10 years on and still feeling the effects…
As we pass the 10-year anniversary of the Lehman Brothers’ collapse, it is perhaps an opportune time to review how markets continue to feel the effect of that fateful day on the 15th September 2008. Arguably, a global financial crisis was already gathering speed, but the collapse of the gigantic 150-year-old American bank became the catalyst for recession. What ensued was a series of events from which markets and economies are still recovering; the Royal Bank of Scotland’s collapse and subsequent bailout (thanks to the injection of tens of billions of pounds of the United Kingdom’s (UK) taxpayers’ money), the slashing of interest rates across the major economies, and the tightening of belts in public services to try and repair the UK government balance sheet all followed. Indeed, the phrase “when America sneezes, the rest of the world catches a cold” could not have been truer. Fannie Mae & Freddie Mac were on their knees, both having lost billions of dollars; Northern Rock was left crippled as the overnight money market dried up; and the financial crisis hit the UK high-street with the likes of retail giant Woolworths closing its doors. Consumer confidence fell, sales fell and business models were strained within a leveraged and over-borrowed world. The age of austerity was here and the risk of sovereign defaults suddenly became a reality, with Greece requiring multi-billion euro bailouts from both the European Union (EU) and the International Monetary Fund (IMF) just to stay afloat. Today – with interest rates only just starting to crawl back up, 6 months to go until Brexit and a lacklustre growth in wages despite high employment levels – we still find ourselves dealing with the economic upheaval that has defined the last decade.
UK Plc has had a stronger month on the data front. Figures for July showed that the UK seemed to shrug off Brexit uncertainty – albeit momentarily – by growing at the fastest quarterly pace in almost a year as the hot summer and World Cup increased household expenditure. This is, however, backwards-looking data, so it will be interesting to see whether such optimism can be maintained. Chancellor Philip Hammond has told the House of Commons that the Bank of England (BoE) governor, Mark Carney, will remain in his position beyond the Brexit deadline and until the end of January 2020. Hammond says the decision will "help support continuity in our economy in this period”. Meanwhile, wages paid to British workers grew at the joint-fastest rate since the summer of 2015 in the three months to July, and the pound picked up a little. Yet, despite the various positive news stories surrounding the UK, it remains unlikely that the BoE will raise interest rates again in the short-term until further clarity surrounding Brexit negotiations materialises. As such, the committee voted unanimously to leave rates unchanged this month. According to figures released this month by the Office for National Statistics, inflation in the British economy rose at its fastest annual rate in six months, hitting 2.7% in August.
The United States (US) Dollar retraced a little as emerging markets lifted off of 16 month lows. CPI figures were weaker than the market anticipated, however employment remained strong, boosting sentiment for another increase in US interest rates in December following the widely anticipated hike this month. Trade wars between the US and China have ramped up, with the US imposing $200bn of tariffs on the world’s second largest economy – in addition to the $50bn already imposed. US President Donald Trump initiated the fight to punish Beijing for what he calls China’s “predatory tactics” to try to supplant US technological supremacy. Figures at the start of the month showed that the American economy expanded at a faster rate than previously thought in the second quarter of 2018, according to the Bureau of Economic Analysis (BEA). The biggest economy in the world has been buoyed by strong global growth as well as the effect of significant fiscal expansion pushed through by the US President. Trump has cut taxes dramatically while rising spending in some areas, in defiance of his Republican party’s professed fiscal conservatism. The US has outpaced the 2.5 per cent annual growth across the mainly advanced economies in the Organisation of Economic Co-operation and Development, with quarterly growth also well above the average across the G7 group of major economies. The acceleration in GDP growth was driven by heightened consumer spending – with one measure of consumer confidence hitting a near 18-year high– as well as increased exports and government spending, the BEA said. The fast pace of growth has prompted some economists to warn that the US Federal Reserve may be forced to tighten monetary policy more rapidly in order to prevent the economy over-heating. With stimulating fiscal policy stoking the fires, such data supports the forecast for two further interest rate hikes this year. Tax cuts in particular have boosted company profits, sending the S&P 500 index to record highs – although private inventory investment and residential investment fell.
In Europe, Brexit remains a main focus and the European Central Bank (ECB) left all monetary policy settings unchanged this month, as expected. The ECB aims to end its Quantitative Easing (QE) program in December but will not look to raise interest rates until the end of summer 2019, highlighting “receding” uncertainty around its inflation outlook. Recent headlines surrounding negotiations have been centered on the Irish Border, with UK Prime Minister Theresa May highlighting that if an agreement is not reached by the end of the special Brexit summit – pencilled in for mid-November – the UK would not seek to extend the negotiations. The EU’s chief negotiator Michel Barnier commented at the beginning of the month that the bloc was prepared to offer Britain a partnership, though no “single market a la carte”.
Oil broke $80 per barrel for the first time since July and neared a three year high on the back of US crude inventories dropping, impending sanctions against Iran and Hurricane Florence. The Organisation of the Petroleum Exporting Countries cut its forecast for oil demand growth in 2019 in its monthly report and said that challenges in emerging countries could hinder global economic growth.
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