News & Reports Archives

Federal Reserve Cuts US Dollar Interest Rates

Written by IntaCapital Swiss on September 30, 2024. Posted in News & Reports. Leave a Comment

On 18^th September 2024 the Federal Reserve cut interest rates by 50 basis points: an aggressive start to bring interest rates down in the United States. After more than twelve months, the FOMC voted by 11 to 1 to lower the federal funds rate to a range of 4.75% – 5%, reflecting the first interest rate cut in over four years. Whilst the markets are expecting further rate cuts this year, projections released by the Federal Reserve regarding the same showed that there was a narrow majority of 10 to 9 in favour of further cuts in 2024.

Following the announcement, the Federal Reserve Chairman Jerome Powell was quoted in a press conference as saying, “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%”. Whilst inflation is indeed moving downwards, analysts suggested that the Chairmans press conference was economic speak for “we are still not sure about the labour market”.

However, Chairman Powell did caution the markets not to take this rate cut as a confirmation that the Federal Reserve has now set the pace at which rate cuts will be considered in the future. As usual, any further rate was tempered with a statement from policymakers that “they will consider additional adjustments to rates based on incoming data, the evolving outlook and balance of risks”. Further tempering was added when policymakers also advised that jog gains have slowed, and inflation remains slightly elevated.

Despite these somewhat negative announcements regarding future interest rate cuts, the financial markets have taken the opposite view with traders ramping up their bets on future interest rate cuts and pricing in a further 70 basis points of rate cuts between now and the end of Q4. Experts suggest that the pace of rate cuts will be as the market predicts, as previously traders have done a relatively good job of predicting the amount and early pace of the cuts. Indeed, despite negative rhetoric, including the warning that ‘the outlook for the world’s largest economy was uncertain’, the ‘Dot Plot’* published by the Federal Reserve indicates that interest rate could be cut by another 50 basis points by the end of Q4, and a further full 1% cut in 2025.

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

The Bank of England Keeps Interest Rates on Hold

Written by IntaCapital Swiss on September 30, 2024. Posted in News & Reports. Leave a Comment

On September 19^th, 2024, and despite a full 50 basis point reduction in US interest rates announced by the Federal Reserve the day before, the Bank of England, (BOE) advised they were holding interest rates steady at 5%, with the MPC (Monetary Policy Committee) voting by 8 – 1 to keep the cost of borrowing steady. Whilst many experts, investors and analysts expected a hold on interest rates, the word coming out of the BOE was that they are waiting on further data to confirm inflationary pressures have subsided before making a second cut in the cost of borrowing. The decision also pushed sterling to its strongest level against the US Dollar since March 2022, and is just a hair’s breadth away from its two year high against the Euro.

I think we are on a gradual path down. That is the good news.
Andrew Bailey, BOE Governor

In a statement by the BOE Governor Andrew Bailey he said “We should be able to reduce rates gradually over time, it is vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” Later on the Governor was also quoted as saying “I think we are on a gradual path down. That is the good news. I think interest rates are going to come down. I am optimistic on that front, but we do need to see some more evidence. We need to see that sort of residual element now fully taken out, to keep inflation sustainably at the 2% target.”

Released minutes of the MPC meeting said, “In the absence of material developments, a gradual approach to removing policy restraints remains appropriate.” The minutes also reiterated the need for policy to remain ‘restrictive for sufficiently long’ and that the MPC will take a meeting-by-meeting approach to interest rates. This gradual approach comes despite recently released data showing August inflation at 2.2% (below the BOE’s forecast of 2.4%), however, service inflation remains sticky at an uncomfortable high of 5.6%. Some experts are suggesting that service inflation may well hamper any further rate cuts this year, but they are definitely in the minority.

Experts advise the general feeling in the financial markets is that at the next policy meeting of the MPC on November 7th, a rate cut is almost a racing certainty, especially as inflation is below the BOE’s expectation. However, the BOE have warned that they expect headline inflation to increase to 2.5% by the end of Q4 this year. Elsewhere, interest rates were held steady in Japan, China , Taiwan, and Turkey, whilst Oman and South Africa both cut interest rates.

September 2024: The 2nd ECB Interest Rate Cuts

Written by IntaCapital Swiss on September 18, 2024. Posted in News & Reports. Leave a Comment

For the second time in 2024 the ECB (European Central Bank) has cut interest rates by a ¼ of 1% (25 basis points) as inflation recedes towards their target of 2%. The key deposit rate was cut, as expected by most financial experts, to 3.5% despite the recovery facing some economic headwinds. Additionally, the refinancing rate (or minimum bid rate, is the interest rate which banks have to pay when borrowing money from the ECB) was cut by a full 60 basis points to 3.65%, a technical adjustment which had been on the cards for quite a while.

The ECB President Christine Lagarde, like her peers in the United Kingdom and the United States, was quoted as saying “we shall remain data-dependent” and going on to add that the decision to cut interest rates was totally unanimous. The President was further quoted as saying “A declining path is not predetermined, neither in terms of sequence, nor in terms of volume”. A number of analysts surmised that this is financial speak for ‘We may or may not be doing another rate cut this year and we are therefore not going to commit ourselves.’ Financial markets slightly eased back on bets on further monetary easing predicting a total, predicting a circa 36 basis points increase by the end of Q4, though there is no complete consensus.

The interest rate announcement by the ECB follows a fall in inflation in August to 2.2% with data released showing wage increases which drive price increases in the service sector are now on the decline. A comprehensive measure of workers’ pay, the “Compensation Per Employee”, provided data showing an easing to 4.3% in Q2 from 4.8% in Q1. The ECB President stressed that their inflation target of 2% should be reached by the end of Q4 2025. However, as in a number of other economies, service inflation is still on the radar as being one of the main concerns.

Despite the sluggish growth in the euro zone’s 20- nation economy, where declining momentum from earlier in the year (households are not supporting the rebound in Q1 and figures for manufacturers remain indifferent), many analysts suggest that there is a predictable outlook to interest rate cuts. Whilst many analysts see an interest rate cut in each of the upcoming quarters until end of Q4 2025, there are some doubts due to the weak economy, which is the justification for the ECB remaining on the fence regarding the timing of future rate cuts.

UK Government Debt Still as Popular as Ever

Written by IntaCapital Swiss on September 10, 2024. Posted in News & Reports. Leave a Comment

On Tuesday 2^nd 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 29^th 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

Written by IntaCapital Swiss on September 2, 2024. Posted in News & Reports. Leave a Comment

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 (20^th – 22^nd 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 18^th, 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

Written by IntaCapital Swiss on August 27, 2024. Posted in News & Reports. Leave a Comment

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 21^st 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 1^st, 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?

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.