Back to school – end of Goldie-Locks

9 September 2016

The past week ended with a little bang as equity markets lost between 1 and 2% in the wake of bond markets having suddenly reversed their summer trend towards ever further falling yields. On the face of it the culprits were the Eurozone’s central bank through its unwillingness to extend its monetary stimulus program even further and noises from US rate setting committee members that they would prefer raising rates earlier rather than later (that means September instead of December as markets currently expect). However, as we also point out in the next article, markets have been exceptionally ‘well behaved’ over the summer and thus a return of a touch more volatility was overdue. This had additionally been predicted by the chart analysts and so it wasn’t overly surprising that the first full September week ended, as we had suspected last week – softer.

The actual economic news flow is beginning to confirm what we had observed through our internal models for a little while, which is that the acceleration phase of the Global economy since the winter lull is ebbing away as we return once again to the previous slow growth cruise speed. We have grappled with this phenomenon now since the decade began and the jury is out whether this will change for the better or the worse, once the hiatus in the US economy as a result of the divisive presidential election campaign is over in November.

In the UK, the end of the summer recess brought the return of political confusion, with no sight of a plan of how to achieve a EU divorce without putting the UK’s economy unduly at risk. The first debate in the commons also made apparent that even the cabinet isn’t quite in agreement what form of Brexit the government actually wants to pursue. So while the G20 summit in China ended with an indication of attempts to coordinate Global policy towards achieving improved growth levels, it would appear that the UK needs to brace itself for a return of an increased level of political uncertainty. This has the potential to undo the calming of (business) nerves which was behind the remarkable August rebound. I am hopeful that the regained momentum, combined with the continued Global economic progress carries the UK through at least September and October.

In the new week, the UK’s central bank, the Bank of England (BoE) with its monetary policy stance will once again take centre stage for UK capital markets as they report the decisions of their September meeting on Wednesday. There is a general expectation of a further minute rate reduction of 0.1%, although it will be difficult to argue any additional easing for the Bank’s governor after the strong August sentiment readings. Since so much is currently written and commented about central banks’ extraordinary monetary easing policies like QE and what they may or may not cause, we include in this week’s edition an insight article about the fundamentals of QE and especially whether and how the additional money that has been created may be reduced again, when it is deemed necessary to prevent inflationary tendencies.

Last but not least, the bankruptcy announcement of a major South Korean container shipping company (Hanjin) unsettled the Global trade community and we discuss in the second article what this may tell us about the state of globalisation. We suggest that after decades of exponential expansion, the Global slow growth phenomenon is claiming its first victims amongst those who simply extrapolated the previous decade’s growth rates, when it should have been clear that further globalisation has for the time being stalled and can therefore also not contribute further growth.