Author: IntaCapital Swiss

UK Government Debt Still as Popular as Ever

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On Tuesday 2nd of September 2024, the appetite for UK Government Bonds remained as strong as ever as the government received orders of £110 Billion (USD144 Billion) in orders for a new sale of Gilts (UK Government Bonds), the first sale via banks* since a Labour landslide election victory two months ago. The UK Treasury managed to raise via their executive agency the DMO (Debt Management Office) GBP8 Billion on the sale of a gilt which matures in January 2040 offering a coupon of 4.375%**.

*Banks / Bookrunners – Banco Santander SA, HSBC Holdings Plc, Bank of America Corp, Lloyds Bank Group Plc and Goldman Sachs Group Inc.

**Gilt Maturing 2040 – This security is priced at 4 Basis Points over comparable notes.

According to experts, this is the largest ever demand on record where demand is compared to the size of the sale, and data shows that the order book matched that of June this year where a similar record was set. This latest offering and take-up does, according to analysts, show a trust by investors in this new Labour government who are indeed under pressure to fill a hole in the UK’s budget. Furthermore, data reflets that growth in the United Kingdom in Q1 and Q2 of 2024 outstripped that of the other G7 Nations, giving investors optimism regarding the near-term growth of the country.

Experts suggest that the outsized orders for this gilt not only reflects a trust in this government but also that investors are grabbing yields that are still elevated before the Bank of England introduce yet another rate cut. The head of fixed-income strategy at Saxo Bank said, “The recent successful gilt sale is primarily fueled by long-term investors seeking to lock in yields above historical averages”, they also added that if inflation persists then long-term debt is susceptible to even higher yields. Data provided by analysts show government borrowing as higher than expected in Q1 and the first month of Q2 of the fiscal year despite the economy being stronger

Experts go on to suggest that the new Chancellor of the Exchequer, Rachel Reeves, will either have to cut spending or raise taxes to meet the fiscal rules that Labour have kept from the previous conservative government. Cutting spending seems hardly likely as the chancellor has already announced on 29th July 2024 an above-inflation pay rise of 5.5% to 6% to most NHS workers, teachers, and the armed forces. She has also offered medics in England a 22.3% average pay rise, all of which suggest that the tax avenue is where the chancellor intends to go as the these pay rises amount to circa GBP9.4 Billion, however unpopular cuts elsewhere such as the winter fuel allowance she hopes will help balance the pay rises. This is a new government and only time will tell if future gilt sales are just as popular as the recent 2040 maturity bond.

The Declining Value of the US Dollar

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In the past two months the US Dollar has declined 5% against major currencies (the US Dollar index currently stands at a 13 month low) suggesting that increase in the value of the dollar in the years after the Covid-19 Pandemic has come to end. Analysts suggest that this is not too surprising because the rhetoric coming out of the Federal Reserve has recently softened regarding interest rates. Indeed, the Chairman of the Federal Reserve, Jerome Powell, made it plain at the Jackson Hole Economic Symposium (20th  – 22nd August 2024) that inflation was, in fact, receding. Chairman Powell went on to say “Inflation is on what increasingly appears to be a sustainable path to our 2% objective”. 

The big question at the moment is not if, but by how much the Federal Reserve will cut interest rates at their next meeting on September 18th, 2024, and will sustained cuts in interest rates erode the dollar haven that the United States has enjoyed for the last three years? Analysts suggest that according to bond market pricing* financial markets can expect a 0.25% reduction in interest rates at the September Federal Reserve meeting. However, there are those in the market who suggest that the Federal Reserve could indeed cut rates by a full half percentage point. 

*Correlation Between Interest Rates and Bond Prices – The relationship between interest rates and bond prices are such that when interest rates fall bond prices rise and when interest rates rise bond prices fall. Thus when existing bonds have a lower interest rate than current interest rates they are less desirable, so as the interest rate on the US Dollar falls, so bonds become more attractive and their price rises. 

What effect will the declining value of the US Dollar have on emerging markets, exporters of commodities, and the rest of the world? As the dollar declines due to interest rate cuts some analysts are questioning whether the status as global reserve currency will be affected. Experts agree that the reserve currency status will not be threatened by a declining US Dollar as the United States is still the safest place to invest with buoyant stock markets and decent yields. However funds that are domiciled in the United States may look outside its borders as investment opportunities open up in other parts of the world. 

