Market Bulletin - Plastic money
US employment figures disappointed late in the week, as the Leave camp pulled ahead in the EU referendum polls.
Fourteen centuries after the Chinese court produced the first paper banknotes, the Bank of England has announced that it is retiring the £5 version. The £5 note first appeared 223 years ago, but from 13 September it will be going plastic, complete with an image of Winston Churchill. Mark Carney, governor of the Bank of England, pointed to the fact that Australia, New Zealand and Canada have already made the leap to the more durable material. “As Churchill did, we may have to wait a while for the Americans,” said Carney.
Banknotes are rare among ‘consumer products’ for not seeing quality improvements reflected in prices. In fact, last week sterling suffered its worst weekly drop in value since mid-March, slipping significantly below $1.45. The pound’s performance against the greenback – or ‘paperback’, as it may yet become known – has not been this bad since early 2009. Likewise, the cost of protecting against swings in the value of the pound surged; sterling looks set to clock the biggest quarterly rise in implied volatility in its history.
The reason for the ructions was no mystery. The results of two Guardian/ICM polls on the EU referendum, announced at the start of last week, showed the Leave camp three percentage points ahead, reversing what had hitherto looked like slow-plodding momentum towards the Remain camp. There is now little more than a fortnight to go before the vote, and the deadline for voter registration falls on Tuesday this week. Market sensitivity to fresh poll results is only likely to increase.
The FTSE 100 dropped by 0.98% on referendum uncertainty, commodity price slips and disappointing Chinese industrial data, although the fall was softened by the recovery of some mining stocks late in the week. Business sentiment can’t have been helped by events last week: no buyer was found for Brixton-born BHS; RBS announced a further 450 UK job cuts; and it emerged that the proposed merger of the London Stock Exchange and Deutsche Börse would see 1,250 jobs lost. Nevertheless, figures last week showed that business activity in Britain’s dominant services sector rose slightly in May.
The Federal Reserve supposedly has bigger issues to worry about than Westminster’s relationship with Brussels, but last week a member of its rate-setting committee said that the uncertainty over the outcome of the British referendum might lead the central bank to delay raising rates at its meeting in mid-June. America’s central bank is supposed to focus on achieving ‘maximum employment, stable prices and moderate long-term interest rates’.
Yet in attempting to do so, it seems to have reached the conclusion that it can ignore neither the markets nor significant political events. Increasingly, it speaks of “financial conditions” as a particular concern – generally accepted code for market trends and events. Janet Yellen’s speech later today in Philadelphia will doubtless be parsed for possible meanings, as expectation grows that the Fed will hold off from a June rate rise.
Hawks at the Fed were dealt a further blow on Friday, when figures showed that just 38,000 jobs had been added in May, the slowest rate since May 2010 and far below the 164,000 jobs forecast. The productivity of US businesses and workers remained flat – the Chair of the Chicago Federal Reserve told an audience in London last week that it may be returning to the low rates last seen in the 1970s. After rising earlier in the week, the S&P 500 took a hit from Friday’s report – it finished down 0.2%.
Given that the US payrolls report is the most watched data release in the US, it can only add to expectations that members of the Federal Reserve’s Open Market Committee will sit on their hands later this month. While that may offer some short-term relief for foreign countries with dollar-denominated debt, there will be deeper concerns at the outlook for US growth, given how sluggish the global economy has been in recent months.
In retrospect, therefore, the European Central Bank may wish it had lowered rates rather than left them on hold Thursday. In the event, the bank’s governor argued that the outlook has improved. “The balance of risks has improved on the back of the monetary policy measures taken and the stimulus still in the pipeline,” he said. Eurozone consumer and business sentiment rose in May, but prices were down slightly – and central banks in Germany and France lowered their growth forecasts for the eurozone’s two largest economies. The FTSEurofirst 300 finished the week down 2.9%, following a late blow from the US payrolls data.
Draghi did at least leave the door ajar for a shift in view. Among other things, he is waiting to see what impact a new wave of quantitative easing will have. This month the ECB will start buying corporate bonds for the first time – around €5-10 billion a month is expected. Large companies are already borrowing cheaply but it is hoping the purchases will have a domino effect, encouraging smaller companies to increase their own activity.
On Greece, the ECB was less open-minded, saying that it would wait a further three weeks before allowing the country access to cheap loans. Faster aid was expected, but the timing allows the bank to see whether Athens succeeds in meeting the terms of its bailout review.
Last week much of the EU’s attention was trained on relations with the Anglo-Saxons. The leaders of Germany, Spain, Ireland and the Netherlands each went public with warnings that a British exit from the EU would cost the UK – Mariano Rajoy, prime minister of Spain, said British citizens would lose their right to live, work and invest in EU countries.
Meanwhile, Jean-Claude Juncker was working hard to ensure that the Trans-Atlantic Trade and Investment Partnership (TTIP), a landmark trade deal between the US and EU, receives the support of both France and Germany in time for ratification before the end of Barack Obama’s second term. Agreement is not a given.
The price of oil continued to rise, pushing above $50 a barrel last week, despite a decision by OPEC not to cut production. Supply disruptions have undoubtedly offered a boost to the price, but problems in the oil and gas industry remain pressing. Debt at the 15 largest Western oil companies reached $383 billion at the end of March, up more than threefold on a year earlier. Saudi Arabia called a meeting of global bankers in Riyadh last week to organise the issuance of dollar-denominated Saudi debt – a reflection of how its funding has been hit by cheap oil.
In this context, a rising oil price might be seen as a net positive for the global economy, but a report by Citigroup suggests the truth is more mixed – were oil to reach $60, the bank calculated, it would limit growth in both the eurozone and Japan.
Japan suffered a difficult week. The Nikkei 225 dropped 1.1% last week and, rightly or wrongly, the weight of market expectation remains on politicians and central bankers alike to offer investors some good news. Nevertheless, there was heartening news in the form of unemployment remaining flat at 3.2%, and job availability reaching its highest level in 24 years.
However, retail sales figures released last week showed no monthly improvement in April, pointing to the ongoing problem faced by the Bank of Japan of lacklustre inflation. Thus far, the central bank has been unable to resolve the issue, by either introducing negative rates or printing its paper money. The latest policy response to the subdued outlook came on Wednesday, when the prime minister delayed a planned sales tax rise.
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