Ten years later
The third quarter marked ten years since the start of the financial crisis, and saw central banks just beginning to move on, says CIO Chris Ralph.
Many anniversaries are merely incidental, of interest only to reporters lacking a good story – not this one. The 9th of August 2017 marked ten years since the beginning of the global financial crisis, and neither the global economy nor financial markets can yet be said to have emerged from its shadow.
At the start of the crisis, the official UK interest rate had never dipped below 2% since the founding of the Bank of England in 1694. Today, that rate is just 0.25%. More importantly, however, central banks around the world have injected some $15 trillion into financial markets over the past ten years – significantly more than China’s current gross domestic product.1 In broad financial and economic terms, the last decade has been an aberration.
Yet it has been a profitable one for investors. Since its mid-crisis low in early 2009, the S&P 500 has tripled in value – in the third quarter alone it rose 3.96%, and crested above 2,500 points for the first time in its history. Corporate earnings season provided plenty of support, as energy, technology and financial results struck new highs, and more than 70% of S&P 500 companies beat expectations.
The US economic recovery continued – it is now the third-longest on record.2 Moreover, although the dollar completed a six-month run of monthly falls against a basket of global currencies, growth has taken wages up with it; unemployment remained below 4.5% throughout the quarter.3
Hearteningly, this economic momentum continued over the quarter despite major troubles in the south, which was afflicted by two destructive hurricanes. A calamitous earthquake also struck neighbouring Mexico, killing 333 people.4
Politically, there was plenty to unnerve investors over the three-month period. As North Korea launched a series of missile tests, two of which flew over Japan, political tempers were increasingly flared. Yet although volatility ticked up to its highest level of the year, it remained very subdued in historical terms.5 The Nikkei 225 rose 1.61% over the quarter, and was boosted again by economic growth figures late in the quarter, as the prime minister called a snap election.
After the unorthodox European elections of the spring, the third quarter offered the staid spectacle of German federal elections in September. Angela Merkel was duly returned for her fourth term, but left considerably weaker.
The Eurofirst 300 rose 2.24%, reflecting a buoyant economic picture. Greece returned to debt markets for the first time since 2014 and Portugal sold 10-year government bonds at record low yields. More broadly, an August report showed second quarter eurozone growth striking an impressive 0.6%, while EU consumer confidence reached its highest levels since 2007 and the euro continued its rise.
Momentum within the EU shifted somewhat from Merkel to Macron, as the new French president pushed his labour reform package through the French parliament and spelled out a little more of his vision for the EU. The quarter ended with violence, however, as Catalans voted on independence.
In the UK, the FTSE 100 rose by just 0.82%, and indicators generally told a nuanced tale. Despite some positive corporate results, new figures showed that business investment in the UK has remained flat since the EU exit referendum, and headline growth in the second quarter was revised downwards, making the UK the slowest-growing G7 economy.
An OBR report on bank stress tests said that UK bank balance sheets were much improved since the crisis. However, when the OBR applied the same criteria to the UK government, the institute said the government would have failed. The UK received two downgrades by major ratings agencies over the quarter – the Brexit outlook was cited among the reasons. However, Theresa May used a speech in Florence in September to bridge the growing rhetorical divide between the UK and EU authorities – and to begin to set out some details. Meanwhile, Jeremy Corbyn’s star appeared to be rising.
Apparently taking the ten-year anniversary as its cue, the Bank of England warned that interest rates might need to rise in the near future, despite meagre headline growth (not to mention wage growth), due to inflationary pressures. Yet it was the Fed and ECB which appeared to be taking the lead on leading the world out of the post-crisis era. The heads of both banks in September said that they were making plans to begin the slow process of withdrawing QE programmes. The Fed will begin to do so this month. The move will mark the end of era, but it won’t be a short final chapter.
Source: FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.
© S&P Dow Jones LLC 2017. All rights reserved.