Elsewhere, countries whose economies rely on the exports of commodities will usually reap the benefit of a falling US Dollar, as the commodity price correlation usually moves inversely to that of the US Dollar. Emerging markets that have not had the best of times in recent years should broadly benefit, especially those resource-poor markets (Inc India and China) who rely on the importation of commodities denominated in US Dollars. The US Dollar has lost ground against the  G-10 currencies, the largest of which is within the European Union and specifically the Federal Republic of Germany, where a stronger Euro will only increase the pain of weakening capital expenditure and consumer confidence.

The odds are very good for the Federal Reserve to cut interest rates at their September meeting. However, Chairman Powell always hedges his bets by reminding the financial community that their decisions are always data driven. He reminded us at Jackson Hole, with the upside of beating inflation against the downside of labour market concerns (which had cooled substantially with unemployment rising to 4.3%), future actions would depend on incoming data and the balance of risks.

The Underlying Problems in the Russian Economy

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Despite over 1,000 global multinational corporations leaving the country plus sanctions being imposed, the Russian leadership has been “bigging up” the economy, but do their words really ring true? On closer inspection the apparent economic feel-good factor is down to the Russian government massively overspending, which has hidden restrictive monetary policy from the populous using intense fiscal stimulus. All is not rosy in the economic garden of Russia as experts suggest that the government is engaged in a spending spree that is completely unsustainable.

Analysts have shown that most of Russia’s human, production and financial resources have all been redirected to the defence sector in order to finance the President’s war with the Ukraine. This has left the civilian sector exceptionally short of resources, who have been struggling to meet the increasing demand from the consumer sector. Sadly, the disparity that now reigns within the Russian economy (funding the war at the expense of the rest of the economy) has seen inflation jump with added pressure coming from increasing costs of imports and the depreciation of the rouble. The prioritisation of military spending over everything else is essentially stifling innovation and damping down any long-term growth prospects.

Analysts suggest that Russia is indeed running out of reserves and estimate that the amount of liquid assets available for distribution is just shy of USD100 Billion. This shows that the war is eating heavily into Russian reserves built up from oil revenues in the first decade of the 21st century, despite new levies and increases in taxes across the whole economy. The largest contributor to revenue has, without a doubt, been the oil and gas sector, where experts estimate such contributions amount to circa 33% of total revenues. Regarding tax, a mineral extraction tax has been levied on the giants of the oil and gas industry and their only LNG producer Novatek now faces an increase in its corporate tax rate from 20% to 34%. Furthermore the Russian government will from January 1st, 2025, increase the overall corporate tax rate from 20% to 25%, the war effort now creeping into the bottom lines of all major Russian corporations. 

The tax measures being taken by the Russian government in itself is not totally ruinous, but when combined with the withdrawal of virtually all global multinationals and sanctions it’s clear they are ruining any chances of critical investment vital to the future of the Russian economy. A number of key development projects such as the Arctic LNG-2* have been brought to a halt due to the lack of investment and the withdrawal of key international companies. The war effort is bleeding the private sector dry, especially in the area of wages, where they cannot compete with the defence sector.

*Arctic LNG-2 – Novatek reported that there had been a massive increase in capital expenditure of USD$4 Billion on this project as they had to turn to Chinese replacements of western equipment. Due to the virtual total withdrawal of international companies (Baker Hughes, Linde and Technip along with sanctions), this project has now come to a complete standstill. 

Despite the political rhetoric, China has ceased helping Russia on the financial front with analysts advising that circa 80% of Russian transactions in Yuan are being reversed as fear of secondary sanctions have scared off Chinese financial institutions indicating the reluctance of engaging with Russia. Furthermore, experts report that important direct commodity payments between Russia and China are being frozen. On top of this interest rates are currently 18% and not stopping inflation. Government financial experts had expected with interest rates so high Indian and Chinese investors would flock to the marketplace, but such thinking is flawed as Russian assets are regarded as toxic. Finally, Russia is banned from the international capital markets so has no chance of raising funds from the global debt and equity markets. At this rate the entire financial structure of the Russian economy will become destabilised, and who knows what a bankrupt President Putin would do to alleviate the situation. 

Are Global Markets Facing a New Period of Volatility?

