Peter Garnry
The main Q4 topics for equities include the US presidential election, a potential rate hike and the discussion on bonds versus equities says Peter Garnry, head of equity strategy at Saxo Bank.
Article / 18 August 2016 at 13:30 GMT

Markets need a plan, and QE isn't it

Head of Trading / The ECU Group plc
United Kingdom

  • Global capital 'not being encouraged to invest'
  • UK economy showing resilience post-Brexit
  • US rate hike demands wage inflation

From the dark end of the street...” — Van Morrison

According to a recent study by UK estate agent Haart, a pattern has emerged in the British property market that struck an interesting chord with us this morning. The report suggests that the UK property market has become skewed by how people voted in the Brexit referendum, highlighting that in areas that voted to Remain, the number of sales that have fallen through have jumped by 50%, whereas activity has picked up in those areas that voted Leave. 

“The reality is that we have a property market that is heavily driven by sentiment and it is the confident Leave voters who are currently keeping the market afloat”, said Haart's CEO.

If we take a step back from the regional UK property market there are some interesting connotations and possibly implications for the UK economy and global market sentiment that arise from this anecdote. Confidence is key. If policymakers could find a way to allay the Brexit fears of Remain voters, not just at the individual level but at the corporate and multinational level, then the UK will be in a very strong position. 

What is needed is a plan.

Global private capital is not being encouraged to invest” — Scott Morrison

From a monetary policy standpoint, the global "race to the bottom" has likely had a significant impact on broad, long-term consumer confidence. 

By this we do not mean the traditional measures of investor and purchaser sentiment that have held up well over recent years, but the difficult-to-quantify negative impact on confidence of very weak pension growth, (almost) no return on savings and asset price distortion that arise as a function of the current global monetary policy activism. 

Furthermore, as Australian treasurer Scott Morrison suggested recently, “global private capital is not being encouraged to invest” in the current growth/inflation/yield environment. This perhaps argues that the huge global monetary stimulus is not doing what it is intended to do. 

Quantitative easing

It is almost as if printing money is a less-than-complete answer to economic woes. Photo: iStock

This sentiment was echoed recently by Bill Gross, who said that “capitalism does not work at zero interest rates”. It is perhaps not surprising, therefore, that many central banks (notably those of Japan, New Zealand, and the US) appear to be conducting a thorough review of the efficacy and objectives of monetary policy against continued pedestrian economic activity at the current juncture.

This is the strangest life I’ve ever known” — Jim Morrison

Last night’s Federal Reserve minutes shed little new light on the progression of US monetary policy. On one hand there appears to be a growing minority that sees the US economy as being at or near the point at which a rate rise is warranted. However, several members wanted to “wait for more inflation confidence”, stressing that they saw “ample time to act if inflation rises”. 

That is likely the key point. Until there are clear signs of an uptick in price and/or wage inflation, there is little conviction to raise rates. Markets are now pricing a 50% chance of a single rise in the Fed Funds target rate by January ‘17. 

We have outlined the implications of this a number of times recently. We maintain the view that a US economy that is too cold for rate rises and too hot for recession fears generates a hunt for yield, diverting cash into equities and risk assets (including emerging markets). This likely continues unless or until there is some evidence of inflationary pressure or rising inflation expectations.

We can make this last forever” — James Morrison, Please Don’t Stop the Rain

Perhaps more worrying than the monetary situation in the US is the monetary situation in Japan. It was reported overnight in the Wall Street Journal that Japanese prime minister Shinzo Abe’s economic advisor Etsuro Honda sees “more than a 50% possibility” of the Bank of Japan taking "bold" measures next month. 

The interview goes on to discuss an increase in the monetary base target to JPY 100 trillion per year indefinitely, stating that Japanese monetary policy “hasn’t been eased enough”. the bright side of the road” — Van Morrison

In the UK this morning, retail sales surged past expectations, accelerating to an annual growth rate of 5.9%. This comes in quick succession after the stronger-than-expected UK employment data for July, where employment hit an all-time high and the dole queue shortened in the month after the referendum. 

We will pick up on GBP again next week, suffice to say that our views remain unchanged from recent comments where we have been advocating GBP strength (particularly in the near term against the USD). 


Brexit may have shocked sterling, but the UK economy appears to be 
more resilient than some thought. Photo: iStock 

So far it seems that the negative economic claims of "project fear" have failed to materialise in the UK... yet. While we are acutely aware that heightened risks to business investment, trade and fiscal support remain in the medium term, we retain the view that confidence is key to the recovery, globally. 

We would also argue that the confidence argument is even more critical at zero interest rates. Outside of winning a record number Olympic gold medals, it may be difficult for government to formulate a policy of "confidence stimulus". However, the first steps must be a plan, and a supportive fiscal platform from which to launch it. 

In that regard, as global monetary policy throws ever large numbers at ever smaller returns, fiscal policy is likely to become the dominant driver of sentiment and ultimately confidence.

— Edited by Michael McKenna

Neil Staines is head of trading at The ECU Group


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