If we look at the recent performance of world markets we can see that many equity markets have in effect shrugged off the impact of the political unrest in North Africa and Arabia. It would also appear that a rising oil price has not bothered them much either. Last night the US Dow Jones equity index closed up 93 points at 12,226. So we can see that the setback has been quite small particularly when we consider the strength of the recent rally since the end of November when the index was around 11,000. Another market which is putting in a very strong performance is the German Dax equity index which started its recent surge in late August 2010 when it dipped to 5833 briefly. Accordingly yesterday where the market closed up 87 points at 7272 for a rally of 25% over this period. Happy days indeed for equity investors. The UK FTSE 100 has also rallied but has not been as strong with a close just below 6000 yesterday representing a rally of more like 15% over the same period since late August. In my opinion the recent underperformance represents a slightly more realistic view of our banking sector and its prospects as recent figures gave a small dose of reality.
The Oil Price
Of course oil company shares are likely to rise with the oil price but with the price of a barrel of Brent crude now settled (for a day or two anyway!) at around US $112 per barrel we can see that this compares with a price of US $95.05 as 2011 began so we are 17.8% up since then. If we look further back then oil prices too have been rising since late August when a low of US $72.10 per barrel was touched and we are now some 40 dollars or 55% higher.
As a commodity which often has to be bought oil has both inflationary and deflationary effects on the world. The inflationary effect is simple as its own price rise affects the cost of heating,lighting and transport which have cost impacts on virtually all homes and businesses. If you think about it then it is one of the price rises which is hardest to avoid which is one of the reasons why I place a much lower emphasis on core inflation measures than many others. As these core inflation measures exclude food and energy if you are wondering about this please see how far you can get today before you have to use one or the other!
The deflationary impact is more of a substitution one. If your finances are particularly tight but you need oil for example to heat your home then spending more on oil means that you have less to spend elsewhere. In the end all budgets are limited to some extent but many have some flexibility before this impact takes place. Accordingly it is not easy to predict but it is likely to be impacting in North Africa right now and there is of course an irony in unrest caused by rising food prices leading to rising oil prices making these individuals even poorer! Sometimes life and events seem very unfair.
Perhaps they seem even more unfair when we look again at the fact that many equity investors are doing well. This leads me to two thoughts. Firstly in the initial stages of an oil price rise equity markets can do well and indeed many are. Secondly we are back to my theme of a lack of investment diversity as over this phase oil prices and commodity prices and equity indices have risen together. Where is there any investment diversification there? For the early part of the period government bond markets fell at least giving us some diversification but recently some have rallied on a safe-haven trade so they currently are not helping either!
Commodity Prices rise again
Commodity prices have resumed their upward trend after a recent downward move. Last week saw at one point a 10% fall in cotton prices and drops in the price of corn and wheat. However last night the Commodity Research Bureau spot index closed back towards it recent highs being up 3.92 at 565.78. For the poor struggling to feed themselves then there is more pressure from the foodstuffs sub-component which rose by just under 1% to 494.95.
Regular readers may not be surprised to learn that the S&P total return index which covers 24 commodities has outperformed world equity markets (the corresponding S&P index covers 45 equity markets) for each of the last 3 months.
The European Central Bank faces yet more problems
We discovered yesterday that the European Central Bank had purchased an extra 369 million Euros of peripheral government debt. These were likely to be purchases of Portuguese government bonds back on the 18th of February. European taxpayers may well like to mull the implications of holding 77.5 billion Euros of largely loss-making assets and a central bank that if it were a listed bank would be suspended for insolvency.
Marginal Lending Facility
I have reported in recent days the fact that some Irish banks had been making use of this facility. The amount currently being borrowed has dropped slightly to 16.322 billion Euros but is still of significance. However today is an important day as the weekly Main Refinancing Operation (MRO) takes place. So yet again these banks will have the opportunity to borrow more cheaply than 1.75%.
The excuses for this borrowing are starting to wear thin to my mind. If you think about it the supposed shuffling of Irish banking deposits that underlies it could simply be agreed to take place at the end of the next MRO could it not? So the real question now is why has this not been done?After all the funds are only committed for one calendar week. We will find out more tomorrow when we see if the banks have shifted back to the cheaper weekly deal.