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On Monday 5th August 2024 trading rooms in financial centres across the world faced one of the most volatile and chaotic days in recent history. In the United States by the close of business on Monday The MSCI (Morgan Stanley Capital International) All Country World Index (ACWI) was showing 90% of stocks had fallen, in what has been termed as an indiscriminate global sell-off. In Tokyo the Nikkei was down 12%, in Seoul the Kospi was down by 9% and at the opening bell in New York the Nasdaq plunged 6% in seconds. However by the Thursday evening of that week the turmoil in the markets had been forgotten as the S&P and ACWI were both down by only 1%.

But what brought about this huge summer sell-off? Many financial experts suggest that financial markets had convinced themselves that a soft land for the US economy was a given especially after what was perceived as a successful fight against inflation, with interest rates being kept high by the Federal Reserve. However, the moves in the markets were completely off the scale in relation to what actually triggered the sell-off. Analysts suggest the touchpaper was lit when two economic updates were published in the first two days of August 2024, plus a further announcement by the Bank of Japan (BOJ) that they were raising interest rates.

The first set of data was a survey of manufacturing, which was closely followed by official data released regarding the state of the US labour market. When taken together analysts suggested that instead of a soft landing, the US economy was indeed heading for a recession, and that unlike the Bank of England and the European Central Bank (ECB), the Federal Reserve was moving too slowly on interest rate cuts. The data released on new jobs, which was by no means the worst of the year, fell short of expectations of being only 114,000 as opposed to the expected figure of 175,000.

The start of the sell-off began in the Asian markets on Monday 5th August, as a stronger yen and rising interest rates in Japan combined with the bad economic data coming out of the United States. A vast number of market players and investors have been tied up in the “Yen Carry-Trade”*, where advantage has been taken of low interest rates in Japan allowing investors to borrow cheaply in Yen and invest in overseas assets especially in large US tech stocks and Mexican bonds. A number of traders felt the Yen carry trade was the “epicentre” of the markets and the unwinding of these trade caused the shakeout that followed. 

*Yen Carry Trade – For many years cheap money has been in Japan where interest rates have held at near zero. Any investor, bank, hedge fund etc can, for a small fee, borrow Japanese Yen and buy things like US tech stocks, government bonds or the Mexican Peso which have in recent years offered solid returns. The theory to this trade is that as long as the US Dollar remains low against the Yen investors can pay back the Yen and still walk away with a good profit. 

The sell-off also hit the Tokyo Stock Exchange which recorded its sharpest fall in 40 years, whilst the VIX** also known as the “Fear Gauge” hit a high of 65 (only surpassed a few times this century having enjoyed a lifetime average of circa 19.5), implying the markets expect a swing of 4% a day over the next month in the S&P 500. Analysts announced that when trading hit its peak it was very reminiscent of the 2007 – 2009 Global Financial Crisis, but without systemic risk fears. A well-known Japanese equity strategist suggested “The breath and the depth of the sell-off appeared to be driven a lot more by extremely concentrated positioning coming up against very tight risk limits”. 

**The VIX – is a ticker symbol and the in-house or popular name for the Chicago Board Options Exchange’s (CBOE) Volatility Index. This is a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.

In the last four years Yen carry trades have been very popular as Japan has been essentially offering free money keeping interest rates at almost zero to encourage economic growth whilst the United States, the United Kingdom and Europe were raising interest rates to fight inflation. For many, borrowing at next to nothing in Japan and investing in a US Treasury Bond paying 5% or Mexican Bonds paying 10% seemed like a no brainer. However, once the market fundamentals of this carry trade started moving towards negative territory the global unwinding of these trades was an inevitability.

The market makers were always in evidence throughout the sell-off, suggesting that the structure of the markets were still in place. However, experts said that the biggest moves on the VIX were driven by a tsunami of investors all moving in the same direction. As one senior executive put it “there was no yin and yang of different views”, it was just one way traffic. However, the rebound on the following Thursday just highlighted the lack of fundamental clarity where, as one expert put it “The market is so fascinated by what is the latest data point that the ties between day-to-day stock price moves and fundamentals are more disconnected than ever before”. 

