Showing posts with label UK. Show all posts
Showing posts with label UK. Show all posts

Thursday, 14 July 2016

Can we imply further NIRP if the BoE lowers rates?

Just as the United Kingdom received a new prime minister yesterday in Theresa May's appointment to Britain's political hot seat, focus now shifts to the Bank of England's interest rate decision with pundits expecting BoE governor Mark Carney to drop rates for the first time in seven years.

At first glance it appears the decision will be made as a reactionary measure following the developments concerning Brexit which probably holds the greatest weight in the argument to edge rates to all time lows. Needless to say it can also be seen as a coercive coordination in responding to the re-instituted quantitative stimulus by its developed nation counterparts such as the European Central Bank and the Bank of Japan.

It's prudent to be reminded that although interest rates in the UK currently sits at all time lows of 0.5%, the central bank has an arsenal of monetary tools its able to enact to fight off dangers to the economy. It briefly paused its bond buying program in 2012 when other banks opted to continue and still extensively rely upon it but to no avail.

In the past four years the BoE has resisted the temptation to restart these programs however we need to question the British economy's capability in shielding itself from additional bond purchases that's ridden the strength of the British Pound since 2012 when stimulus was paused and in the light of the drastic economic upset from the Brexit vote to leave the European Union.

If the strength with which the British economy boldly defended its monetary policy stance has been wounded badly by the future outlook, then it brings into question the validity over the distorted might of the US economy that's hardly churned out economic growth sufficient to create waves in the global economy. It would suggest that it too is susceptible to becoming influenced by its fellow central bank counterparts exploring the riskiness of negative interest rate policy.

The BoE's decision will impact the global financial system more than simply the confines of its own economy with an action of lowering rates placing pressure on the US Federal Reserve in defending its case of normalisation of interest rates and in saying this implicitly suggest that its influence of directing world economic policy has been tremendously harmed.    
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Friday, 1 July 2016

Do negative yields call for bold new economic policy?

An emerging topic that's gaining traction of late is the tremendous shift seen in developed nations bond rates with some nations sovereign debt trading at negative yields, a world first. The ever expanding debt load that's fallen below zero yield has begun consolidating after initially bulging outwards at an alarming pace but could be fuelled further if investors search for positive return is exacerbated by the enormous demand for both US Treasuries and UK Gilts.

As of today the US 10 Year Treasury yield recorded an all time low as buyers stormed through sellers demands as fears from Brexit flood the market with worry and the outlook for the interest rate environment drifted away from expectancy of normalisation after a lengthy period near zero, a once thought lower bound of rationality.  

Stocks are overstretched and have been for a while considering the previous quantitative easing measures that had were in place for some time which prompted companies to take advantage of the low cost of borrowing to repurchase stock in the open market. Although the effects of this helped extend the bull market by an extra year or two the party soon came to an end when the taps turned off and earnings were suppose to continue their growth.

This hasn't happened, in fact earnings are fading fast along with the global economy that can't find the right footing to leverage the mounds of debt created to act as stimulus.

The US Federal Reserve divergent plan to act in a different manner to its developed nation counterparts is a far greater mission than had been expected which is why investors foresee it departing from this policy stance and reverting back to its old habits of printing money till the cows come home.

Why is this all bad?

Simply because the world cannot function on the perpetual money creating scheme that has so many politicians fixated with in an effort to cover up their own flaws. We've entered a new era of economics and the need to find policies that branch off from convention yet address the evolutionary problems that constantly grow as year go by cannot be without fail.
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Monday, 27 June 2016

Political bamboozling is leaving the market confused

As the fallout over Brexit continues the British Pound fell to its lowest rate in over 31 years highlighting the extent of fear lurking in world markets at present. Politicians have come out in their droves after a weekend of crisis talks in an attempt to pour cold water on speculation that the UK leaving the EU would cause shockwaves for years to come while others warned the stability of the British economy has been compromised because of the vote.

Chancellor of Exchequer George Osborne failed to convince market participants of certainty going forward stressing the point that the "new"government to be announced after the Conservative Party conference will need to find ways of protecting the fiscal shape of the UK's budget policy.

