After a hiccup or perhaps more of a coughing fit last week, the UK stock-market (FTSE 100) closed today (18.03.15) at 6945, more or less where it started the month, gaining an impressive 1.5% on the day. Had the Chancellor in his budget speech produced a whole warren of rabbits out the hat? Other major markets at the time of writing at least are showing nothing like such vigour; the US S&P is down c. 0.3%.
It’s the politics, stupid
There were of course some business friendly measures in the budget, in particular changes to North Sea taxation to help the hard–pressed oil industry; Shell was up 2.4% on the day. But the gains in shares were pretty widely spread; both of the major pharmaceutical companies (GSK and AZN) as well as Imperial Tobacco and Rolls-Royce showed gains of close to or above 2%. The mining sector was the only conspicuously weak area.
Financials were reasonably strong – led by Standard Chartered – is that much anticipated bid about to materialise? The stock was up 8% but there has been no announcement from the company. That aside, perhaps the market was responding to the general saver friendly nature of the budget (eg ISA flexibility); although investors with generous final salary pension schemes and/or large pension pots should pay attention to the further reduction in the Lifetime Allowance.
It may be that the market deemed that the budget speech was a political success or that it was simply pleased to get it out of the way without anything too nasty happening. There certainly wasn’t much in the way of surprises as regards the state of the economy or government finances; the measures announced are unlikely to shift the outlook to any great degree.
To be patient or not to be patient?
It is also the case that European markets have been roaring ahead recently so possibly the UK is playing catch up here. Whatever today’s euphoria it is likely, however, that attention will swiftly switch to the US as Federal Reserve Chair Janet Yellen gives her much anticipated press conference this evening (6.30 pm UK time). Markets are looking for guidance on the course of US interest rates. Will the word ‘patient’ be removed from the wording, thus indicating a rise in rates this June?
The market temper tantrums of last week were largely about fears of rising US rates, anticipation of which has caused the dollar to strengthen considerably, with a knock on effect of weakening the earnings of US companies with overseas sales. Will bond markets sell off if interest rates rise, thus reducing the attraction of equities?
Supply and demand
In my view there are two important points about the question of rising US rates; firstly as argued by David McWilliams in a piece for Neil Woodford, just because we get one or two rate rises, this does not mean we are inexorably heading for rates of 4% (I paraphrase somewhat). Yellen quite possibly could raise rates towards 2% and leave it at that – the state of the economy will be important in determining how far she goes.
Secondly, as Martin Wolf in today’s FT points out, central banks cannot set long term interest rates; these are determined by markets, at least partly in response to the demand for and supply of savings. If as seems likely there is a global glut of savings the extent to which long term interest rates can rise is limited. Those bond vigilantes may not have quite as much power as they think! But Janet we are all ears.
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