Rate Cut(?) day and the BOE must decide whether to slice another piece off the cost of borrowing. The current rate at 1.5pc is the lowest in the 315 year history of the UK’s central bank but, forgive me for saying it, this is yet another indication of the modern habit of resorting to knee jerk reactions over immediate events. Times are tough but not that tough and even in my life time I can remember much grimmer periods. If you compare events now to the history of Great Britain it is difficult to get a proper perspective on the management of the financial crisis by the various financial authorities.
The corporate bond market issued more debt in January than in the past 18 months as funds searched out for ‘reasonable’ returns and companies paid up to get their borrowing requirements finalised as soon as possible. If the bond market is back to its normal issuance levels then there is a strong argument that rates should not be falling further but actually considering hiking as the ‘green shoots’ do indeed seem to be arriving. Unfortunately this is only one sign of a return to normalcy and we still have the full momentum of a slowing economy to turn around. Low rates were also supposed to be an attempt to get more liquidity into the markets but this was always an argument that I found difficult to understand. Yes, low rates make it easier for central banks to issue debt (of which there is soon to be a mind boggling sum) and add liquidity in this fashion but it is hardly going to tempt funds or banks to lend more. I might lend to get a return of 5 to 10pc but I would be wary of taking the exact same risk (on the sum lent) for just 1 to 2 pc.
Japan has had ultra low rates for almost 20 years and much good it has done them. Their State debt levels are now so high (up to almost 200pc of GDP according to the IMF) that they could never afford rates up in the 5pc range as interest payments alone would swallow up to 10pc of GDP. This is one of the strange conundrums of the strong Yen. It is argued that the pound is weak because of the level of debt that will be issued in the next five years but on a global viewpoint we do indeed (much as I hate to agree with ‘Our Gordon’ on anything) have a low overall debt level which will, no doubt, increase but at least a sterling investor can be reasonably sure that rates will eventually go back up again. For holders of the Yen nought to one pc returns have become the norm. This is a long term view and is certainly not a recommendation of immediate Sterling buying!
Tui Travel and Easyjet have AGM’s today and we can expect some sort of trading statement from both. These stocks are classic examples of the difficulty of investing. Both, you would have thought, served pretty much the same market and both are low cost providers of travel products yet Tui is just 25pc from the highs of ’07 whilst Easyjet slums it with a fall of 60pc (and no dividend to boot). Since June last year Oil has fallen by over $100 (the rise in the price of aviation fuel was one of the main reasons given for the worries in the airline industry) and yet there has been virtually zero knock on benefit to Easyjets stock. Tui, who depend on foreign holiday uptake seem to be taking everything in their stride. The saving grace for the company is that, like many FTSE 100 companies) 70pc of revenue comes from outside the UK this means that (while income in the UK is probably under pressure) much of their total revenue will be magnified by the slump in the Pound and head office costs are all in Sterling. Compare to Easyjet where nearly all their income is from the UK but much of their cost base is in dollars.
The FTSE is likely to open lower after the US fell in late trading last night. We continue to trade over the same old ground day after day with each attempt at a break out either to the up side or down is defeated. As volatility contracts this becomes an almost self fulfilling prophesy with traders shunning the ‘common ground (4100 to 4200) and buying below this level and selling above it. The index is looking to open at around 4175 this morning and we are not likely to see too much action until the BOE decision. Tomorrow sees the Non Farm Payroll numbers out of the states as well so long term investment decisions will probably hold off for a day as well.
Traders are still contra trading in many asset classes and this is proving to be the correct style for the time being. With no ‘break outs’ in Oil, Currencies or Indices the safer bet has proved to be to trade the range in small size.
Cable had another failed attempt at the 1.4500 level yesterday but the Pound is definitely recovering from weakness rather more robustly than for some time. For the fist time since last spring a strong reversal of a small bull move was defeated (Monday’s drop has been reversed). While the pound does not seem to be able to hold above 1.4500 vs the dollar at the moment there may be the odd stirrings of a recovery. Sterling Yen has also managed to stagger through the steep medium term downward trend line and, at 129.07-129.15, there is a lot more room on the up side than the down. Almost incredibly the GBP/JPY cross could rally to over 190.00 and STILL be in a bear trend.
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