The UK monetary authorities are facing quite a challenge as they grapple with the policy tools at their disposal in an attempt to head off any Brexit-induced headwinds. But will they work? That’s the question on Brian Tora’s mind this month.
Now, here’s a thought. Could QE have run out of road? The Bank of England engages in this form of monetary stimulus by buying bonds – more specifically, long dated government securities. Except that when they attempted to carry out this exercise in August, they couldn’t entice sufficient sellers to fulfill their planned purchase amount, despite offering prices above market levels. And this despite the fact that yields are at record lows.
Last month when my words graced these pages, I was remarking on how much bonds were finding favour with investors. It hasn’t changed – not as I write this, that is. Yields continue to fall, helped on their way by the decision of the Bank of England to cut rates to a measly 0.25%. Why anyone should buy gilts at these levels escapes me – except that is precisely what the Bank of England is doing to try to stimulate an economy that is facing Brexit headwinds.
Quantitative easing – QE for short – was not a term I had heard before central banks put their heads together to try to head off the recessionary pressures of the financial crisis that gripped markets in the wake of Lehman Brothers collapse. Since then these masters of nations’ finances have created trillions of dollars, pounds and euros – not to mention the yen – in an effort to keep the global economy on course. It is one huge financial experiment and we still don’t know how it will play out in the end.
But imagine if, as a result of this recent experience, Governor Mark Carney declares that QE has run its course? The consequences could be interesting in the extreme. If the Bank ceases to be a buyer of gilts, it is hard to see where a replacement might emerge from. We could then see this recent trend reverse – quick time. Bear in mind, too, that inflationary pressures could well start to build as the effects of the fall in sterling translate into higher prices for imported goods and transportation.
It could also be that the new government might take a different view to the attractions of the wave of monetary easing that is arguably a legacy of a Chancellor presently consigned to the history books. Perhaps Mr Hammond and Mrs May would prefer fiscal stimulus instead. It is just a thought but do give it some consideration as you ponder where to place your clients’ cash.
Why are stockmarkets not lower?
The trouble is, where else can it go? Our FTSE 100 index recovered comprehensively following the unexpected referendum result and reached a high for the year in August. As I was putting pen to paper, the S&P 500 Index was hitting yet another high and was looking far from cheap, both historically and relatively. While the economy there seems in reasonable shape and employment numbers are encouraging, it has not been a one way street so far as data is concerned and a rate rise remains in prospect from the Fed.
Witch or clown?
And it’s Presidential election year. We might find the hustings entertaining, but the degree of uncertainty that could build as we approach the vote could unsettle sentiment. As one seasoned commentator remarked once the candidates were confirmed, the American public get to choose between a witch and a clown. I leave it to you to decide which description applies to which candidate.
US politics tend to look obscure to those of us on this side of the pond – just as our political divisions must appear opaque to American eyes. I am old enough to remember Bob Hope joking about a general election here back in the 1960s, describing the Labour party as socialists and the Conservative party as, well, socialists. All we can be reasonably certain of is that a White House occupied by Hilary Clinton would probably mean little change in policy or attitudes, whereas one where Donald Trump is the incumbent is likely to lead to change – perhaps significantly so.
Seldom have I faced a future so beset with uncertainty as at present. Yet markets are in a robust mood – perhaps a consequence of a lack of reasonable alternatives. I am not brave enough to dash for cash, though in the middle of the night it can seem a prudent course of action. Cash doesn’t reward, though, and could lead to investors missing out. Diversification seems the answer. But arguably it always is at times of uncertainty.