The turbulence in the stock markets last week signals a new era of global volatility that will continue for some time.
This is the somewhat gloomy assessment of Bob Prince, the co-chief investment officer at the world’s biggest hedge fund – Bridgewater - who said the market mayhem of the past seven days was a consequence of an adjustment to higher interest rates after a decade of extremely relaxed monetary policy.
Speaking with the Financial Times, Prince said that the decision by central banks to tighten monetary policy this year through interest rates rises, following years of contemplation, has left complacent markets having to catch up. He predicted that: “we will have more volatility as we are entering a new macroeconomic environment”.
After a week which saw $4tn wiped off the value of shares around the world, the prospect of further selling will leave investors nervous. And while it was rising bond yields and higher inflation that were identified as the primary cause for this market instability, Prince believes that the next phase of turbulence will be as a result of the broader economic picture, when the inflationary pressures that have remained dormant for some time begin to manifest themselves and central banks begin to claw back some of the trillions of dollars they have put into the financial system in recent years.
His partner at Bridgewater, Ray Dalio, was equally pessimistic when he spoke at the World Economic Forum in Davos last month, blaming growing political polarisation in Washington as well as the shift in central bank policy for the downturn.
Prince does strike a hopeful note though and says that, for all the doom and gloom, global growth will remain on track while the financial markets get their act together. He forecasts that “the real economy will outperform financial economy this year, the opposite of what we've seen in recent years”.
With the FTSE100 due to open up 1.25% according to futures trading, and the Dow Jones average on Wall Street is set to rise 0.7%, investors will be watching with great interest this morning to see if Friday’s late rally has created momentum going into this week, which may go some way to confounding the expectations of Prince and many of those in the financial world.
Theresa May has said that EU migrants who come to the UK during the Brexit transition period will not have the automatic right to remain in the country. The prime minister’s stance has caused alarm in the Home Office, where senior officials have said that they would struggle to create separate systems to register existing EU citizens and new arrivals by March next year. (£)
Penny Mordaunt, the international development secretary, will today meet with senior Oxfam managers to discuss the allegations of sexual misconduct by some of its aid workers. Mordaunt has warned that the charity must account for the way it handled the claims or it risks losing government funding.
Theresa May and Irish Prime Minister Leo Varadkar will travel to Belfast today amid growing speculation that a deal between Sinn Fein and the DUP is close. They will meet with Stormont’s main political parties to try and restore the coalition after 13 months of stalemate.
Business & Economy
A fall in high street shopping contributed to a decline in overall UK consumer spending in January for the first time in five years. According to research by Visa, household spending fell by 1.2% in January compared with 12 months ago, the first time there has been a decline at that time of year since 2013. (£)
Bob Dudley, the boss of BP, has dismissed suggestions that Britain’s status is diminished by Brexit, arguing that Britain will still have power when it comes to striking trade deals across the world. Dudley has also expressed his support for Theresa May’s decision to keep Brexit negotiations under wraps. (£)
US banking giant Citi has announced it is to set up an innovation centre in London, signalling one of the first strategic investments by a big US bank in the British capital since June 2016’s UK vote to leave the EU. The group is initially hiring 60 technologists for the centre and the decision to house the centre in London is a major boost for the City’s fintech sector. (£)
The week ahead
Today, Rex Tillerson, the US secretary of state, is in Cairo on the first day of his five-nation tour of the Middle East. After a trip to Kuwait, Tillerson will stop off in Lebanon and Jordan, where he is expected to face considerable heat for Washington’s recognition of Jerusalem as Israel’s capital. He rounds off his tour in Turkey.
On Tuesday, PepsiCo reports fourth-quarter earnings this week, before Coca-Cola post its results on Friday.
With recent volatility in the US stock market, investors will have a keen eye on Wednesday when US inflation data is released. Analysts are looking at headline inflation increasing by 0.4% and core prices – those that exclude the volatile food and energy prices – likely to go up by 0.2%. Core CPI is tipped for a 1.7 per cent year-on-year advance. Germany’s Federal Statistics Agency will issue its first estimate of growth in the fourth quarter of 2017 on Wednesday too.
A number of big-name companies announce results on Thursday, with Nestle, Airbus and Bombardier all reporting figures. Finally, UK retail sales figures are published on Friday, with interest mounting around how sales in the sector have bounced back since suffering the biggest fall since the direct aftermath of the 2016 Brexit referendum vote in December.
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Columns of Note
In his weekly Sunday Times Scotland column, Kevin Pringle argues that the shambles over MSPs’ access to Brexit impact assessment highlights the need to revisit David Cameron’s ‘respect agenda’ and make it real. Where UK-wide frameworks are required for powers repatriated from Brussels, Pringle suggests that these could be governed by a British council of ministers, with representatives of the country’s four nations, as “Brexit isn’t exactly going swimmingly, and four heads would be better than one.” (£)
Writing in the Financial Times, Wolfgang Münchau says that Germany is currently in the midst of political chaos that mirrors the situation found in the UK in the immediate aftermath of the Brexit vote. Münchau says that Angela Merkel’s political future is in the hands of the 464,000 members of the centre-left Social Democratic party, as they prepare to vote on whether they accept the grand coalition between their party and the German chancellor’s Christian Democrats party. (£)
Did you know?
To avoid any potential confusion with North Korea's capital, Pyongyang, the PyeongChang resort – the location for the Winter Olympics currently taking place in South Korea - has changed its name for the Games, by capitalizing the "C”. The location is just 50 miles south of the demilitarised zone that separates the two countries.
House of Commons
In recess. The House will next sit on Tuesday 20 February
House of Lords
In recess. The House will next sit on Tuesday 20 February
In recess until Monday 19 February