Graduate Market Update

Interest Rates

We have a world where either economic growth is stagnating or there is a fear of such stagnation! Europe is one of the regions where there is most fear of recession prompting the European Central Bank (ECB) last week to announce its biggest package of rate cuts and economic stimulus in 3 years as ECB President Mario Draghi warned governments they needed to act quickly to revive flagging eurozone growth.

The ECB cut interest rates further into negative territory by announcing a cut to its deposit rate by 10 basis points to a record low of minus 0.5 per cent. At the same time, it revived its EUR 2.6 Trillion programme of buying bonds for an unlimited period, in the latest sign of concern over the global economy. It also eased lending terms for eurozone banks and offered them tiered interest rates in a bid to ease pressure on their lending margins. 

With the Euro currency naturally weakening on such moves, this sparked a war of words on Twitter with Donald Trump stating “They (the ECB) are trying, and succeeding, in weakening the euro against a VERY strong dollar, hurting US exports” and Trump further called on the US Federal Reserve to themselves cut interest rates. Mario Dragho responded to Trump stating “We (the ECB) have a mandate. We pursue price stability. And we don’t target exchange rates. Period.”

There was also dissent from Germany, in particular Reinhold von Eben-Worlee and President of Germany’s Association of Family Enterprises, saying that Quantitative Easing (QE) has led to “serious distortions and should be terminated”.Whether we are in an asset price bubble, only time will tell.

The US did respond with its own rate cuts a few days later with the ‘Fed’ cutting its main policy rate, the Fed Funds rate, by a quarter of a percentage point to 1.75 per cent to 2 per cent, as data showed investment falling and surveys suggested Donald Trump’s trade skirmish with China has hit sentiment.   

Trump, never a happy man, immediately went on the attack against the Federal Open Markets Committee and its chairman Jay Powell, who Trump himself appointed as Chairman, saying “Jay Powell and the Federal Reserve fail again. No “guts”, no sense, no vision. A terrible communicator!” The US President continues to pile pressure on the Fed to cut interest rates. Interesting that the Fed is meant to be independent of the US government! The FOMC’s median projection shows a flat path for interest rates to the end of 2020.

Another interesting point is that although the growth outlook has slowed in Europe, prompting interest rate cuts, the US Federal Reserve has revealed deep divisions within the Central Bank over whether the US economy needs more monetary easing and whether it needs to expand its balance sheet (by buying bonds in the market i.e. QE).

The main tension the Fed faces is that the economy has not really slowed!The unemployment rate remains at 40-year lows.Consumer spending remains strong.People have jobs and are buying things, the two necessary conditions for a thriving economy.So one group in the Fed is arguing nothing (negative) has happened so there should be no rate cuts.Another group within the Fed is very concerned about the effects of trade uncertainty around US/China trade tariffs.They are pushing for larger rate cuts.

Bond and equity markets did not react much to either set of interest rates moves as they were largely expected.

Commodities

OIL: Commodities, on the other hand, and oil in particular, have experienced extreme volatility recently, as oil prices spiked up as much as 20 per cent in the biggest percentage gain since Saddam Hussein invaded Kuwait among fears of prolonged supply production after attacks in Saudi Arabia knocked out more than half of its production. Saudi Arabia is the world’s biggest oil exporter.

The US blamed Iran for the attack on Abqaiq, a crude processing centre that processes almost 70 per cent of the kingdom’s crude for export. Brent Crude prices, the international pricing benchmark, rose by $12 per barrel to near $72.

State oil group Saudi Aramco has been scrambling to bring back output online. This comes at a time when Saudi Aramco is preparing an IPO – Initial Public Offering – billed as the biggest in history! It is not clear whether the attacks will delay the IPO, which had been planned for this year.

The veteran investor Warren Buffet famous quote “You only find out who is swimming naked when the tide goes out” came to fruition when it was revealed a rogue trader at Mitsubishi in Singapore has lost $320 million through failed bets on the crude oil price, in a case reminiscent of the scandal that brought down Barings Bank.

GOLD: All this global uncertainty and a low interest rate regime continues to support the ‘safe haven‘ asset of gold with prices holding firm above $1500 per ounce.

Equities

S&P 500: 2930

Nasdaq: 8130

FTSE 100: 7350

Bonds – 10 Year Government Yields

US 1.700%

EU -58% 

GB 0.60%

Foreign Exchange 

EUR/USD  1.1100 (1 euro buys 1.1200 dollars)

GBP/USD  1.2400 (1 pound buys 1.2100 dollars)

Commodities

OIL: Brent: 69 (dollars per barrel)

GOLD: 1500 (dollars per ounce)

 

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About Paul McCormick

Paul McCormick is the founder of Opening City Doors and is a Financial Market Specialist having worked for several leading Investment Banks and financial technology institutions additionally.He therefore provides a unique insight, and unusually broad perspective, into the opportunities available in London Financial Markets and related sectors and how to launch your career in the ‘City’.