IntaCapital Swiss, Author at IntaCapitalSwiss SA

Are Global Markets Facing a New Period of Volatility?

Written by IntaCapital Swiss on August 16, 2024. Posted in News & Reports. Leave a Comment

On Monday 5^th 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?

Written by IntaCapital Swiss on August 15, 2024. Posted in News & Reports. Leave a Comment

On the 6^{th of} June 2024 The European Central Bank (ECB) cut their interest rates by 0.25%, the Bank of England followed suit on the 1^{st 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 31^{st 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 14^th, 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

Written by IntaCapital Swiss on August 15, 2024. Posted in Blog Article, News & Reports, Uncategorized. Leave a Comment

On the 1^{st 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

Written by IntaCapital Swiss on August 1, 2024. Posted in Blog Article, News & Reports, Uncategorized. Leave a Comment

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 10^th, 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?

Written by IntaCapital Swiss on July 25, 2024. Posted in Blog Article, News & Reports, Uncategorized. Leave a Comment

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 16^th 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 8^{th 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 1^{st 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?

Written by IntaCapital Swiss on July 25, 2024. Posted in Blog Article, News & Reports. Leave a Comment

On Thursday July 4^th 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 1^st 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 July 8, 2024. Posted in Blog Article, News & Reports. Leave a Comment

On June 12^th, 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.

European Central Bank Finally Cuts Interest Rates

Written by IntaCapital Swiss on July 8, 2024. Posted in Blog Article, News & Reports. Leave a Comment

On June 6^th 2024 the ECB (European Central Bank) announced a cut in interest rates of 25 basis points to the deposit rate lowering it from 4.00% to 3.75% as headline inflation is now just above its 2% target having fallen from 10% in 2022. Inflation has largely come down due to lower fuel costs and supply chains, which have now become normalised after a few post Covid-19 twists and turns.

However, the ECB advised that inflation is not yet beaten as the service sector remains sticky and as a result the ECB announced that “despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.” The decision to lower interest rates was nearly unanimous with the only negative vote coming from Robert Holzman, Governor of the Central Bank of Austria.

The President of the ECB Christine Lagarde hedged her bets when answering questions regarding future rate cuts. She is quoted as saying “ Are we moving into a dialling back phase? I would not volunteer that. Is the dialling back process underway? There’s a strong likelihood”. A number of experts have described her message as somewhat confusing, especially as she added “We are not pre-committing to a particular rate path”. Experts and analysts alike suggest that another rate cut in July is now unlikely, with financial markets now focusing on September 2024.

Last month the President Lagarde declared inflation under control, however with the lack of a clear path on rate cuts being offered by the ECB the string of recent data has pointed the finger at enduring price pressures. This alone would suggest that the ECB is going to be, as with other central banks, data driven prompting cautions when talking about future interest rate cuts. Together with a quarterly outlook published by the ECB forecasts for inflation will average 2.2% for 2025 up from an earlier forecast of 2%.

Elsewhere the Bank of Canada reduced its benchmark interest rate but both the Federal Reserve and the Bank of England are fighting tougher price pressures, and are only expected to follow suit in the coming months. Financial markets are waiting for some clear signs from both the Bank of England and the Federal Reserve as to when they expect to cut rates.

Private Equity Companies/Partners/Owners are Engaged in Standard and Exotic Loans

Written by IntaCapital Swiss on June 21, 2024. Posted in Blog Article, News & Reports. Leave a Comment

Over the last three or four decades executives of private equity companies ruled the roost where investors from all over the world would beat a path to their front door looking to invest in their next big fund. However, times have changed, declining valuations and much higher interest rates have made it harder to sell assets, raise new money for investments and fund distributions to their investors.

Today the biggest investors or backers of these private equity funds have turned the tables and are demanding more from private equity owners/directors, such as if we invest you now have to invest more of your own money. Throughout the private equity industry, company directors/owners /partners are having to take on debt and pledge their personal assets (homes, paintings, yachts etc) in order to appease their larger investors.

In 2023, contributions to equity from the private equity sector was circa 2% and in 2024 is circa 5%, and according to analysts, in some cases as high as 20%. In order for some of these executives to raise the requisite amount of cash, they have been taking out high interest loans where the rate is anywhere between 10% and 20%, and some banks, so experts advise, are demanding collateral of all personal assets. Such is the need for more cash in the private equity sector, some money managers are now scrambling to get cash, and private lenders such as Oak Capital Management are making funds available.

