At the moment it is clear that the UK is not only going to the polls today it is in the middle of a political crisis. Yet financial markets and the economy are not behaving as they did in the past and mostly this is a positive, although care is needed as we still in the wake of the credit crunch effect. You might think that the Bank of England would be on the case but these days it seems keen to deflect away from monetary policy.
We’ve published a report for people working in the general insurance sector. It’s on how to assess the financial impacts of climate change. We want to know what you think about it.
It seems to have appointed itself as an authority on climate change instead and personally I find that a bit concerning. After all it’s role is elsewhere.
The UK Gilt Market
For newer readers UK government bonds are called Gilts because it is short for Gilt-Edged from the days they were backed by Gold. Actually technically that is still true as we have some Gold but the edge is very thin these days! Sadly we managed to sell a fair bit of our reserves at what was pretty much the low in the modern era.
However at a time like this the media would normally be running headlines, like Gilt market plunges. We have quite a few possible reasons for one to happen right now and I have worked through many episodes where prices plunged and yields soared. If you like what is now called the “bond vigilantes” turned up and had market power. Also let me add a nuance which is that as I will explain in the UK Pound £ section part of the situation is true but not all.
In fact we are seeing exactly the reverse as the UK Gilt market has rallied and indeed has done so strongly. Our benchmark ten-year Gilt yield has dipped below 1% this morning. So if we go back to my subject of the 16th of this month this is rather curiously a risk-off move. Putting it another way the UK Gilt future has rallied some two and a half points since the lows of early this month and is around 129.5 as I type this.
So people can borrow cheaply again in institutional markets and that suggests we will see lower fixed-rate mortgages and business borrowing rates. The five-year yield is a signal for those and it has fallen from 0.95% on the sixth of this month to 0.75% now. So if this stays I expect a burst of lower mortgage-rates. Also a yield of 0.75% which is the same as Bank Rate is awkward for a Bank of England trying to gain traction with this.
The Committee continues to judge that, were the economy to develop broadly in line with its Inflation Report
projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited
extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon
Presently markets are pricing in an “ongoing tightening” of zero. Ironically that is due to expectations or fears depending on your point of view that it will undertake more QE style Gilt purchases adding to its current £435 billion.
The UK Pound
This has been in a weak run since the 3rd of this month when it rallied to US $1.317. Men At Work must have been singing “It’s a mistake” because it has been slip-sliding away ever since and is now at US $1.263. So we can open with by noting that as most commodity prices are in US Dollars then we are seeing some producer price inflation pressure to add to this reported yesterday.
The growth rate of prices for materials and fuels used in the manufacturing process was 3.8% on the year to April 2019, up from 3.2% in March 2019.
Actually the reports I have received suggest that at least some of the selling has come from the Far East mostly versus the Yen. This is consistent with our fall from over 146 Yen to 139 Yen over the same time frame as above. However linking to the Gilt market that would usually in the past be accompanied by Gilt sales except if they have it has been singing along with Rod Stewart.
Them homesick blues and radical views
Haven’t left a mark on you, you wear it well.
Moving to the trade-weighted or effective exchange rate we are still a fair way above the October 2016 low and appear to be range trading if you look at the overall period. We are still up in 2019 as well but if we move to the more recent period we see that using the old Bank of England rule of thumb we have received the equivalent of a 1% Bank Rate cut. Make you think doesn’t it?
UK FTSE 100
This is a more curious beast these days via the number of companies in it that trade overseas and benefit form a lower value for the UK Pound. So until today it has pretty much sailed through the May storm. I say until today as it is down 100 points today but that is in percentage terms 1.3% which compares to a 1.9% fall for the German Dax index so it is probably very little to do with UK domestic issues. We can exclude some of the currency effect by moving to the FTSE 250 index but the truth is that over the May storm it has only fallen slightly until today’s “trade war” move.
However there is a more troubled sector and it is one of our themes, or the zombified banking sector. Let me illustrate via Barclays where I recall a friend be long shares during the crash and then suggesting selling on the bounce above £3. I am not writing that to be clever but to give some perspective on the current price of £1.48 which is down 3% today. During our May perspective it has been a case of what the Rolling Stones would call Tumbling Dice from the £1.65 of the third of this month. After all aren’t we supposed to have been in a decade long recovery?
It was only yesterday that I was nice to Royal Bank of Scotland but that £800 million dividend is not much compensation for a £2.13 share price when you invested at a fiver.
In Bank of England speak this is called being “resiliient”
As you can see we are seeing further ch-ch-changes. The clearest is the Gilt market which is rallying into events that used to cause falls and plunges. Overall the stock market does not seem that bothered either. So the headline writers have only the falling UK Pound and of course many of them still have singed fingers in this area, as for example the Financial Times is still short it five cents lower than here. The banks are an exception as “The Precious” seems to lack people willing to back it with their money, can anybody think why?
Returning to the Bank of England it has been doing some number crunching and its effort to explain the inflation data is welcome. Although the more thoughtful might wonder where house prices are? Also they may wonder if the days of football tickets in the inflation measure are marked?
Meanwhile the cost of watching football has rocketed. Over the same period the price of a match ticket has increased more than six times, or around 8% each year.
Also the new green central banking agenda might like to address why the price of a light bulb has gone up 140% since 2010?
One category that feels a little gory is home killed shoulder of lamb. Also I am a non-smoker but even I know they are not sold in eights or fifteens.
Me on The Investing Channel