Comment: Markets look to US for monetary direction

George Kerevan
George Kerevan
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THE markets had a bout of dyspepsia this week caused by worries that the US Federal Reserve might be planning to rein back its monetary expansion programme, currently running at a staggering £55 billion a month.

My guess is that the Fed is unlikely to do anything precipitate but is merely softening up the markets in order to get them to prepare for the inevitable monetary unwinding when it comes (say, in two years’ time).

That leaves two possibilities on the investment front. First: the markets recover from this week’s fit of Victorian vapours and share prices go on rising.

The chances of this have been boosted (slightly) by Tuesday’s decision of the European Commission to let France, Italy and Spain delay reducing their budget deficits.

The second option is a major market readjustment involving the emerging economies.

China, the great driver of the post-2009 global economy, is in deep trouble. Beijing has reached the limits of monetary expansion after pumping an insane £9 trillion of new credit into its economy in only four years.

As domestic growth stalls, China is buying fewer raw materials from the rest of the world, spreading the gloom. In Brazil stock prices are actually down while the currency has plummeted 8 per cent since March.

We could be facing the biggest inflection point for emerging markets since 2008.

This will happen if decelerating growth combines with fears of US monetary expansion tapering off, leading investors to exit Asian stocks and bonds en masse.

The immediate evidence is that portfolio money is still pouring into Asia. Longer-term depends on whether the Fed manages an orderly retreat from monetary expansion.

Borrowers find loans process too tough

Here’s a conundrum. House purchases are on the up in the UK, thanks in part to the Bank of England’s Funding for Lending scheme (FLS).

Introduced last August, this lets high street banks borrow at below market rates from the Bank of England, provided they lend the cash on house buyers. The UK government has just approved an extension of the subsidy to 2015.

The conundrum is that the same scheme also applies to lending to small firms but according to the latest data bank loans to businesses actually fell in April.

Lending to SMEs shrank by £660 million following a £115m fall in March. That contrasts with net mortgage lending, which jumped by £875m. Why the discrepancy?

It could be down to a difference in demand in the two sectors, as the banks argue. There’s truth in this: according to SME Finance Monitor, three quarters of all SMEs are “happy non-seekers” of finance. That is, they have not sought a bank facility in the past 12 months, and say nothing has stopped them from doing so.

Yet the same study found that a significant 7 per cent of SMEs were frustrated “would-be seekers” of finance. Of these, 38 per cent blame the red tape involved while another 36 per cent just assume the bank will say no.

I recently set up a new small business account. The process proved excessively complicated, while communicating with my account manager is akin to contacting Mars.

God knows what it would be like if I needed to borrow any money instead of just giving them mine. I think the answer to the SME loan conundrum is patently obvious.