Manufacturing in the Euro zone
This morning has seen the publication of the purchasing managers index for manufacturing in February and the figures are strong with the number confirmed at 59 on a scale where a number above 50 indicates growth. So good news except for two main influences. The first links directly with the news on commodity prices reported above.
Input price inflation climbed to record rates in Germany, France, Italy, Spain, the Netherlands and Austria, reached a near-survey peak in Ireland and the fastest since July 2008 in Greece.
I will just give you the main points here as they are fairly self-explanatory.
Latest data from Markit showed that February progressed much as 2011 began, with manufacturing output, new orders and employment all falling sharply, and price pressures increasing
We are again seeing signs of a two-speed Europe or perhaps even worse a three-speed one. Whilst these are only survey results and therefore some caution is required they do reflect other data. As there are now signs of increasing inflation put yourself right now on the Governing Council of the European Central Bank. What level of interest-rates would you set for the seventeen nations of the Euro zone? My contention is that at this time there is not a correct interest-rate as the concept of one size fits all needs much more economic convergence than we are seeing. If you raise rates to prevent Germany over-heating you will be hurting Greece, Ireland and Portugal in particular and if you do not you may be letting inflation into her system. As the Alan Parsons Project put it “Damned if I do, damned if I don’t”
Crossing your fingers and hoping for the best is hardly a strategy at all…….
The UK economy sees manufacturing expand strongly
For many years there has been the complaint that we no longer manufacture enough. Some take the argument that we manufacture nothing at all which is plainly not true as it represents around 13% of our economy. Recently it has been showing signs of an improvement and the latest purchasing managers index figures for February show the trend is holding.
The seasonally adjusted Markit/CIPS UK Manufacturing PMI™ posted 61.5 in February, unchanged from January’s series record high. The PMI has now remained above the neutral 50.0 mark for nineteen successive months.
In itself this is good news and let us hope that we can carry on in this vein. Unfortunately it comes with a fly in the ointment and it is the same fly which has stopped many expansionary phases in the UK economy in the past.
Inflationary pressures remained elevated in the manufacturing sector during February. Rates of increase in output prices and input costs were near to their respective record highs.
The growth figures for manufacturing are pleasing even allowing for the fact that this is just a survey. We now have several indicators which disagree with the official economic growth figures as the monthly figures from the National Institute for Economic and Social Research on economic growth differ too. Of course there are bigger influences on our economy than manufacturing but I suspect this debate will run and run and the Office of National Statistics may yet be right but it is placing itself as an outlier when its credibility has been higher.
Looking further into the PMI figures I noticed that their input price figures track quite well with the input price figures used by the Office for National Statistics. I raise this point because the latest figure on an annualised basis is well above 20%. I hope that the Bank of England takes a look at these figures before its next vote on interest-rates which takes place next week.
Is Equality necessarily fair?
I hear on the news that the European Court of Justice has ruled that it will in future be illegal to charge different insurance rates on the grounds of gender. The two main markets affected with be car insurance where women are charged cheaper rates and annuities which are the way most people receive an income from their private pension where currently women receive lower annuity rates because they live longer.
So a question for readers is equality fair here? I will be interested in replies from both sexes. I am afraid that us men will just have to take God’s original unfairness that we live shorter lives on the chin as there is not much we can do about that!
I have argued before that we have a problem with long-term contracts and this ruling highlights the problem yet again. If we put to one side whether the ruling is correct look at what it does. There will be men about to retire who will receive a lower level of income from a pension annuity but that annuity could have been built up over 30/40 years on a set of rules and expectations that have now been changed as a result of this decision. There will be corresponding gains for some women. So much for trust and reliance in a system.
My point is that this is arbitrary and if you were thinking of a long-term savings contract now would you trust the future? Accordingly we can expect to see investors trusting long-term contracts less and less and that in my opinion to quote from 1066 and all that is “A Bad Thing”. I am afraid that policians talk on long-term contracts simply do not match their deeds although of course they have a pension based on a different system.