with Myanma Economic Holdings Public Company Limited (MEHPCL), a company run by Myanmar’s army, after a military coup deposed the democratically elected government.
As part of its decision on whether to maintain its ownership in Kirin, the Norwegian fund will monitor the implementation of the company’s plan to end the ties, Norway’s central bank said in a statement.
Kirin’s decision effectively scraps the Myanmar Brewery joint venture, in which the Japanese firm’s controlling stake was valued at up to $1.7 billion, although Kirin also said it still wanted to keep selling beer in Myanmar.
Norges Bank Investment Management (NBIM), which manages the world’s largest sovereign wealth fund, held a 1.29% stake in Kirin Holdings at the end of 2020 with a value of $277.1 million.
“We remain focused on urgently implementing the termination of our joint-venture partnership with MEHPCL,” Kirin said in an emailed statement to Reuters.
“As part of this, we hope to find a way forward that will allow Kirin to continue to contribute positively to Myanmar. We value opinions and feedback from all of our stakeholders and are open to constructive engagement on this matter,” it added.
The Norwegian sovereign fund, formally called the Government Pension Fund Global and set up in 1996 to save petroleum revenues for future generations, owns about 1.5% of all globally listed shares.
Holding stakes in around 9,100 companies worldwide, it has set the pace on a host of issues in the environmental, social and corporate governance (ESG) field, and its decisions are often followed by other investors.
The bank separately said it would allow the wealth fund to invest again in Poland’s Atal SA, which had been excluded since 2017 for risk of human rights violations through its use of North Korean workers at Polish construction sites.
“As a result of a resolution in the United Nations Security Council, all North Korean workers have now been sent out of Poland. Therefore, there are no longer grounds for excluding the company,” Norges Bank said.
Atal did not immediately respond to an email seeking comment.
A third firm, Germany’s Thyssenkrupp AG, will be the subject of an “active ownership” process as the fund’s management seeks to probe the company’s anti-corruption work, Norges bank said.
“Norges Bank has been in dialogue with the company over a long period of time. We therefore have a good foundation for active ownership on the issues to which this matter relates,” the central bank said.
The fund held a 1.3% stake in the German firm at the end of 2020 valued at $147.1 million.
Thyssenkrupp did not immediately respond to an email seeking comment.
(Editing by Gwladys Fouche, Richard Pullin and Gerry Doyle)
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