Performance enhancement. Alongside world records being smashed by elite athletes in Rio de Janeiro this week, the UK Equities market is setting records of its own. The FTSE 100, up 11% so far in 2016 to close last week at 6,916 is at its highest level in 14 months. So what is behind the performance burst? No doubt monetary policy measures intended to drive down the returns on bonds, and cut interest rates to record lows have served to stimulate demand. Alongside quantitative easing (QE), the value of the pound also dropped, boosting overseas earnings. In an interesting twist, one of the Bank of England’s most notorious hawks, Ian McCafferty, now states that he believes rates could go even lower in upcoming months. Well, well, well…do I hear 7,000?
Money can’t buy you bonds. The Bank of England is in the market for gilts. The latest QE plan (announced 9 August) is based on an assumption that as buyers of gilts, the Bank of England would find sellers. The problem with that assumption is simple. The owners (largely financial institutions) are reluctant to sell, particularly their longer dated assets. As a result, the Bank of England failed to buy as much as required, calling into question the viability of the wider QE programme. And this problem appears unlikely to go away anytime soon given the difficulty that long term pensions and savings plans face generating a sufficient return. Why would you sell to the Bank of England at the moment? If the Bank of England want yields to go down, your prices are going up.
Brexit bonanza. The latest retail sales figures could help temper fears that the economy is grinding to a halt. In total terms, sales rose by 1.9% in July, the strongest growth since January. The positive news story will come as a welcome relief to town centres across the country, given early indicators suggesting consumer activity slowing in the wake of the EU referendum. Warm weather and a weak pound are attributed with boosting a feel good factor at home and tourism interest from abroad – the number of foreign visitors to Britain jumped 18% in July. While the numbers are a reason to be cheerful, it is only the first month of full figures post Brexit. Encouraging news, but early days. Best to hold off ordering the bunting for now.