It’s been a millpondesque week in financial markets, which is great for investors’ nerves, but catastrophic for those of us trying to inject drama into a weekly market summary.
One previously reliable well of tension that has run dry is the Bank of England rate setting meeting. There used to be genuine uncertainty over its outcome: An interest rate rise? A cut? A quarter of a per cent? Or the full half? Not anymore: The BofE crew met this week, but their fiercest debate would have been their choice of biscuit, as their “no change” verdict on interest rates was all but set in stone.
They did elicit a slight tremor in the pound, however, by announcing they are relaxed with inflation running up to 3.1% for a while (their target is 2%). They expect this to be a temporary thing that will soon pass, which is exactly how I feel about my 11-year old son’s recent willingness to tidy his room.
Sterling’s wobble happened because investors are drawn to currencies that pay higher interest rates. But the BofE’s chillaxed attitude means they’re not planning on raising rates even if inflation does tick up. This obviously disappointed those expecting them to copy the US Federal Reserve’s more clenched tone from last week. So, there was some light pressure on sterling against the euro, but not so much that you’d notice in, say, the price of a tub of tzatziki.
One good thing about this market lull is it gives me a chance to expand on the inflation theme. As I mentioned last week, it really is ‘The Big Thing’ that investors markets are obsessing over. Many commentators believe we are at a historical turning point, at which the long era of falling inflation turns to a period of rising inflation. If they’re right, this polarity reversal would have a profound impact on the fortunes of different asset classes, turning winners to losers.
It also highlights another of the slipperier areas of investing: that we measure the size of one thing (returns made by our investments) using something – a currency – that also changes in value. There has, and bear with me on this, been much conjecture about the gradual shrinking of our beloved snacks, such as the Creme Egg, the Wagon Wheel or the Mars Bar (a phenomenon that itself may have diddled the inflation calculation). But, for anyone with a ruler, this is simple to measure.
But now imagine measuring the length of a Mars Bar using not centimetres, but Creme Eggs. If the Creme Egg has shrunk while the Mars Bar has stayed constant, it will appear as if Mars Bars have actually grown. This isn’t as trite as it may sound: much has been made of equities’ extended rally, but this has happened at a time when the supply of the things used to measure it – dollars, euros or pounds – has been expanded at pace. So have the prices of shares, fine wines and second homes in Cornwall all risen? Or have currencies all dropped? And, either way, will this trend continue? These are some of the reality-bending issues we continue to wrestle with on your behalf.
Have a great weekend,
Simon Evan-Cook
(On Behalf of Raymond James, Barbican)
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.