Are pre-election ‘jitters’ set to hit sterling?

Looking at exchange rate moves so far in 2015, sterling has very much been in the middle of the pack. In the first quarter it declined against the Swiss franc, US dollar, Japanese yen and New Zealand dollar (by between 2% and 8%), but it posted similar sized gains against the Australian dollar and other European currencies. So there was little evidence of ‘election jitters’. But since the end of March sterling has shown a greater propensity to decline against most of the main currencies, so perhaps investor nervousness is intensifying. As 7 May approaches we could reasonably expect more volatility, and sterling rather than short-dated Gilts is likely to feel the heat despite its recent declines. Rate rises earlier than the market expects could be supportive of the currency later in the year, but for now we have slightly increased non-sterling (ie US dollar) exposure.

Howard Cunningham – Newton, A BNY Mellon company

 

Looking at exchange rate moves so far in 2015, sterling has very much been in the middle of the pack. In the first quarter it declined against the Swiss franc, US dollar, Japanese yen and New Zealand dollar (by between 2% and 8%), but it posted similar sized gains against the Australian dollar and other European currencies. So there was … read more

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Show this to your boss: wage increases on the way in US

Sign-up bonuses for truck drivers in Detroit, Michigan, of between US$10,000 and US$20,000, alongside an increase in people quitting their jobs, show the US  recovery is continuing. When it comes to informing monetary policy, Federal Reserve chairwoman, Janet Yellen, pays close attention to the Employment Cost Index (ECI) which tracks wage growth. According to the most recent data from the US Labour Department, compensation costs rose 2.2% over the 12-month period ended December 2014.

We prefer to watch the National Federation of Independent Business’ (NFIB) Small Business Optimism Index, as we believe it is illustrative of the larger picture. This index surveys the intentions of smaller businesses in relation to worker compensation over the next six months and is currently indicating the ECI could be poised to rise more than 3% in the coming months.

Why do you think small business owners are preparing to give wage increases? Is it because they are philanthropic? No, it is because they are struggling to find the right candidates and are offering more to try and attract them. Their number one problem is finding attractive candidates, and even in lower-skilled jobs, like mass-merchandise retail, some of the largest US employers are raising wages. This will be supportive of consumer spending going forward and sectors such as tech are likely beneficiaries.

Dave Daglio – The Boston Company Asset Management, A BNY Mellon company

Sign-up bonuses for truck drivers in Detroit, Michigan, of between US$10,000 and US$20,000, alongside an increase in people quitting their jobs, show the US  recovery is continuing. When it comes to informing monetary policy, Federal Reserve chairwoman, Janet Yellen, pays close attention to the Employment Cost Index (ECI) which tracks wage growth. According to the most recent data from the … read more

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Investment opportunities from crumbling US roads

In the US a lot of road and bridge infrastructure is paid for through the Highway Trust Fund (HTF). This is funded at the Federal level through the Gas Tax, which has been 18.3 cents per gallon of gasoline since President Clinton’s administration in 1993. This means the Federal component of the HTF has not adjusted for inflation in over 20 years. It has been suggested that with the oil price rolling over, as it has in the past six months, now would be a good time to raise the Gas Tax because it wouldn’t be felt as much by consumers.

The trouble is it would be a politically unpopular move. There will always be roads in need of repair and it would be economically positive to repair those roads but the benefits are not seen on day one. The lack of political will to address this issue has led to a significant funding gap, which has not been helped by the leveling off in miles driven and the increase in fuel efficiency of vehicles – leading to a lower consumption of gasoline. President Obama’s latest suggestion to implement a 14% one-time tax grab on US$2 trillion of overseas earnings could raise US$238bn from US companies. But even if it is passed this will not be a cure-all. The American Society of Civil Engineers assigned a grade of D+ to US infrastructure in 2013 noting an estimated US$3.6 trillion of investments are needed by 2020 to get infrastructure systems to a state of good repair. Private companies will increasingly step in to fill this void – stumping up the original capital to fund the project and then recouping this (plus some) through tolls.

James Lydotes – The Boston Company Asset Management, A BNY Mellon company

In the US a lot of road and bridge infrastructure is paid for through the Highway Trust Fund (HTF). This is funded at the Federal level through the Gas Tax, which has been 18.3 cents per gallon of gasoline since President Clinton’s administration in 1993. This means the Federal component of the HTF has not adjusted for inflation in over … read more

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High yield debt: a blockage in the system?

One consequence of the widely discussed hunt for yield has been enduringly strong flows into high yield assets. What is perhaps less known is how much those markets have grown over the long term. Net annual flows into the asset class have been positive in 17 of the past 23 years, for example. Net outflows have only occurred in six of those 23 years.

Meanwhile, retail ownership in the asset class has also skyrocketed. According to Morgan Stanley data, about 20% of US high yield is now owned by mutual funds or ETFs. That compares with 5% in 1993. More of the market than ever before is now owned by retail investors.

Accompanying this overall growth in the levels of debt has been a decline in the ability of the market to cope with inflows and outflows, as increased regulation, such as Basel III, has stymied the ability of banks to take on inventory.

As the market has grown, the amount of dealer capital available to trade fixed income has fallen. The liquidity of bond markets versus equities has always been low but now it is even more so. The trend is reflected in the frequency of bond trades versus that of equities. In January 2015, for example, the percentage of NYSE stocks with zero trades was 0.1%. For bonds, that figure was 53%. The percentage of equities with more than 25 trades a day was 99.7%. For bonds, that figure was just 0.4%.

Raman Srivastava – Standish, a BNY Mellon company

One consequence of the widely discussed hunt for yield has been enduringly strong flows into high yield assets. What is perhaps less known is how much those markets have grown over the long term. Net annual flows into the asset class have been positive in 17 of the past 23 years, for example. Net outflows have only occurred in six … read more

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A race to the bottom?

Central banks have engaged in unconventional policies since the onset of the financial crisis in the form of QE, long-term repo operations, funding for lending and, in the US, the Troubled Asset Relief Program. Central banks’ commitment to safeguard their respective economies should not be underestimated. However, it is unsettling to see monetary authorities continue to ease policy at a time when lower oil prices are expected to boost disposable incomes and fuel global growth. Policy error is an important risk to consider when investing and given the unprecedented action taken since the financial crisis, it is difficult to gauge its impact in the longer term. Should central banks misjudge the policy responses, inflation could run higher than expected.

David Hooker – Insight, a BNY Mellon company

Central banks have engaged in unconventional policies since the onset of the financial crisis in the form of QE, long-term repo operations, funding for lending and, in the US, the Troubled Asset Relief Program. Central banks’ commitment to safeguard their respective economies should not be underestimated. However, it is unsettling to see monetary authorities continue to ease policy at a … read more

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