There have, however, been undercurrents in the background indicating a shift in current trends, and with unnerving global politics from the United States to the Middle East plus continued rumblings from China over Taiwan, volatility in the markets is ever present. Add to this US growth trending downwards and market/investor concern over stretched valuations in the US tech market, taken together with other factors including the fourth consecutive move south in the S&P and the VIX trending higher, a negative move in the markets could have been anticipated. So, whilst the fundamentals were in place to be interpreted by market experts, it was the data points and the unwinding of the Yen carry trades that kicked off the volatility swings.

Looking back from today (Friday 16th August) it is as if the volatility and single day crash never happened, however a number of experts suggest that markets could remain volatile until the Federal Reserve interest rate decision in September. Many renown commentators have said what happens in the United States does not stay in the United States, especially as the country has been a major driver of global economic growth, so if the United States does go into recession the world as a whole would suffer. Analysts also suggest that there are further Yen carry trades to unwind which will impart volatility into the markets. In the short-term, therefore, it would appear volatility is on the menu especially with an uncertain presidential election in November. Long term volatility is difficult to predict, but the markets will now be aware that when there is consensus thinking e.g. a soft landing for the US economy and all is rosy in the garden, markets can quickly turn on their heads and bite you very badly.

Has the Federal Reserve Left it Too late?

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On the 6th of June 2024 The European Central Bank (ECB) cut their interest rates by 0.25%, the Bank of England followed suit on the 1st of August 2024 lowering their interest rates by exactly the same percentage points. However, the US Federal Reserve’s Federal Open Market Committee (FOMC) on the 31st of July announced they were once again holding interest rates steady at 5.25% – 5.50% where they have now sat since July 2023. The last time the Federal Reserve cut interest rates was in March 2020, but all eyes are now on the FOMC meeting in September where financial markets and experts are expecting the Federal Reserve to announce a rate cut.

The mood coming out of the Federal Reserve suggests a cooling economy with data showing rising unemployment and moderating job gains. This suggests that the Federal Reserve may well indeed cut rates at their September meeting, but a weakening economy in some cases can spiral into a recession by feeding off itself. So, has the Federal Reserve left it too late to cut interest rates? Economists and financial experts alike remind us that the United States avoided a predicted recession in 2023, which may have resulted in favourable predictions that the US economy would enjoy a soft landing in 2024. 

However, the Federal Reserve may have misinterpreted data in a favourable manner due to Q2 enjoying unexpected increased growth figures of 2.8%, which was taken as evidence that the US economy was indeed in good shape. Some analysts have looked beyond this figure and suggest the economic growth has been propped up not only by government spending (which has been backed up by a sizeable deficit) but also by excessive hiring in the public sector. Warning signals such as the ISM Manufacturing New Orders Index* (a bell weather signal for past recessions) is showing signs of decline, in the week ending July 2024 jobless claims rose to an eleven month high and plethora of companies who are consumer focused recently recorded earnings figures misses. 

*ISM Manufacturing New Orders Index – This index, which is sometimes referred to as the “Purchasing Managers’ Index”, is considered a key indicator of the current state of the US Economy. It indicates the level of demand for products by measuring the amount of ordering activity at the nation’s factories. 

Other warning signals come from the New York Federal Reserve who are suggesting that there is a better than even chance of a recession appearing at some stage in Q3 and Q4. Such predictions are based on “the curve over time of bond yields”* though this has been an unreliable indicator in the past. Experts at a major New York investment bank suggest that the mean or median optimum interest rate (based on a number of monetary policy rules) should be 4%. Yet the Federal Reserve chose not to cut interest rates despite inflation in June coming close (within 0.5%) to their benchmark target of 2%.

*The curve over time of bond yields – If the yield curve is flattening , it raises fears of high inflation and recession. In the event of yield curve inversion this “EVENT” is viewed as the likelihood of the US economy slipping into recession. An inverted yield curve occurs when short-term yields on US Treasuries exceed long-term yields on US Treasuries. This occurred on June 14th, 2024, when the yield for a 10-year treasury was 4.2% and the yield for a 2-year treasury was 4.67%.

Experts suggest that an economy does not slow down in an undeviating manner and, unless checked, an economy can lose economic momentum and spiral out of control into recession. That means that any pricing by the financial markets for a soft landing can quickly go out the window. There are enough warnings out there for the Federal Reserve to take their foot off the brake on interest rate cuts, but will they lament not having cut interest rates in July when the FOMC meets in September.

