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Economy 18707

European experiment

Investors are drawing strength from aggressive monetary policy in the eurozone as Greece hardens its anti-austerity stance. 

European experiment

Slow growth and falling inflation are emerging as key challenges across the world’s economies and financial markets in 2015. These twin concerns have prompted central banks to ease policy, including last week in Australia, China and Denmark, and are the target of the European Central Bank’s (ECB) new quantitative easing (QE) scheme. Meanwhile, Greece’s negotiations with its creditors continue to fan uncertainty, with Athens at the weekend reaffirming plans to abandon the current bailout deal. The prospect of a Greek exit from the eurozone is unsettling, but European stocks have drawn strength from Frankfurt’s adoption of QE. As tensions over the future of Greece rumbles on, investors know that low growth and deflation are firmly in the sights of Frankfurt’s €1.1 trillion scheme.

In these conditions, eurozone government bond yields have hovered around historic lows. Last week the yield on Germany’s government bonds slipped below Japan’s for the first time, amid concern over deflation. However, the decline will be helpful for the fiscal positions of southern eurozone countries, although they remain vulnerable to a rebound. Meanwhile, UK gilt yields, after touching a historic low last month, rallied last week. As AXA Framlington notes, eurozone QE and rate cuts support all asset classes, including sovereign bonds. And investors should reassure themselves that government bonds are an important component of a well-diversified portfolio.

American lead

The strongest signs of growth continue to emanate from the other side of the Atlantic. US businesses created 257,000 new jobs in January, which beat forecasts, while employment figures for the last two months of 2014 were revised upwards. The new jobs in November were the largest monthly gain since May 2010, and employment figures have risen by more than 200,000 for 11 successive months as wages also grow. With more Americans in work and more money in household budgets, the US economy is showing the strength that the Fed wants before it raises interest rates. Markets now anticipate a June rise, which further strengthened the dollar and pushed up yields on US Treasury debt.

FTSE high

Meanwhile the FTSE 100 slid in early trading, although it remains near to its all-time high of 6,930 points in December 1999. The rally for the energy sector supported a 1.54% gain last week for the UK main index, as did BT Group’s advance after it finalised a £12.5 billion deal to buy EE, Britain’s largest mobile network, from Deutsche Telekom and Orange. Although GlaxoSmithKline revealed that its 2014 profits halved due to weak demand for its best-selling drugs, shares in the pharmaceutical giant were up 3% over the week as investors focused on its transformation into a vaccines and consumer drug powerhouse following its $20 billion asset swap with Novartis of Switzerland.

Alongside the steady start to the year for UK stocks, Britain’s economy has entered 2015 in robust shape. There are challenges from Europe and Greece – which Chancellor George Osborne conceded at the weekend could cause “real ructions” – as well as the uncertainty over what the general election will bring, and over a possible referendum to decide Britain’s future in the European Union. However, investors have much to be positive about, even with these uncertainties. As John Greenwood, chief economist at Invesco Perpetual, points out, the UK’s private sector is now in “pretty good shape”, with corporate investment and consumer spending at levels that make the upturn sustainable.

The recent fall in the price of oil and energy costs, as well as the supermarket price war, have helped to push inflation down to just 0.5%. However, there is a possibility that the UK economy will enter a period of deflation. Yet the Bank of England has remained upbeat about the low inflation, with governor Mark Carney describing the fall in prices as “unambiguously positive”. Bank officials are concerned that Britain’s recovery could still be derailed, however, if it lifted the base rate too soon from its record low level. Moreover, the strengthening of the pound against the euro following the introduction of QE into the eurozone is likely to act as a further anchor on interest rates.

No surprise

There was, then, little surprise that Carney last week held interest rates. The Bank this week releases its revised inflation and growth forecasts, together with its letter to the chancellor explaining why inflation is more than 1 percentage point below the 2% target. Markets will look for insight into when to expect an interest rate rise, as expectations in recent months have been pushed further back. Some now speculate that a rise will not occur until the summer of 2016; however, the consensus is for an increase by the end of 2015. But, as Bank officials have repeated, those rises will be gradual and slow. Bank data also show that markets believe rates will only rise to 1.5% by 2020.

Despite hopes that the recent launch of Pensioner Bonds for elderly savers might prompt banks and building societies to raise returns, they have continued to cut rates on deposits. Meanwhile, borrowers are set to benefit further as mortgage deals become cheaper. UK lenders are now offering five-year fixed deals that are just above 2%, while borrowers with larger deposits can obtain deals of around 1%. Mortgage approvals rose in December for the first time in six months, suggesting the housing market slowdown is drawing to a close. Although these developments demonstrate the economy’s growing vitality, long-suffering savers will have to continue to wait for interest rates to rise.

Meanwhile, over-55s only have to wait until April for new pension rules to come into force. With the general election four weeks after, the political debate unsurprisingly is heating up over the reforms that give people the freedom to decide what to do with their defined contribution pensions. Delivery of the biggest change to pensions in nearly a century in just a year was always going to be a challenge. What the countdown highlights is the need for the right advice to plan for the future. And, with the tax year-end also approaching, the next few months are an ideal time to explore allowances, exemptions and planning measures. Expert advice can help identify these opportunities.

Words by Tom Williams. Tom has vast experience in trading the Forex markets and is a qualified financial advisor. With expertise in wealth management, retirement planning and inheritance tax planning, he regularly advises on how to maximise personal wealth. 

To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning contact Tom Williams on 0777 910 5434 or

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