There were also rumours afloat that Osborne was considering his political position at this current time knowing fully well that his administration of government's crucial ministry's affords him a large degree of political credibility should he wish to pursue the position of prime minister, something his remained tight lipped about.

Yet the political infighting isn't immune to the Tories only with the Labour Party using the event as an attempt to oust recently installed leader Jeremy Corbyn who's been in the firing line from members of his own party for not being vocal enough in his campaign for the "Remain" camp. A number of Labour MP's have resigned their position in an effort to shore up support against Corbyn.

One would've thought the Labour Party would've use the vulnerability of the Conservative's as a platform to work towards in eroding the strength of the ruling party however top leadership has left a lot to be desired.    
The fate of Bank of England governor Mark Carney now hangs in the balance as critics have taken a swing at his ability to manage the financial system by saying his commentary during the build up of the referendum was largely skewed in favour of "Remain"putting him at odds with situation that's turn itself on its head.

A campaign to rid the Bank of its governor is placing additional risk into the equation making it difficult for any market participant to find any type of optimism in the midst of chaos.

And who can forget the frontrunner to become the next prime minister of Britain Boris Johnson who's been singing like a canary bird in his response to questions about the manner in which he envisions the process of Brexit unfolding in the coming years as well as the type of policy needed to make the market feel certain of a stronger Britain again.

When asked about his concern about the current market volatility over the saga Johnson shrugged off any concern saying he felt the markets were pretty calm by his account, an ignorant and worrisome statement to make in the face of danger.

He went on to say that he would strive for the free trade agreement between the UK and EU to remain but said the free movement of labour would certainly become restricted to protect British jobs. If anyone wanted some sort of clue to the direction the UK could be headed in they would do well following Mr Johnson's comments closely.

In saying this it cannot be said enough that the current political whirlwind throwing the British economy into disarray has direct influence from the very policymakers who tried desperately to twist the arm of the electorate into believing whatever propaganda they thought would've appealed to them. The vote day is over, the results are in yet the politicians haven't the slightest idea on the next plan of action.

It seems as if the majority of British politicians aren't satisfied with the way polling has gone leading many to believe their could be a plot twist to a dramatic political play. What will it be?

We aren't certain of it yet which stokes the fires of fear even more at a time when politicians should be concentrated on finding a long term solution that doesn't hinder the outlook of the economy.  
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Friday, 24 June 2016

Brexit; What's the state of play right now?

One of the crucial lessons you'll ever learn when participating in financial markets is complacency is often caught on the wrong side of expectation. This is what many woke up to find this morning after the British public elected to leave the EU sending shockwaves throughout world markets who up until yesterday believed the "Remain" camp had done enough to secure a victory.

I'll be the first to admit that my intuition told me the possibilities of the UK leaving the EU was largely unlikely but I do believe that my opinion wasn't far off from the markets expectation in the midst of a global selloff felt today.

If financial market participants believed that they fully understood the psyche of the British voter or even that of a European voter this morning's shock decision has reminded them they're very wrong. It's as if there's a disconnect between what politicians in the EU are saying and what's really happening on the ground with the latter proving more serious in their convictions than the former.  
Where to from here?

David Cameron's campaign to convince the British public of staying with the EU has irrevocably failed along with his reputation to lead the country forward forcing him to make a decision to step down from his role as prime minister that'll happen in October with no mentions of who might take over. The obvious candidate would be the current chancellor of exchequer George Osborne however this won't be a firm certainty with the Conservative Party reeling from split lines in support of Cameron's campaign.

One critic that stood out boldly was former Mayor of London Boris Johnson who added weight to the "Leave"camp that's successfully resulted in the desired outcome for their campaign but not without longer term implications for UK's leading political party.

Cameron's decision to stay on until the Conservative Party Conference was strategically link with saving the image of the party who did itself no favours holding such a vote that's ended up dividing the party instead of uniting it. It could also suggest that Osborne might not fancy himself sitting in Number 10 lamenting the defeat whilst preparing the UK for life after the EU considering he strongly favoured "Remain".

