Bill Jamieson: Negative rates shake walls of central banks

Money traders work in front of the computer terminal at a foreign exchange brokerage in Tokyo. Picture: AP
Money traders work in front of the computer terminal at a foreign exchange brokerage in Tokyo. Picture: AP
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Time was when central banks were seen as the restorers of calm, with words and deeds that would work to soothe market volatility.

Such confidence has been shaken in recent months. First came talk of a return to financial “normality”: interest rates would be steadily raised from their current emergency low levels.

Then, within weeks, came a reversal of this guidance as stock markets tumbled. The Bank of England’s Mark Carney has signalled that rate rises were now off the agenda. In the US, Janet Yellen, head of the Federal Reserve, now dissimulates on further rate rises after raising rates for the first time in almost a decade in December.

The rate rise policy reversal has been forced by growing fears over the global economic slowdown. But it is not just higher rates that are being abandoned. I suspect we will see another major central bank reversal: the push into negative interest rates will also come under huge pressure.

The Bank of Japan moved into negative interest rates last month. Sweden, Denmark and Switzerland all followed suit and now have negative rates of 0.35 per cent, 0.65 per cent and 0.75 per cent ­respectively.

Far from restoring confidence, markets have reacted badly. Last week the Tokyo stock market slumped by 11 per cent. And shares in leading banks have taken a battering. Barclays and Standard Chartered have lost more than a quarter of their value in the space of just over a month. HSBC is down 17 per cent. In Europe losses have been even more severe. Deutsche Bank shares touched a 30-year low before reassuring statements saw a rally by the end of last week.

The immediate fear is that the lower negative interest rates go, the harder it is for banks to make money, driving them into riskier assets. Households and businesses alike sense more trouble ahead. Coupled with exposed loans to the energy sector and continuing concern over China, we now seem caught in a “doomsday loop” – poor sentiment hitting spending and investment, further reinforcing an economic slowdown.

Households don’t warm to the idea of “the death of money”. This push into punishment for those holding cash only adds to the unease. For these reasons I suspect that the latest “solution” of negative rates will be halted and in time reversed.

Meanwhile, markets will find their own way – as they historically have done – of breaking the loop. The jaw-dropping falls of recent weeks are not being mirrored in consumer spending retrenchment while the signals from the broader economy suggest a slowdown – just that – and not a recessionary rout, as markets suggest.

Last Friday’s 3.1 per cent or 170.6 surge in the FTSE 100 to 5,707.60 serves as a reminder that markets are prone to over-shooting and at some stage buyers will emerge for the shares and sectors that have fallen most steeply. Paras Anand, head of European equities at fund manager giant Fidelity, caught the eye last week when he revealed that the group was looking at those sectors of the market most heavily hit by the sell-off. He believes the long bull run for defensive stocks at the expense of cyclical companies more exposed to the economic cycle could be drawing to a close.

He said: “We are starting to consider, and to invest in, some of the parts of the market in the eye of the storm. Some of the most interesting things we are seeing are companies in the sectors which are hardest hit.

“The difference between the price on the screen and what we see as being the true fundamental strength of the business has got to such an extreme level. We do not have a structurally weak banking sector at the moment.”

Another focus was on some of the hardest-hit areas of the consumer-facing sector. “We think the outlook for the consumer remains positive and is actually strengthening.”

Citywire reports investment trust analysts at Stifel have slapped a “buy” rating on Murray International after Bruce Stout’s underperforming global equity income fund held up well in the New Year sell-off.

Its positive rating on the trust comes amid a growing debate over whether 2016 could see a shift in investment style from growth to value. Analysis by Morgan Stanley has shown the gap between outperforming growth stocks and underperforming value stocks is as wide as it was in the dotcom bubble at the end of the last century. Certainly a break in recent falls would help calm nerves.