The Latest Bank of England Inflation Report is Not Heartening for Investors

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The Latest Bank of England Inflation Report is Not Heartening for Investors

Not even the most optimistic options trader believes that the Euro is likely to find stability in the coming weeks. The recent release of the inflation report by the BOE seems to be underscoring exactly how bad the situation can get. According to the BOE, inflation is likely to stay over the 2% mark for now.

Uncertain Growth Prospects

The Bank of England has said that the possibility of growth seems ‘unusually uncertain’. BOE Governor King advises that it is the ‘bigger picture of growth’ that should be kept in mind. However, the fact that inflation is likely to stay above 2% in spite of a dip toward this level is not good news at all.

According to the BOE Governor, the uncertain outlook is arising from the euro zone crisis. Clearly, the Bank of England is also taking the possibility of Greece exiting the Euro quite seriously. The path to recovery is certainly going to be ‘slow and uncertain’ in the words of Mervyn King.

Options Traders Should Heed Indications of Euro Break-Up

Binary options traders with exposure to the Euro should take special note of the indications that a Euro break up may be imminent. Concerns about Greece exiting the currency have been making the rounds for quite a while now. However, overt talks about a possible ‘defection’ of sorts by other nations in the wake of Greek exit have only just begun to go public.

As long as this climate of uncertainty exists in the Eurozone the Euro is likely to be under immense pressure. Binary traders should keep in mind that the BOE Governor King has explicitly stated that the “euro-zone is tearing itself apart”.

Key Employment Data Will Give Further Indication

The bond guaranteed to beat inflation

National Counties building society has filled the gap left by National Savings with a five-year bond guaranteed to beat inflation.

A lifeline for savers

At a time when inflation remains stubbornly high and the government has withdrawn the only inflation proof investment, index-linked National Savings Securities, it is heartening to see one institution offering a lifeline to savers.

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The small National Counties building society is offering a five-year tax free ISA (individual savings account) investment which will pay 1% above the rate of inflation, as measured by the retail prices index (RPI). The only drawback is that savers must be prepared to lock up their money for the full five years as no withdrawals are allowed during the term of the bond.

The minimum investment is high at £5,100, the maximum annual amount allowed for a cash ISA. National Counties will also accept transfers from other companies so someone who has put the maximum into a cash ISA every year since their introduction will be able to inflation proof around £50,000.

FSA gets tough

The gamble, of course, is that nobody knows what inflation might do over the coming five years. Were RPI to remain at its latest rate of 4.8% until 2020, National Counties’ ISA would give savers an annual return of 5.8% a year.

However, the government and the Bank of England would consider inflation at this level a big failure and there would be pressure to bring inflation down to its target level of 2% for the consumer price index (CPI).

The Financial Services Authority has got tough with National Counties over the figures it was using to promote the index-linked bond and is insisting that it uses the average RPI over the last five years as an ‘illustrative rate of 3.96%. Initially, the society quoted potential returns of 5.82% a year in its marketing material.

Halifax next best bet

Savers must consider whether the National Counties’ inflation-linked deal, with its unknown return, will turn out to be a better bet than the best fixed rate ISA from Halifax, which is currently 4.25% for four years with a much lower minimum investment of £500.

Economists are divided on the longer term outlook for inflation. In the short term RPI is likely to stay comparatively high because of rising food and fuel costs and the introduction of VAT at 20% in January of next year. In its quarterly inflation report last week, the Bank of England warned that CPI – which has generally risen at a lower rate than RPI – was likely to remain above its 2% target rate into 2020, falling thereafter (see chart).

Latest figures from the Office for National Statistics show that the annual rate of inflation as measured by CPI slowed to 3.1% from 3.2% in June while the RPI dropped from 5% to 4.8%. The CPI figure was the lowest since February but the eighth consecutive month that it has exceeded the Bank’s 2% target.

For those who think deflation (falling prices) is more of a problem in the longer term, if the RPI falls over the five-year term, investors in the National Counties bond will receive their capital back in full plus 1% interest a year.

No safe investments

The new bond will be welcomed by savers as National Savings Index Linked Savings Certificates were withdrawn last month and there is now no investment, suitable for small investors, guaranteed to beat inflation. Most taxed investments cannot even keep pace with inflation and the institutions are taking advantage of the ‘tax free’ label on ISAs to pay very poor rates of return.

With RPI inflation at its current rate a basic rate taxpayer needs an investment showing a return of 6% just to maintain the value of their capital while the equivalent figure for a 40% taxpayer is 8%. There are no safe investments showing a return as high as this so the National Counties bond is likely to be very popular.

Savers who are prepared to take the gamble on future inflation staying high should move quickly as the bond is launched next Monday and is only available until 30 September, although it could be withdrawn earlier if demand is high.

Contact

National Counties (01372 747771) has only one office in Epsom in Surrey and it is a member of the Financial Services Compensation Scheme so the first £50,000 of any deposit is protected in the event of the society failing. .

Bonds Rise With Emerging Markets After Trump Selloff; Oil Surges

Posted By: Samed Olukoya November 16, 2020

  • Bonds Rise With Emerging Markets After Trump Selloff; Oil Surges

The fallout from Donald Trump’s election to the U.S. presidency eased off in financial markets with Treasuries and emerging markets halting their slide. Stocks jumped with crude.