Bank of England Cuts Interest Rates: Aug 2024

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On the 1st of August 2024 the Bank of England (BOE) cut interest rates by 25 basis points to 5% making this cut the first of its kind since March 2020. The BOE has held interest rates steady at 5.25% since August 2023 in its on-going battle against inflation. The vote to cut interest rates was a knife-edge decision, with members of the Monetary Policy Committee (MPC) voting five to four in favour of cutting interest rates. It was the governor himself who cast the deciding vote whilst the chief economist of the BOE Mr Huw Pill voted against a rate cut. Financial markets had expected an interest rate cut because, for the second month in succession, inflation held steady at the BOE’s target of 2%. 

The Governor of the BOE Andrew Bailey said that inflationary pressures had eased to the extent to allow the Bank to finally cut interest rates, but he went on to warn the markets and general public that they should not expect large rate cuts in the forthcoming months. The Governor went on to say, “Ensuring low and stable inflation is the best thing we can do to support economic growth and prosperity of the country”. This cut will be a boost for the new Labour Government as they attempt to revive a stagnating economy and improve living standards. 

Whilst inflation fell back to 2% in May 2024 the BOE is still very concerned that prices still remain high and, in fact, are significantly higher than three years ago and sadly are still rising. The BOE remains worried that the service sector still has problems with stubborn price increases and resilience in wage growth. As for the future, the MPC advises that over the upcoming months inflation will probably rise to 2.75%, overshooting the benchmark set by the BOE of 2%. However, the BOE appears confident and have forecasted that inflation in 2026 will fall to 1.7% with a further drop of 0.2% culminating in an inflation figure of 1.5% in 2027. 

Analysts have noted that the MPC has adopted a change in guidance, the key change being the wording on the “ importance of data release on wages and growth and service prices” have been dropped, but they did go on to say that they are closely monitoring the risks of inflation persistence. The recent announcement by the government of a public sector pay increase will, according to Governor Bailey, have little effect on inflation and the impact of other changes in policy would depend on how they were funded. These uncertainties combined with the hawkish stance by the MPC have left analysts confused, saying that current BOE policy is highly ambiguous, and they do not appear to be in a rush to cut rates again anytime soon.

Global Financial Markets Rethink

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Expert financial analysts are suggesting that many of the presumptions that have driven the global financial markets in 2024 are quickly being rethought. Speculation that the Federal Reserve may well cut interest rates faster than predicted has given way to doubt over the economy of the United States, prompting investors to redeploy their investments in the currency and bond markets. The shift in sentiment has also been driven by a slew of disappointing results in corporate earnings, together with scepticism from shareholders that the huge investments in AI* (artificial intelligence) by tech companies may not pay off as soon as was originally expected. 

Indeed, analysts advise how investors were caught by surprise when results for Alphabet Inc (google parent) showed how much had been invested in technology, but any returns were not reflected in the revenue figures. Interestingly, while still up 12%, this year the Nasdaq 100 index has fallen circa 9% from its record high on July 10th, wiping out USD23 Trillion from its market value. Many experts have pronounced that the AI frenzy no longer looks as positive as it was before. 

*Artificial Intelligence – The bull market up to June 2024 has boosted the S&P 500 market capitalisation by USD9 Trillion (fuelled by AI stocks) since the Federal Reserve pivoted away from rate hikes in August 2023. Experts advise that performance is extremely concentrated in a few mega-cap names and could make the effect of any major decline in big tech stocks more pronounced.

Another example of the “rethink” is where investors have been borrowing in low yielding yen to invest in higher yields such as the Mexican Peso, the New Zealand Dollar, and the Australian Dollar. However, it appears that these transactions are a thing of the past as the gap between the BOJ’s (Bank of Japan) and its counterparts is set to come closer to each other.  Elsewhere, experts advise that the European and United States Equity markets in 2024 have been driven by the general agreement that inflation was slowly coming under control, however they feel that now the US economy is becoming weaker and weaker, changing the perception towards equities. 

