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Pointless – with apologies to Alexander Armstrong and Richard Osman

Summary

The unintended consequences of official interest rate changes in the developed economies have come to the fore in February ensuring the first half of February looks much like January – volatile markets and negative equity and credit market conditions.

The unintended consequences of official interest rate changes in the developed economies have come to the fore in February ensuring the first half of February looks much like January – volatile markets and negative equity and credit market conditions.  Of course government bonds have been the beneficiaries as the US December hike in the Fed Funds rate looks misplaced in the light of recent date and the race to how low can you go in Europe and Japan looks inevitable and pointless.
 
The US Federal Reserve’s guidance last December pointed us to further rate hikes this year but the market has quickly moved to a different consensus.
Feb 2016 image 1
 
 
 
 
 
Meanwhile Japan’s ‘surprise’ negative rate move earlier this month, Sweden’s recent move in the same direction and European Central Bank’s words hinting at further negativity on rates are all examples in our opinion that NIRP (Negative Interest Rate Policy) isn’t working and is unlikely to.  The concept of a helpfully weaker currency backfired when the Japanese yen surged and the euro rose against the US dollar after those moves.  The problem is that these cheap-to-borrow-in currencies rise when even more negative interest rates promote a fear of ‘what do they know that we don’t?!’ and a risk-off mentality returns prompting buying back of the ‘cheap’ currencies – pointless. 
Another consequence of negative rates is that it reverberates along the yield curve to longer maturity government debt.  The idea is that no one would want to own government debt and would prefer to buy riskier assets with a higher yield or capital gain potential.  The opposite happens as investors look at these abnormal yield levels, become fearful and avoid anything risky. The amount of negative-yielding bonds out there is staggering.  They might be perceived as safe havens but are not attractive investments.
Feb 2016 image 3
 
 
 
 
 
We have spoken about the positive impact of a much lower oil price on consumers, I’m now regularly filling my car up with diesel at less than £1 a litre. While equity markets look like being in oversold territory as the panic index below indicates, risk asset market bounces will be capped by further selling from sovereign wealth funds who still have to plug their budget deficits. 
Feb 2016 image 2
 
 
 
 
Of course more and negative rates have brought bank profits into the spotlight and the likely damage to them yet having previously given them the money supply ammunition to lend more – pointless.  As with any panic, some good assets emerge at heavily discounted prices.  These tend to be stock or credit specific which lends itself to our investment philosophy which focuses on those managers that can take advantage of those opportunities as they arise.

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