Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Currencies

Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Categorized | Currencies

Investors beware, chill winds are coming


Posted on August 31, 2016

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August was a soporific, a gentle susurration of stock markets ebbing and flowing without force. The month was a collective holiday from excitement after the mania of Brexit, a stark contrast to last year when a surprise devaluation of the Chinese currency was followed by generalised, if temporary, financial mayhem around the world.

The worry may be that investors could awake with a start, given a US election is approaching as well as a vote on the Italian constitution. Yet to decide what will influence markets in the months ahead it may help to look back and ask a question: an eventful year later, what has really changed?

    Consider the apparently divergent paths of the UK and Europe. At first glance British stocks were the smart choice as September began last year. Including dividends, an investor in the FTSE All-Share is 12 per cent richer. By comparison, MSCI’s broad index of European shares which excludes the UK has lost the imaginary shareholder 1 per cent of her capital, after dividends. The markets took their own routes to different destinations.

    Yet, if the comparison is approached from the perspective of a US dollar investor, suddenly the difference becomes hard to spot.

    Before UK voters decided to leave the EU, the two markets marched in lockstep. Since then they have diverged only slightly. In dollar terms, and with dividends, the UK is down 4 per cent while the rest of Europe has dropped by 2 per cent.

    So, for all the political and economic developments of the past year, a form of stasis appears to have set in. Estimates for corporate profits in the UK and Europe have been declining, largely offset by central bank measures which help to support asset prices. With calm restored, little underlying movement has occurred.

    Or, to cut it another way, the rising value of UK companies can be considered a form of money illusion. They are broadly worth the same as a year ago, but the pound is not. What it suggests is an evolution of the complaint often heard in recent years, that central banks are the cause of all market movement. All that now matters is the value of currencies, and where they might go from here.

    dan.mccrum@ft.com