Tradition Financial Commentary Number 97
Tradition Financial Commentary Number 96
Financial Commentary Number 95 – November 2011
As meek little Jane Eyre gazed longingly into the grim, ugly face of Mr Rochester, the similarity of Mr George Papandreou (Prime Minister of Greece) looking upon Angela Merkel struck home. “I love you, but be gentle please!” were Miss Eyre’s implied thoughts, or should that be Mr Papandreou!
The Economy
The MPC has continued to hold base rates at 0.50% as they attempt to stimulate a depressed and dreary domestic economic situation. CPI figures published in September showed a marginal fall from 4.5% to 4.4%, still vastly over target (Although for the time being inflation targets appear to have put on the backburner). Unemployment in the 3 months to July, increased by 80000 to 2.51 million, the largest increase in nearly 2 years. Yet UK PLC is probably living in bliss when compared to the problems facing Euroland!
The ongoing concerns relating to European sovereign debt and the question of the political willpower needed in theUSto deal with the question of its borrowing ceiling have dominated world markets for the last two months. Stock markets across the world have fallen between 20-30% as the global economic problems appear to be coming to a head. In Europe the focus remains onGreece, its likelihood to default, how effective its austerity measures will be and the strong possibility of its investors having to “Take a haircut”. Standing slightly out of the glare of the spotlight, but certainly not out of the minds of investors arePortugal,Spain,IrelandandItaly(Who received a credit rating downgrade). All too aware that the Greek tragedy playing out will have direct implications for them, both immediately and for many years to come. TheUS, powerhouse of the world, has received a credit rating downgrade as investors fret over the ability of the Obama administration to deliver decisive and effective leadership at a time of economic crisis. In an attempt to provide liquidity the US Federal Reserve launched “Operation Twist”, by which it buys longer dated treasuries therefore “twisting” the shape of the yield curve by putting downward pressure on longer term interest rates. However it was poorly received by markets that were anticipating another full blown round of QE. Robert Zoellick, president of the World Bank, has said that the world’s economy is in a “danger zone”. Christine Lagarde, head of the IMF, said that the world economic situation was entering a “dangerous place”. These are indeed trying times!
The Market
The recent turmoil in markets has forced some Local Authorities to review, and compress their already meagre counterparty lists. This has been to the benefit of those Local Authorities seeking to borrow. There has been an increase in Authorities borrowing short term funds up to a duration of 1 year. The last 6 months have been spent preparing for the forthcoming HRA exercise. It was anticipated that a significant proportion of borrowing would likely be sourced from the Capital Markets. However this situation has changed with the announcement that, for a 3 month period, PWLB will be available to those Authorities affected at a discounted rate. This will alleviate immediate pressure, but it must be remembered that this is a temporary measure for a limited number of Authorities. Thus, for general funding requirements, the Capital Markets still offer cash at prices below PWLB, and should therefore be considered when planning a borrowing strategy. We would happily meet any individual Authority that wished to enquire further, in order to assist in tailoring specific funding.
Cash Fund Management
Politics and politicians continue to be the focal point in attempting to analyse the economic forces in Europe and theUSAand the potential knock-on effects in theUK. Sovereign risk and the contagion amongst the European Banks has made investors and consultants fearful, putting even more pressure on Council’s treasury departments.
Volatility has increased providing opportunities, even amongst the most restricted lists, to enhance investment returns. Normality is unlikely to return to the markets for sometime and therefore it is expected that investment decisions for authorities will remain testing.
However, the experience of the cash fund management team ofStuart SelleckandPaul Ewleshas enabled their existing clients to benefit from their input and direction. They continue to actively view-take with positive ideas going forward and can be contacted on 0207 198 5893/4
Any opinions expressed here are given in good faith and no liability whatsoever is accepted for any direct or consequential loss arising from the use of this document.
David Ingram
Tradition (UK) Ltd
Beaufort House 15 St Botolph Street London EC3A 7QX
Local Authorities 020 7422 3566
Facsimile 020 7422 3834
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October 2011