Treasury 10-year note yields fell from this year’s high and Italy’s bonds outperformed German bunds, which investors tend to favor in times of turmoil. The Dow Jones Industrial Average climbed to a record and shares in developing nations rallied after a four-day slump. The dollar advanced to a five-month high against the yen, and Mexico’s peso led gains among major currencies. Oil surged the most in seven months as OPEC members were said to be making a final diplomatic push toward securing a deal to cut output.

Trump’s election victory, which came with pledges to cut taxes, spend more than $500 billion on infrastructure and restrict imports, triggered a record selloff in global bonds as traders assessed the implication for inflation and interest rates. Some, including Fidelity Investments’ Ford O’Neil, have already expressed skepticism that Trump’s proposals will be fully backed by Congress, while Goldman Sachs Group Inc. last week said the rally in iron and copper was “too much, too fast.”

“Many people were surprised by the market reaction to the election, but now portfolio managers are starting to focus more on where potential investment opportunities may be with a Trump administration,” said Ross Yarrow, director of U.S. Equities at Robert W. Baird & Co. in London. There has been “lots of chatter of fiscal stimulus and tax reform, but there are still a lot of moving parts and no firm details.”

Bonds

The yield on benchmark Treasury 10-year notes dropped three basis points, or 0.03 percentage point, to 2.23 percent as of 4 p.m. New York time. The 41 basis-point jump over the last three trading sessions marked the steepest climb in more than seven years and the 14-day relative strength index for the securities indicated they were the most oversold since 1990, a potential signal that they may be set for a reversal.

O’Neil, who oversees about $100 billion in bonds for Fidelity Investments, said the sharp run-up in yields following the election may not be justified given that Trump will face resistance from Congress in getting his fiscal stimulus plans approved.

Federal Reserve Bank of Richmond President Jeffrey Lacker said Monday that easier fiscal policy may require higher rates, but it’s too early for the central bank to react to potential policy changes by the incoming administration.

Italy’s 10-year yield slid 12 basis points to 1.96 percent, after rising for five consecutive days, and that on Spanish securities with a similar due date dropped to 1.45 percent, from as high as 1.66 percent on Monday. German bund yields were little changed at 0.31 percent, as a report showed growth in Europe’s biggest economy slowed to the weakest pace in a year last quarter.

Indian bonds rallied on expectations liquidity will improve in the wake of Prime Minister Narendra Modi’s surprise Nov. 8 crackdown on unaccounted wealth through the withdrawal of high denomination bills. Japan’s 10-year bond yield increased to zero, having been negative for almost eight weeks, as a gauge of demand weakened at a sale of five-year securities on Tuesday.

Currencies

A broad index of the greenback fluctuated after a four-day rally, its longest in a month, as U.S. retail sales figures were stronger than forecast, while Federal Reserve Bank of Boston President Eric Rosengren said the central bank would tighten monetary policy faster with more fiscal stimulus. The president-elect’s proposals to increase spending and cut taxes are fueling bets economic growth will accelerate and push the Fed to raise interest rates.

“The dollar is potentially going to go a lot higher still, if we do go down the route of extra fiscal stimulus,” which would also result in higher interest rates, Jeremy Hale, head of global macro strategy and asset allocation at Citigroup Inc., said in a Bloomberg Television interview. “That mixture of growth stimulus through the fiscal side and tighter monetary policy can be very powerful for the currency.”

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, lost 0.1 percent. It surged 2.8 percent last week, the most since 2020, and on Monday erased its losses for this year. The greenback rose 0.8 percent to 109.23 yen.

The pound fell for a second day versus the dollar as a report showed U.K. inflation unexpectedly slowed in October. Bank of England Governor Mark Carney told lawmakers that sterling weakness was due to the outlook for slower growth.

The MSCI Emerging Markets Currency Index rose 0.4 percent as Mexico’s peso and South Africa’s rand rallied more than 1.8 percent. China’s yuan slipped to its weakest level since 2008.

Commodities

Iron ore slid 9 percent in Singapore, extending the last session’s retreat from a two-year high. The price soared by a record 27 percent last week, driven by speculative interest in China and optimism Trump’s policies will boost steel demand. Goldman Sachs said Friday that iron ore’s reaction to the Trump win was excessive, while Capital Economics Ltd. warned prices will face growing pressure from rising supply.

Copper pulled back from near a one-year high, while gold rebounded from a five-month low. It slid 4.4 percent over the last three days as the dollar strengthened.

Crude oil rose 5.8 percent to $45.81 a barrel in New York. Qatar, Algeria and Venezuela are leading the effort to finalize a deal, a delegate familiar with the talks said.

Stocks

The S&P 500 Index rose 0.8 percent to 2,180.39, after edging lower Monday for a second straight decline. The Dow Average advanced for a seventh straight day, while the Nasdaq Composite Index rallied 1.1 percent.

As central bankers look for signs of stronger growth, a report today showed sales at retailers rose more than forecast last month in a broad advance after an even stronger September than initially estimated, marking the biggest back-to-back increase since 2020. A separate reading on November manufacturing in the New York region unexpectedly rose.

“The retail sales data showed broad-based gains rather than just narrowly focused on home improvement and autos. That’s heartening,” said Brian Jacobsen, the chief portfolio strategist at Wells Fargo Funds Management LLC, which oversees $242 billion. “This is another data release that if the Fed had in hand when it met at the beginning of November, it probably would have hiked. The economic data isn’t likely going to derail this Trump-bump in the market. It could be handed off to a Santa Claus Rally.”

The Stoxx Europe 600 Index rose 0.3 percent. It has swung between intraday gains and losses for six sessions, matching a streak last seen in August, and has struggled to break out of a trading range of about 20 points since July.

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