By Scott Ingham, Investment Director at Heartwood Investment Management
After seven years of slumber, the Bank of England sprang into action yesterday, with Governor Carney unveiling three big changes to monetary policy in order to assist the UK economy’s adjustment to life post-Brexit:
- The Bank base rate was cut from 0.50% to 0.25%.
- A four year‘ Term Funding Scheme’ was launched to provide commercial lenders with cheap financing with the intention of filtering the base rate cut through to consumers.
- The Asset Purchase Programme (‘Quantitative Easing’)was expanded by £70bn (including £10bn of high grade, sterling corporate credit).
This amounts to a meaningful loosening of monetary policy and the initial reaction of the markets recognised this; equities were buoyed, sterling slumped and bond yields collapsed,again.
Increasingly, central banker words are as important as their decisions, and yesterday investors received clear guidance on several outstanding questions:
Will the UK policy rate go negative?
Whilst a majority in the Monetary Policy Committee signalled their intent to push for a 0% base rate by the end of the year, when quizzed on the possibility of negative interest rates in the UK, Governor Carney could not have been more emphatic in his response – ‘No’. However, with ‘doves’ such as chief economist Andy Haldane on the committee, and a potential new Governor in 2018, this question is likely to re-emerge down the road.
What’s most important?
The bank of England has a dual mandate;1) stable inflation and 2) support for economic growth and employment.Post- Brexit, the Bank now forecasts inflation rising above target (due to more costly imports) and the growth rate falling meaningfully (although the core scenario sees the UK narrowly avoiding a recession). Yesterday’s actions prove that it is the latter that is driving policy, and likely will continue to do so over the medium term. Under the Bank’s central forecast, unemployment will increase by 250,000 in spite of looser monetary policy.
Is that it then?
Despite Carney’s best efforts to reassure the market that all of the above policies can be expanded and extended, and that other monetary tools are still available, investors will be very wary of there centexperiences of Japan and Europe. Over the last two years both have embarked on unprecedented money-printing programmes with limited success. Eurozone growth remains tepidat 1.6%year-on-year and Japan at just 0.1%year-on-year. In his communication it was evident that Governor Carney believes that monetary policy alone cannot solve the UK’s structural issues.
Over to you,Hammond
The UK Chancellor publicly welcomed the Bank’s action yesterday(as we would expect, having authorised the expansion of quantitative easing). He has also been vocaling his willingness to soften George Osborne’s austerity goals and ‘reset’ UK economic policy.Now the question is how far will he be willing or able to loosen the purse strings? And will it be enough to make a difference? And a point to consider, is it the right thing to do with a national debt of 91%of Gross Domestic Product? Philip Hammond will no doubt have been keeping a watchful eye on the Japanese markets this week, as Prime Minister Abe announced a new $45bn fiscal stimulus package to boost welfare and infrastructure. Since the announcement on Tuesday the market has been underwhelmed, with the Nikkei 225 index falling over 2%.
The Portfolio Manager view
Whilst the Bank of England filled the headlines yesterday with meaningful consequences for individuals(helping those on tracker mortgages or hurting savers), the policy changes were perhaps less significant for global macro-economic investors. Incredibly loose monetary policy has become a little looser, extremely low bond yields have fallen further and historically cheap sterling now looks even cheaper. With this broader context in mind, we continue with our prudent approach,holding short-medium dated UK government bonds and foreign currency denominated assets for diversification benefit whilst seeking out areas of value to drive portfolio returns.
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
BlackRock to add bitcoin as eligible investment to two funds
By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Bitcoin slumps 10% as pullback from record continues
LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)
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