Apart from the personal loans the industry has seen loans that have been rarely used before. Below are a few examples.

*Manco Loan – This is a relatively new loan where appetite is going through the roof. Taken by the entity or management company that oversees the private equity investment, the collateral consists of cash flows such as equity returns or fee streams. This loan is usually used for funding an individual partners’ equity stake in a private equity fund, succession planning (focuses on maintaining a company’s talent and ensuring a smooth transition should existing leadership leave) and seeding new strategies. Currently there is no data available for the size of outstanding loans, but experts suggest that deal sizes range from USD50 Million to USD350 Million.

*Net-Asset-Value or NAV Funding- This form of finance is usually backed by a pool of portfolio companies within a fund, where the funds are utilised by private equity companies to help return money to investors. However, experts in this area advise that this form of finance is likely to dilute returns at later dates and effectively leaves the fund paying an interest rate that is not to everyone’s liking. Estimates from analysts and experts alike suggest this form of financing will increase circa 700% by 2030 to USD 700 Billion.

*Collateralised Fund Obligations – This form of finance bundles stakes in funds holding private equity owned companies, which are then packaged into one security. Risk categories go from senior to equity tranches and coupons are paid from the cash flows generated by the companies. If the investment goes south the equity tranche takes the first loss, but as it is the riskiest tranche interest payments according to experts are 20%.

In an industry sector that has been used to cheap money from 2010 to 2021, this scrambled rush for loans sees a marked reversal of fortunes. The industry has been facing geopolitical and economic uncertainty plus much higher interest rates which in 2024 has seen takeover volumes down by 50%. Indeed, cash on hand at private equity companies is, according to recent data released, at its lowest mark since 2008 (Global Financial Crisis). Furthermore, experts advise the more influential investors (e.g., state pension providers and sovereign wealth funds) have said they will only commit to new funds if capital in the old funds are released first.

The private equity industry is valued by analysts at circa USD8 Trillion and has undergone a real cultural change with the balance of power shifting away from the private equity companies to the Limited Partners or LP’s (investors). It is suggested that before too long, these LP’s could cut out the middleman and set up their own in-house private equity companies. This will leave the current players in the market struggling to find the best investment deals to offer a smaller number of investors.

The Financial Markets Got It Wrong Predicting a US Dollar Decline in 2024

Written by IntaCapital Swiss on June 21, 2024. Posted in Blog Article, News & Reports. Leave a Comment

As 2024 started many investors, experts and analysts predicted that the US Dollar would decline. However, the greenback, thanks to a very hot US economy, and an inflation problem ensuring the Federal Reserve will not cut interest rates for the time being, means a strong dollar has returned and does not look like it is going away. Furthermore the IMF (International Monetary Fund) has predicted that growth in the United States will grow at a rate of two times that of the remaining members of the Group of Seven, and with geopolitical tensions at a height not seen for decades, the US Dollar is still viewed as the ultimate safe haven.

Many economists and other analysts are predicting that the US Dollar will continue to grow, with one well-known bank suggesting the dollar will continue to increase in value through 2025. The resurgence of the dollar has come on the back of many financial signals pointing to the US economy sidestepping a much anticipated slowdown, with manufacturing continuing to grow and the labour market remaining tight, plus as already mentioned, the forecast of interest rate cuts being put back due to inflationary problems.

The financial markets have scaled back their bets on an early cut in US interest rates which has resulted in soaring benchmark treasury yields hitting a figure of nearly 5% which has been a major factor in the US Dollar’s appeal. The dollar has also been further driven by the demand for AI (Artificial Intelligence) resulting in massive inflows into the relevant US Stocks. One senior asset manager has been quoted as saying “The dollar is such a high yielder, if you are a global allocator and running your portfolio, what a slam dunk to improve your risk-adjusted returns: buy shorter-term US debt, unhedged.

The US Dollar during times of financial and or political instability is still recognised as the ultimate investor sanctuary, and as such with the current geopolitical turmoil investors have been seeking refuge in the greenback. This was proved last Friday 19^th April, where there was a surge of US Dollar buying following Israel’s retaliatory strike on Iran. Indeed, experts suggest that whilst there has been a surge in US Dollars due to geopolitical risks, its strength will probably last well beyond the current conflict. Analysts also advise that high treasury yields coupled with American energy independence will more than likely continue to retain the greenbacks appeal to the financial markets and investors alike.

Author: IntaCapital Swiss