the Bank of England and the Federal Reserve now seem to be heading in different directions and the markets are not sure which way to turn.
Yesterday’s sharp plunge in European stocks may have been coming after a strong run since the start of the year, but it took a surprise twist in the Fed’s monetary policy to trigger the selling of equities.
The US central bank said it may choose to halt or at least ease up on the pace of bond purchases as it believes there is a risk of asset bubbles developing and the potential for a rise in long-term interest rates when the flow of new money is turned off.
This sent the markets into a tailspin and prompted analysts to ask if the recent rally has been sustained purely on central bank asset purchasing, rather than on any foreseeable improvement in economic performance.
It was a reversal of Wednesday’s market moves, when the London stock exchange had been driven to a five-year high on expectations of more asset buying, triggered by Bank of England governor Sir Mervyn King’s surprise U-turn on quantitative easing (QE). His decision to support turning on the money printing presses meant three of the nine-member monetary policy committee now support another injection of funds into the economy.
There is even talk of a cut to the already record low interest rate and employing other tools in the monetary policy box to stimulate growth. The overall sentiment pointed to a rise in QE, possibly as early as next month.
Ultimately, the reason for the diversion in UK-US policy is down to the different pace of recovery. The UK remains stagnant, is still grappling with the deficit in public finances and could face a ratings downgrade. The US expects growth to pick up this year and to exit QE. This will underpin support for the dollar against the pound.
The 6-3 split on the MPC and the strengthening US economy contributed to another fall in sterling, which is at a two-and-a-half-year low against the dollar. Analysts believe the Bank is happy to allow inflation to stay above target and sterling to fall in order to give exporters a lift. Some analysts believe sterling may fall by as much as 20 per cent this year.
Mike Ashley, from zero to high street hero
Mike ASHLEY, the man who the City didn’t like because of his maverick way of operating, is now the darling of the Square Mile who can do no wrong.
A 23 per cent rise in gross profits at his Sports Direct chain is certainly the sort of number that most retailers can only dream about, and investors are inevitably asking how he does it when so many stores are closing their doors. How can his staff continue to enjoy a generous benefits scheme when thousands of other retail employees are either losing their jobs or in fear of losing them?
It’s put down simply to giving the customer what he wants, having the right blend of must-have brands and cheaper items available, and having the correct number of stores in the right locations. Unlike JJB, he is not saddled with the wrong stock and too many under-performing shops. And now he is benefiting from the demise of one of his rivals.
If rumours prove true, he is also planning to expand and to invest in his online operations which should add to pressure on his remaining competition.
Analysts are confident enough to upgrade their earnings forecasts and that cannot be said of many retailers these days.