Economic Outlook March 2016

Regional Analysis (March 30th, 2016)

USA

At the December 2015 meeting the Federal Reserve increased interest rates to 0.375%. At the March 2016 meeting they expect them to be at 0.9% by the end of 2016. The members also further reduced growth, unemployment and inflation expectations.

Eurozone

At the March meeting, the ECB further lowered deposit interest rates to -0.4%, with expectations for it to remain at the present or lower levels for an extended period of time. Monthly asset purchases were expanded to €80bn/month, permitted purchases from individual organisations and banks issues were expanded to 50%, and
non-bank corporations are now included. Further a new long term lending facility to banks commenced. The growth expectations were reduced with risks to the downside.

Japan

Three main policies were decided at the January Bank of Japan Monetary Policy Meeting to achieve the price stability target of 2%. The introduction of a minus 0.1%% interest rates for bank deposits. An annual increase in the monetary base of 80 tr yen. Together with, annual purchases of: 80 tr yen of Japanese government bonds, 3 tr of exchange traded funds, 90 bn yen of real estate investment trusts, 2.2 tr yen of commercial paper and 3.2 tr yen of corporate bonds. Immigration controls need to be drastically relaxed to aid growth so taxes can reduce Government borrowing.

China

The People’s Bank of China sees economic downward pressure in the face of restructuring, they are attempting to moderate the expansion of aggregate demand, while supply-side structural reforms accelerate.. They continue to reduce loan and deposit rates and the reserve requirement ratio together with other policies, whilst foreign exchange balances are reduced. They also aim to eventually allow the market to decide the exchange rate, whilst also managing this transition.

UK

The Bank of England maintained the Bank Rate at 0.5% and the stock of reserve financed purchased assets at £375bn. Drops in energy and food prices, global inflation and, domestic costs anchored domestic inflation below the 2% target. Private domestic demand, the labour market and productivity are all supportive of UK growth. The referendum on the UK membership of the EU was seen as an uncertainty for growth and financial stability.

Capital Markets Outlook March 2016

Asset Class                        March 30th, 2016

  • USA
  • Equities –               Chinese growth concerns and Fed Fund speculation provide short term buying opportunities.  
  • Govt Bonds –         Mild fall in bond prices, but supported by yields.      

 

  • UK
  • Equities –               Pressure from referendum on EU membership.  
  • Govt Bonds –        Low yields offer no incentive to hold.
  • Currency –             Only gradual increase in interest rates to a low level permits currency downside.

 

  • Eurozone
  • Equities –               Struggling from strength of Euro.
  • Govt Bonds –         QE and deflation maintain support.
  • Currency –              Move to monetary easing aid currency’s to fall to fair value, in longer term

 

  • Japan
  • Equities –               Struggling from strength of Yen.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders, negative interest rates support.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure, in the longer term.

 

  • Rest of the World
  • Equities –                Potential to recover on internal rate cuts.
  • Commodities –      Difficult to make significant headway if US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.

 

Economic Outlook December 2015

Regional Analysis (December 29th, 2015)

USA

At the December Meeting the Federal Reserve increased interest rates to 0.375% and expect them to be at 1.4%  by the end of 2016. The members increased growth but reduced unemployment and inflation expectations.

Eurozone

At the December Meeting, the ECB lowered deposit interest rates to -0.3% extended full allotment fixed tender till the end  of 2017, extended asset purchases till beyond March 2017 include euro regional and local government debt and  reinvest principal payments. They slightly lowered inflation expectations.

Japan

Members of the Bank of Japan monetary policy by a reduced majority extended the maturity of Government Bond  purchases to 7-12 years, they also noted that exports and investment in physical and human capital have been picking up, although business sentiment and inflation expectations have been slowing. Immigration controls need
to be drastically relaxed to aid growth so taxes can reduce Government borrowing.

China

The People’s Bank of China sees mass entrepreneurship and innovation and the supply of public goods and  services forming the engine for economic growth, although downward pressures remained high. They continue to  reduce loan and deposit rates and the reserve requirement ratio. The central parity of the currency against the  dollar was reduced by 1.6%.

UK

The Bank of England expects inflation to stay below 1% for at least the next six months but exceed the 2% target  after two years with no further action. The Governments Autumn Statement means a lower pace of deficit reduction, but still impacting growth. Nominal pay growth appears to have flattened. The Monetary Policy  Committee expects rates to rise gradually and to a lower level than in recent cycles.

Capital Market Outlook December 2015

Asset Class                        December 29th, 2015

  • USA
  • Equities –               Chinese growth concerns and Fed Fund speculation provide short term buying opportunities.  
  • Govt Bonds –         Mild fall in bond prices, but supported by yields.      

 

  • UK
  • Equities –               As per  USA.      
  • Govt Bonds –        Low yields offer no incentive to hold.
  • Currency –             Only gradual increase in interest rates to a low level permits currency downside.

 

  • Eurozone
  • Equities –               Currency fall and QE to aid short term recovery.
  • Govt Bonds –         QE and deflation maintain support.
  • Currency –              Move to monetary easing aid currency’s to fall to fair value.

 

  • Japan
  • Equities –               AS per USA.
  • Govt Bonds –         Declared inflation target scares marginal government bond traders.
  • Currency –              Loose money, low growth and debt downgrades maintain pressure.

 

  • Rest of the World
  • Equities –                Potential to recover on internal rate cuts.
  • Commodities –      Difficult to make headway on US dollar appreciation, awaiting reduction in oil production investment.


Uncertainties

  •        Chinese military developments.
  •        Russia/Ukraine.
  •        Regulation of financial institutions and products.
  •        Religious extremism.