This all but guarantees Boris Johnson an open door to take over as prime minister should he want to which would be confirmed in his own decision to stand down as Mayor of London to concentrate his attention of campaigning for the "Leave" vote that's given him incredible momentum to snatch up Britain's highest political position.

But it won't be without its own problems with the party divided, the prospects of the future uncertain and the opposition rearing to take full advantage of the vulnerable state of the ruling party's woes.

Reconsidering Investment

Businesses in the UK will definitely be reconsidering their geographical location now that all ties between Britain and the EU are to be severed. The district served as an entry into Europe together with the benefit of operating in Pounds rather than Euros, producing a currency advantage if the Pound was weak.

They've come to rely on a significant amount of demand stemming from the EU region that'll now be subject to tighter border controls, import tariffs as well as delays in delivery all making matters complicated when they should be easier.

Needless to say the British public have come to recognise the grave risks becoming apparent in the EU with issues such as Greece austerity not being properly addressed, the Syrian refugee crisis benignly out of control and an insurgence of ISIS terrorism threatening to national safety.

Possibly the biggest risk of the Britain staying was the implosion of the Eurozone which seems to be drawing closer with every fresh unattended economic calamity. You could say perhaps Britons have voted to shield themselves from an inevitable crash when it does occur, a view that's not distant but possibly a huge risk to bank on given the importance of it's relevance and relations with the EU.  
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Monday, 16 May 2016

Major currency volatility is feeding from the sentiment of political uncertainty

Brexit might be fear-mongering the British public into the possibilities of a Eurozone without the participation of the UK, it's also stirring up a lot more than fierce debate over the strengths and weaknesses of remaining in the EU with market players beginning to look further than the June 23rd referendum date set down for voting to take place.

The pound has suffered dearly as a result of news flow pointing to the nation going either way when it comes to vote day, sowing the seeds of public discord amongst voters, not the ideal situation UK Prime Minister David Cameron would like to be in facing a possible party backlash should the vote favour heading to the exit door. Such a strong disagreement over the course of action the government should take doesn't make it easier for the Conservative Party after such vote has taken place with many expected to become disgruntled at the outcome whichever way it goes.

Added to this is the US presidential election set to take place in November of this year which itself is beginning to be drawn into the outlook of political uncertainty that has taken hold of global risk sentiment with some saying that it's creating a fluctuating pool of volatility in currency markets.

Part of the reason we seeing stark movements in currency valuations stems from the continuation by some in developed nation economies to extend its expansionary monetary programs through its central bankers causing a tsunami of liquidity that's finding it difficult to secure a home for investment and return.
Both Europe and Japan have joined a number of crippled nation's suffering from appreciative valuations in their domestic currencies, dissuading foreign buyers from purchasing goods and services that contribute significantly to economic activity. The plan of action has been to venture interest rates into negative territory, a first for the world which hasn't been taken too kindly at its implementation.

Japan has been the most aggressive in stepping up its approach yet the desired effects that the BOJ would like to have seen come out of the situation has taken a turn for the worst with the Yen drastically strengthening as the placement of savings abroad no longer meet the prime objective of investment, which is to seek return. Japanese investors are starting to see their little returns made outside its border erode as its counterpart nations follow a similar monetary policy path, causing a mammoth inflow of Yen back into Japan.

The implication of such action has led to the Japanese Finance Ministry threatening intervention in the currency market if the appreciation doesn't stop. This obviously raised the hairs on the back of the necks of its fellow foreign finance ministers who feel that such a move would evoke the start of fresh currency wars.


US Treasury Secretary Jack Lew reiterated that participating in overzealous currency devaluation would only help weaken the world economy instead of fulfilling each nation's self-serving currency goals. This was said in the light of Japan's finance minister Taro Aso edging closer to starting the process of currency intervention and ahead of the G7 summit taking place in Japan in just under two weeks.

It certainly sets the tone for what will be interesting discussions that will likely create a stalemate in terms of agreement around how world leaders will direct the economy in the right way. It's this uncertainty created by indecision that could heighten currency volatility further with the need to find common ground becoming the bone of contention.
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