In Sub-Saharan Africa, analysts advise that a somewhat laboured return to the international capital markets has run straight into a stop sign basically due to uncertainty over the November presidential election which has given global investors the jitters. There are 49 governments in the region and only five (Benin, Cameroon, Ivory Coast, Kenya, and Senegal) have managed to sell US Dollar bonds in 2024 in a combined amount of USD6.2 Billion which is much lower for the same period in 2022*. In fact those countries within emerging markets will see high yield borrowings classed as higher risk if former President Donald Trump wins the upcoming election, as experts feel he will favour fiscal expansion negating any reduction in the already high global borrowing costs.

*Sub Saharan Africa – The whole region was denied access to overseas capital for two years due to rising global interest rates and the devastation of war. 

As the US election approaches, it will be interesting to see how the different markets react, though currently there seems to be a massive “rethink” to how global markets will be driven. Whoever wins the White House, it appears that investor sentiment at least for the being is moving to safer havens.

The Petrodollar Agreement Between The USA and Saudi Arabia: Fact or Fiction?

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In the middle of June 2024 there were a plethora of rumours regarding the collapse of the “Petrodollar Agreement” between Saudi Arabia and the United States. These rumours took off like a rocket and were exacerbated on social media platforms such as X. The purported 50 year old agreement requiring Saudi Arabia to price its crude oil exports in US Dollars had apparently expired on Sunday 16th June 2024. Many commentators on X were horrified and suggested that this would surely undermine the status of the US Dollar as the de facto global world reserve currency, leading to massive financial upheaval. As a result, according to Google Trend data, searches for the term “Petrodollar” spiked to the highest level on record, dating back to 2004.

However, mainstream media did not report this news. Indeed, a number of foreign-policy experts, plus some experts from Wall Street, announced that the agreement in itself did not exist, at least not in the way pronounced on many social media outlets. One well known chief economist advised that this was indeed fake news but did indeed confirm there was a joint agreement between Saudi Arabia and the United States on the 8th of June 1974. 

This agreement is referred to as the United States-Saudi Arabian Joint Commission on Economic Cooperation and had nothing to do with currencies, as the Saudis were already selling their oil in Sterling and continued to do so after signing the agreement. Therefore there was no formal agreement requesting the Saudis to price their oil in USD Dollars only, however, later in 1974 they actually stopped receiving Sterling as payment for oil exports. The 1973 OPEC oil embargo was the reasoning behind the June 1974 agreement and both the United States and Saudi Arabia wished to come to a formal arrangement where each got more out of the other. 

Post the 1973 OPEC oil embargo saw a spike in oil prices which greatly enhanced Saudi Arabia’s surplus of US Dollars. They wished to use to industrialise their economy, whilst the United States were keen for them to recycle these dollars back into the US Economy. This led to a further agreement in late 1974 where the United States promised military aid equipment, and in return the Saudis would invest billions of dollars in US Treasury’s. This agreement was kept under wraps until 2016 when Bloomberg News filed a Freedom of Information Act request to the National Archives. 

However, Saudi Arabia are making noises about receiving payments for oil in other currencies apart from the US Dollar. This is heightening due to their membership of BRICS*, which was due on the 1st of January 2024 but was delayed, however the South African government has since confirmed Saudi Arabia as a full member. Today, Saudi Arabia no longer has US dollar reserves and is borrowing heavily in the sovereign debt market, even selling parts of its national oil company (Saudi Aramco which has in excess of 270 billion barrels in reserve). Furthermore, whilst Saudi Arabia still owns significant reserves, some of which are tied up in US Treasury’s, data reveals that both Japan and China have more assets tied up in US debt. 

*BRICS – Is an intergovernmental agency and is an acronym for Brazil, Russia, India, China, (all joined 2009) followed by South Africa in 2010 as the original participants. Today, membership has grown to include Iran, Egypt, Ethiopia, the United Arab Emirates and Saudi Arabia, with Thailand, and Malaysia on the cusp of joining. Russia sees BRICS as continuing its fight against western sanctions and China, through BRICS, is increasing its influence throughout Africa and wants to be the voice of the “Global South”. A number of commentators feel as the years progress BRICS will become an economic and geopolitical powerhouse and will represent a direct threat to the G7 group of nations. Currently this group represents 44% of the world’s crude oil production and the combined economies are worth in excess of USD28.5 Trillion equivalent to 28% of the global economy. 

