Markets were in turmoil this week as concerns about China, OPEC, Oil, Commodities, Miners, and Bankers came to the fore. Gold rallied as the Dow and FTSE closed below critical levels of 16,000 and 6,000 respectively.
UK Gilt yields fell to 1.38 and US yields fell to 1.71. In Japan ten year bond yields fell to zero, marginally trading in negative territory as markets settled. The Yen rallied, despite the cut in rates, undermining the little credibility remaining for Abenomics.
Life on Planet ZIRP …
There is a problem with life on Planet ZIRP. It is the lure of the NIRP crevasse. Central banks adoption of negative interest rates in Sweden, Switzerland, Europe and Japan is a step into the unknown. The crevasse may well be a deeper black hole, sucking central bankers into the depths of experimentation with the soft lure of a Sirens call.
The Sirens were called the Muses of the lower world. "Their song, though irresistibly sweet, was more desolate than dulcet, lapping both body and soul in fatal lethargy, it was the forerunner of death and corruption.” Walter Copland Perry
So too with the soft call of academic monetarists, the lure of negative interest rises is seducing central bankers, confounding common sense. We were bemused by QE and baffled by extended near zero rates. The stopover on Planet ZIRP has developed in to a prolonged stay from which now there appears to be no escape. Janet Yellen far from making the bold move to leave Planet ZIRP, now appears stuck in the departure lounge.
We have warned of the dangers of low rates in the economy but what of negative interest rates? The damage to savers, the threat to bank deposits is a threat to the banking system in entirety. No wonder shareholders were concerned about bank stocks. The Deutsche Bank rumours partially settled by the share buy back at the end of the week.
This is no time to be experimenting with the world economy. It is time to call for a treaty of the Non Proliferation of Negative Interest Rates before too much damage is done.
Back in the UK …
The trade figures continue to disappoint. The deficit trade in goods was £125 billion in 2015 compared to £123.1 billion prior year. The oil dividend offered a mere £2 billion respite despite our expectations of a much larger contribution. In 2016 we expect the deficit to increase to £128 billion as the economy continues to expand at around 2.5%.
The trade in services surplus was just over £90 billion in the year compared to £88 billion prior year. The overall trade deficit (goods and services) of £35 billion at around 2% of GDP is not of itself a constraint to growth. The wider current account deficit is expected to fall to around 3.5% of GDP this year. Heading in the right direction assisted by the “kindness of strangers” and the “madness of crowds” perhaps …
Manufacturing output fell in the final quarter of the year by -1% falling by -0.2% in the year as a whole. Transport and chemicals the outliers of growth as output of capital equipment and consumer goods were hit through the year.
In 2016, we expect a similar pattern of output with modest growth of just over 1% achievable. Transport (water, wheels and wings) will continue to be the strongest areas of growth.
In the final quarter of the year, construction output increased by 0.4%. For the year as a whole, output increased by 3.4% with a near 7% increase from new work. All new work increased by 6.8% while repair and maintenance decreased by 2.2%. Much better result that appeared possible through the year. So much for data revisions …
In 2014, construction output increased by 7.5% slowing to 3.4% in 2015. We expect growth of around 3.5% in 2016. This together with continued strength in the service sector will underpin growth in the UK economy through the year.
So what of rates …?
Markets are pricing in a UK rate move some time in 2017 with little or no expectations of a rate rise this year. In the US, the FED is giving mixed signals about the extent of further rate rises and the timing of the next move.
Despite turmoil in the markets, the volatility is more “much ado about nothing” rather than the “Tempest” some anticipate. China growth continues, the ASEAN block will grow at around 4.5% this year. The US and UK will continue on track and modest growth continues in Euroland according to the latest Eurostat data.
Sooner or later OPEC will turn the tap down and oil prices (and inflation) will rally. It really is time to leave Planet ZIRP avoiding the lure of the NIRP Crevasse. If Yellen continues to tighten policy, the UK will surely follow, despite the market myopia.
So what happened to Sterling?
Sterling closed unchanged against the Dollar at $1.448 but moved down against the Euro to €1.288 from €1.299. The Euro moved down against the Dollar to €1.124 from €1.400.
Oil Price Brent Crude closed at $33.08 from $34.29. The average price in February last year was $58.1. The deflationary impact continues with some strength.
Markets, crashed then rallied - The Dow closed at 15,910 from 16,242. The FTSE closed at 5,707 from 5,863.
Gilts - yields moved down. UK Ten year gilt yields were at 1.38 from 1.57. US Treasury yields moved to 1.71 from 1.87.
Gold closed at $1,236 ($1,154).
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.