Happy St Patrick’s Day to all my Irish friends and also to the millions of Americans who, for one day a year, believe themselves to be Irish too. How nice would it be if Martin Luther King Day were treated in the same way?
Let’s get the easy bits dealt with first – the FOMC did what was expected of it by leaving monetary policy unchanged and, in comparing yesterday’s post-meeting statement with the one issued after the January meeting, the shift in language is truly only marginal. The changes, as expected, focus on external risks emanating from the struggles the global economy is going through. In fact, “global economic and financial developments” are mentioned twice. The vote was, no surprise there, unanimous.
Risks
These “global economic and financial risks” went on to form the back-drop for Janet Yellen’s subsequent briefing. Although she cited China’s slowing growth as no surprise, she did regard Japan’s negative Q4 as having been one. With weaker growth than hoped for showing in Europe, and with Canada and Mexico - the US’ nearest neighbours and closest markets - both weighed down by the low oil price, the Committee’s conclusion had to be to flatten the trajectory for future monetary tightening.
The response in the currency markets was instant with the dollar dropping sharply, but in the greater scheme of things and outside of the day-trading space it didn’t do that much and it remains well within recent trading ranges. Gold did, however, look good as it closed at just above US$1,260/oz, not far off the recent high of US$1,284/oz. After a long period in the doldrums, gold is beginning to look a little more attractive again; the fact that US core inflation might find itself creeping higher faster than interest rates can’t hurt.
Muddy waters
Back in the UK, things are a lot less clear. George Osborne’s Budget was a mixed and confused bag, to say the least. After the gloating of the Autumn Statement, he looked to be a very much more sombre and chastened chancellor yesterday. Although he can’t be blamed for the disappointing rate of recovery in the rest of the world, he does bear responsibility for having disregarded the developing headwinds back in November. The hubris he displayed then is now proven to have been deeply out of place. That said, he now has an added political dimension to deal with in the shape of the Brexit referendum and, as with the Scottish referendum, his boss seems to have slightly misjudged the mood in the electorate.
He opened his address by revising the growth forecast for the current year down to 2% from 2.4%, which - no surprise there - shoots a huge broadside through anticipated fiscal revenues. With balancing the budget still top of Osborne’s policy agenda, some fancy footwork was required, especially with the referendum ahead and the prize of Cameron’s succession on the table.
There was quite a lot of “left pocket/right pocket” on display along with the same language which we were to hear a few hours later from Madame Yellen, with respect to “global economic and financial developments”.
Corporation tax has been cut to 17% but there is an attempt, bless him, to close some of the tax loopholes which multinationals have used and which have caused such a storm and PR disaster for the Treasury. There is, tacitly, an appeal for companies to do the honourable thing and to pay their fair share of tax, although there is a view that if boards approve tax payments that could have been avoided, they could be deemed to be in breach of their fiduciary duty towards their shareholders and could find themselves with civil and possibly even criminal proceedings against them. Scary thought.
The rest of the budget makes a lot of sense in the vein of “kangaroo finance” – big leaps with an empty pouch.
Brazil nuts
I don’t go there very often as I don’t know enough to be able to comment with authority but Brazil is really something to behold. If I’d read a novel which had the president appointing a predecessor who is under investigation for tax fraud to the role of chief of staff and taking him thus, as a member of the cabinet, out of the reach of the courts, I’d throw the thing in the bin. Brazil is becoming a bit like Venezuela with Walter Mitty-style government.
We’ve come to expect it of Venezuela but Brazil, the great BRIC nation and host of the 2016 summer Olympics, was supposed to be the poster child of how to emerge from being a third-world basket case into a surging, modern state. I shouldn’t say what I’m thinking – Thought Police alert – so I won’t, but I’m sure you can fill in between the dots. Suffice to say that money is made in emerging markets, as it was in third-world debt and then in lesser developed countries’ debt – same thing, different label - by being the first in and the first out. The first outs are long out and sunning themselves on the beach. Not a time to be increasing exposure in my book, irrespective of how attractive the coupons look in a world of Zirp and Nirp.
Stella performance
Finally, the six-tranche InBev transaction did exactly what it said on the tin. My compliments to both the leads and the issuer for not squeezing every last basis point out of the deal. Doing €13.25bn with such ease is proof that markets, if treated nicely, are there and that, if needed, they will be there again in the future. Cheers to grown up behaviour.