I have touched on the subject of monetary policy a couple of times in recent weeks. Today I am returning to the topic. In my latest trips to our regional offices to update our investment outlook, I described central bank policy meetings as some of the key “bricks” in the “wall of worry” that equity markets would climb over the rest of the year and into 2018. Other bricks included China’s Communist Party Congress (excellently covered by John Haynes last week), various political developments (e.g. the situation in Catalonia and Germany’s coalition negotiations), and North Korea. The first of several key central bank meetings came last week, as the European Central Bank (ECB) held its eagerly awaited October meeting.
Central bank meetings are perfect for attracting the attention of traders. The dates are set in stone months in advance; there is a growing expectation of policy shifts; and the decisions have the capacity to catalyse sharp moves in markets. Not surprisingly they generate a huge amount of speculative comment ahead of the event followed by endless post mortems. I suppose I am guilty of adding to that pile!
So why are these meetings currently attracting so much attention? For much of the period since the financial crisis central banks have been in easing mode, either cutting interest rates or implementing asset purchase policies, namely Quantitative Easing (QE). This was done with a view to improving economic growth, which has ultimately been successful (although not everyone agrees on this cause and effect), but has had an even more positive effect on financial assets – fine for the minority of people who own them, but exacerbating inequality and reinforcing the support for populist politicians. Since 2013 there has been a touch more uncertainty. That was when the US Federal Reserve surprised markets by announcing that it would stop its QE programme, triggering the “taper tantrum”. Investors have been petrified ever since that another such upset is on the cards, but we have generally avoided a repeat performance for a couple of good reasons. First, investors’ positioning in markets is less extreme than it was then; second, the central bankers themselves are aware of the risk of surprising markets again, so have been very circumspect in their announcements, leaning heavily on the concept of “forward guidance”.
That doesn’t mean that there are no risks. Equity and corporate bond markets came under extreme pressure in early 2016 as investors feared a policy mistake from the Federal Reserve. Its “dot plot” of the future level of interest rates, derived from the forecasts of board members, suggested as many as four quarter percent interest rate rises in 2016. That was in the face of a wobbly Chinese economy and collapsing commodity prices. Obligingly, the Fed held its fire until December 2016, only raising the Fed Funds rate once. There have been two ticks up since, and another is expected in December, but these are against the background of a strengthening global economy. The “dot plot” suggests another three rises in 2018.
|FTSE 100 Weekly Winners|
|Paddy Power Betfair||9.5%|
|Smurfit Kappa Group||6.4%|
|FTSE 100 Weekly Losers|
The Bank of England has, at least, got a big monkey off its back by delivering a rate rise. It was clear from the coverage of last week’s move that the passage of time since the last rise – more than ten years – made this one such a big deal. Apparently, some of Arsenal Football Club’s “Invincibles”, who went on a forty-nine match unbeaten run in 2003-04, became more worried about not losing than winning. Sometimes in recent years it has almost felt as if the standing Monetary Policy Committee didn’t want to be the one to raise rates after so long. Arsenal’s run ended at Manchester United in the infamous “Pizzagate” match. I am not aware of any savoury snacks having been lobbed around the hallowed halls of Threadneedle Street last week.
This week takes us through the one-year anniversary of Donald Trump’s election victory, so that offers an opportunity to reflect on the period. I certainly expect the day itself to be marked by a stream of tweets from Mr Trump highlighting all the great things that have happened during this time, and foremost amongst them is likely to be the performance of the stock market. The S&P 500 Index is up 21% since the close on election day last year, and the tech-heavy NASDAQ 100 an even more punchy 31%. But can The Donald really claim any credit?
In the immediate aftermath of his win, the dollar soared on expectations of more domestic-friendly policies and the potential for, for example, heavy infrastructure spending; banks and construction companies outperformed; growth stocks lagged. But following the inauguration, that trade went into reverse. Precious little in the way of new policy was forthcoming. Indeed, Trump appeared more obsessed with undoing the legacy of Barack Obama than implementing any of his own strategies. If anything, the President’s interventions into the world of business were negative, as he complained about the profits being made in various industries. He has taken an unconstructive view of existing and proposed trade agreements. During the summer, his sabre-rattling against North Korea created a degree of uncertainty. And his responses to major domestic incidents have generally been deemed to be unsympathetic, to say the least.
All this would seem to suggest that equities have rallied despite him. It is really only in the last couple of weeks that we have seen some progress on tax reform being priced into the market. The truth is that he inherited an economy that was on the mend, not least owing to the fact that we were coming off a huge contraction in capital expenditure in the Energy sector following the collapse in the oil price. It really couldn’t have got any worse on a sequential basis. Meanwhile, the global economy continued to recover, Europe was finding its feet again, China was supporting its economy ahead of the big Party Congress, and global trade was bouncing. It was all a gift to the winner. So take those tweets with a pinch of salt.
Most recently Trump has decided to put his stamp on the Federal Reserve, by pensioning off Janet Yellen and promoting Jay Powell to the chair. Nothing too controversial here, as Powell is seen as the “continuity choice”. He voted with Ms Yellen on every occasion in the last five years. We would expect to see gradual policy tightening continuing as long as the economic background justifies it. Finally, the poem Halloween was written by Robert Burns. This week, what was the last imperial dynasty of China?
Year-to-date market performance
FTSE 100 Index, past 12 months
Past performance is no indicator of future performance
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