Indeed analysts suggest that in a sense the “Petrodollar” actually died about 30 years ago. Fifty years ago Saudi Arabia’s current account surplus was in excess of 50% of its GDP (Gross Domestic Product) with the petrodollar reflecting this. The only reason the United States benefited was due to Saudi Arabia recycling US Dollars into the American debt market. However, between 2003 – 2008, the value of these dollars became less and less as Saudi Arabia and other OPEC nations channelled these funds to improve their economy spending on items such as goods and services. In 2024, data released shows that the current account surplus of Saudi Arabia is 0.5%, with analysts suggesting that the country will fall into deficit in 2025 continuing until 2030. 

With speculation abounding that Saudi Arabia is about to move away from receiving US Dollars for oil, experts advise that the administration of Joe Biden is close to signing a security deal with Saudi Arabia. Analysts advise that this deal will also encompass efforts to solve the current Gaza conflict, making progress towards creating a Palestinian state and a civil nuclear agreement between Saudi Arabia and the United States.

Experts in foreign policy suggest that the signing of this agreement is President Joe Biden’s attempt to bring Saudi Arabia closer to the United States and mend some fences between the two countries. Furthermore these experts suggest that this agreement will also encourage Saudi Arabia to pull back from the current Sino-Saudi partnership involving security and increased diplomatic relations, thus putting an end to speculation of Saudi Arabia dumping the dollar in favour of other currencies.

UK’s Labour Landslide 2024: Is it Appealing to Investors?

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On Thursday July 4th 2024, the Labour Party won a landslide general election, winning 411 seats in the House of Parliament giving them a majority of 172 seats (just shy of Tony Blair’s majority Labour Party majority in 1997.) This represents a total repudiation of Conservative Party policies, who won only 121 seats down from 365 in 2019 (their lowest since 1906), but with a new labour government not used to governing, how will this affect investors? Experts and analysts suggest that investors are happy with the new government as they feel the United Kingdom now stands for stability, a marked improvement against other European countries such as France. Interestingly, sterling is the only currency within the G10* group countries to gain against the US Dollar in 2024. 

*G10 Group of Countries – Consists of 11 countries being Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland (Minor Role), the United Kingdom, and the United States. Established in 1962 this group agreed to participate in the General Arrangements to Borrow (GAB) which was created to provide the International Monetary Fund (IMF) with additional funds thereby increasing their ability to lend.

A number of investment strategists have suggested that with the Labour party enjoying such a huge majority, and conversely other developed companies undergoing political turmoil, the United Kingdom may well present itself as a political haven. They went on to say that businesses could view the United Kingdom as a known quantity giving them confidence to operate in their particular sectors. There is favourable sentiment regarding Labour’s manifesto promise to overhaul the planning system in the United Kingdom. If such a promise is successful, it should stimulate the economy and give a boost to stocks which have sadly trailed their counterparts in the United States and Europe for the last ten years.

Other commentators suggest that foreign investors may well be interested in Gilts (UK Government Bonds) due to Labour’s cautious borrowing plans as reflected in their manifesto. The suggested period of political stability should make Gilts more attractive after the somewhat political rollercoaster ride. This is following Brexit, and the four Prime Ministers since David Cameron, including Theresa May’s unmitigated disaster towards Brexit, Boris Johnson’s wayward leadership (seriously hampered by the COVID pandemic), the disastrous Liz Truss budget, and Rishi Sunak not being elected by grass roots. Furthermore, a potential Donald Trump victory in the November 2024 US elections, which has been sparked by an assassination attempt on the former president, has resulted in recent swings in the US Treasuries market whilst Gilts have remained relatively stable.

Over the last decade, from a standpoint of productivity and investments, the United Kingdom has played second fiddle and lagged behind the G7* (Group of Seven Nations). Experts suggest that Labour’s growth policies should be implemented sooner rather than later, and it appears that the government is pressing ahead with these policies with great rapidity. The new Chancellor of the Exchequer Rachael Reeves announced that a new National Wealth Fund (NWF) which will promote investments and productivity by expanding on the UK Infrastructure Bank** and the British Business Bank***. The Chancellor further announced that the initial funding will be set at GBP7.3 Billion and will straightaway make investment available to green energy, ports, clean steel and gigafactories.Ahe went on to say, “it would provide a concierge service for investors and businesses that want to invest in Britain, so they know where to go”. It is the labour party’s belief that the New National Wealth Fund will be a public/private partnership in its endeavours and should triple the initial investment of GBP7.3 Billion to circa GBP22 Billion. 

