A lack of interest

An increasing feature arising from global stimulus measures by central banks has been negative interest rates and negative bond yields. Indeed, it is estimated that there is now over $13 trillion of Government bonds globally offering a negative return to redemption.

The fact that many parts of the world now have negative interest rates means it costs banks and financial institutions to store cash with central banks, so some are considering buying ‘physical’ warehouses to store their cash in instead. In Germany, where the European Central Bank (ECB) does charge for deposits, some major financial institutions are already experimenting with bulk storage of cash.

The Bank of England (BoE) recently cut UK interest rates to 0.25% – the lowest it has been in the Bank’s 322-year history and suggested rates could move lower. Understandably many high-street banks and building societies have cut savings rates. The interest rate on cash, and yield on gilts is now particularly miserly. While the BoE does not appear to be a fan of negative interest rates, if they were to be introduced, will more of us put our spare cash under the mattress instead?

The hunt for income continues to be challenging. This has greater significance if inflation is taken into consideration. Weaker Sterling has pushed inflation higher. The wider inflation measure – CPI is at 0.6%, however RPI, which is still used for indexing a series of inflation linked costs, has hit 1.9%. Savers are suffering negative real interest rates and the situation is only likely to worsen. Equities still look an attractive asset class to access decent yields and growing incomes, but do come with increased risk, compared to cash.

What have we been watching?

As fund managers started to return to their desks after the summer holidays most focused on the US jobs data and ramifications for US interest rate policy. In the UK, investors remained on Brexit economic watch but most are waiting on the Government’s Autumn statement. Since June 23rd the BoE has done its bit, now it’s up to the politicians to deliver the much needed fiscal stimulus.

Interestingly according to an article in the FT, a report has estimated that following the collapse in government bond yields, Governments globally are saving in the region of $500bn in annual interest payments. Such a backdrop is clearly helpful should governments, including that of the UK, seek to increase infrastructure investment to boost their economies.

UK politicians also returned from summer holidays and PM Theresa May called ministers in to thrash out what the statement ‘Brexit means Brexit’ will mean. It looks as if Article 50 could be triggered early in 2017 to start the two- year Brexit negotiation process. Theresa May has agreed with her cabinet that immigration will be a red line in EU negotiations, which does not bode well for the City of London/the financial sector seeking to maintain access to the single market.

In the UK, Bank of England (BoE) data showed July mortgage approvals fell to one of the lowest levels seen in the last three years, almost 19% below the same time last year. However, this differs from what many of the quoted housebuilders have been saying, with visitor activity up by 20% on the same period last year. Could the data reflect an affordability issue in London and the south-east perhaps? However, leading retirement housebuilder McCarthy & Stone issued a profit warning referring to some evidence of weakness in the secondary housing market since June.

UK manufacturing activity has started to benefit from the fall in Sterling post the EU referendum with the order and output reading bouncing back from 48 to 53, the biggest jump in 25 years. Sterling firmed against the US Dollar on this data which prompted some in the City to ask whether the Bank of England was too hasty to cut interest rates?

In Europe, eyebrows will have been raised again by the latest ‘flash’ inflation reading for August which came in at just 0.2%.

In the USA, all eyes were on the jobs data for guidance on the likely timing of the next US interest rate rise. Leading into the data, US manufacturing data for August showed broad-based weakness with new orders, employment and inventories all slightly lower. Friday’s jobs data revealed slower than expected growth in August after two previous stronger months, which the market interpreted as removing pressure from the Fed to increase US interest rates, with December seen as most likely for a hike.

Chinese manufacturing activity was better than expected with a reading at a two year high just in expansion territory at 50.4.

Oil gave up some of its August gain following data showing higher than expected US oil inventories.

Finally, the European Commission has ordered Apple to pay €13bn in back taxes to Ireland. While this may be appealed by both Ireland and Apple and is likely to spend years in the courts it is an interesting development. Globalisation has allowed multi-national companies to re-base operations to lower tax regimes and some countries have openly courted big companies with low corporate tax rates in the hope of inward investment and job creation. However, lower corporate tax rates have not helped government finances. In a low growth world with high government deficits but high company cash balances, are some global names now vulnerable to a shift in the political winds? Having said this, it will be interesting to see if the UK tries to encourage investment by lowering corporate tax rates in the coming months.

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A lack of interest

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