*G7 – Otherwise known as the Group of Seven consists of seven countries, Canada, France, Germany, Italy, Japan, United Kingdom, and the United State of America. Each member’s head of state or government meets annually at the G7 summit along with the EU’s Commission President and the European Council President to discuss such topics as major global issues, especially in the areas of security trade economics and climate change. Lesser luminaries such as high ranking officials of the G7 and the EU meet throughout the year.

**UK Infrastructure Bank – This is state owned (the Treasury) and was set up in June 2021 to aid the Government’s plans on reaching net-zero carbon by 2050 and support economic growth in local and regional sectors of the United Kingdom.

***The British Business Bank – This a state owned (the Department for Business and Trade) economic development bank created on the 1st November 2014 with a remit to increase the supply of credit to SMEs (small and medium enterprises) as well as providing business advice services. 

As mentioned above, one area which the government hopes will attract private investment is green energy, and to this end Labour wish to make Great Britain a clean energy superpower by setting up Great British Energy. The aim is to have clean energy by 2030 and be an independent exporter of energy so Britain will no longer be shackled by fossil fuels and never again be held as an energy hostage to the likes of President Putin. In order for the government to deliver “clean power”, they will, together with private investment, triple solar energy, double onshore and triple offshore wind energy. In order to support this plan fossil fuel companies can expect Labour to close loopholes in the windfall tax on oil and gas companies.

It appears that the watchword for overseas investors into Great Britain is stability. After the turmoil years of a conservative government, even a semblance of competence, consistency and stability are music to the ears of overseas investors. The bar to please overseas investors has been set very low due to the number of conservative leadership changes plus the somewhat farcical budget offered up by the then Prime Minister Liz Truss. The Labour government have promised to build bridges with Britain’s European counterparts, and with many of their plans for rebuilding the economy centring on lifting growth with supply-side reforms (e.g., simpler planning laws and seed investment into private sector projects), plus a government that will see the country through to just shy of the end of the decade, global fund managers are sitting up and taking notice.

Federal Reserve Holds its Benchmark Interest Rate

Written by IntaCapital Swiss on . Posted in Blog Article, News & Reports. Leave a Comment

On June 12th, 2024, the FOMC (Federal Open Market Committee) for the seventh straight meeting, once again held its benchmark interest rate steady at 5.25% – 5.5%, which is the highest level it’s been for over twenty years. Whilst Chairman Powell dialled back expectations for rate cuts this year saying the latest forecasts were a new conservative approach, financial markets suggest that there may be two rate cuts this year with the first cut possibly coming in September. However, policymakers have advised that instead of three rate cuts in 2024 as previously advised, they now only expect to make one rate cut in 2024. 

On the same day before the FOMC meeting CPI (consumer price index) figures were published, reflecting better than expected data which is cause for optimism in the future. Chairman Powell was quoted as saying the “numbers are encouraging” and suggested that the latest CPI figures may not have been fully taken into account by the latest quarterly projections. He went on to say that although the committee were briefed on the CPI figures, most individuals do not update projections when data arrives in the middle of policy meetings. His words were jumped on by many leading experts who suggested that the door is still wide open for two rate cuts in 2024. 

Officials of the Federal Reserve raised their outlook for inflation in the longer term to 2.8%, up 0.2% from their March 2024 estimation and still above their target of 2%. However, experts suggest the Federal Reserve is still trying to come to terms as to the appropriate time to cut interest rates, as there is uncertainty regarding tight monetary policy and the impact it is having on the economy. Despite high borrowing costs, consumer spending and job growth have been particularly resilient even though inflation remains above 2%. Chairman Powell has been quick to point out the split within the committee where the “Dot Plot”* showed eight officials expecting 2 rate cuts, seven expecting one rate cut and four expecting zero rate cuts.

*Dot Plot – This is a graphical display consisting of data points on a graph which the Federal Reserve uses to predict interest rates. The graphs display quantitative variables where each dot represents a value.

Experts suggest that chairman Powell is content to leave interest rates unchanged until the economy sends a clear signal such as a jump in the unemployment rate or further declines in the CPI. However, with the Federal Reserve’s eyes on the PCE index (Personal Consumption Index), nothing is really as it seems.

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