Beware the October shock
GLOBAL financial gatherings are intended to ease financial tensions. But that is not always the case and in the past they have sparked market shocks.
Next week will see the 30th anniversary of Black Monday on Wall Street an event which sparked the biggest ever one- day fall in the FTSE 100 which plunged 12.2pc to 1801.60. This followed a 10.8pc fall the previous day, in response to the collapse in the Dow Jones and the hurricane which blew an ill-wind over Michael Fish’s reputation as a weather forecaster.
october has a reputation for being a dangerous month for investors.
It hosted ten of the biggest ever falls in the FTSE including the dive which followed the collapse of Lehman Brothers nine years ago and the subsequent bailouts of Royal Bank of Scotland and Lloyds. It was also the month of the Great Crash of 1929.
What is often forgotten about these events is the economic backdrop. In 1987 the markets plunged after an interest rate row between the United States and Germany.
With the Dow Jones and the S&P 500 currently hitting new highs each day, and with cheerleader CNBC behaving as if it can never end, it is worth considering the trigger for the next setback to share prices.
Most obvious would be a rise in Western interest rates. The IMF’s chief economist Maurice obstfeld is clear that it is too early for the European Central Bank and the Bank of Japan to end quantitative easing and low interest rates which have delivered a rare co- ordinated recovery for the advanced world. To pull back now would be disruptive to Western economies and emerging markets which are in recovery.
The US, as one of the fastest growing advanced economies, is in a better position to start normalising rates without causing a market shock and is proceeding delicately.
The Bank of England has positioned itself for a rate rise as soon as November, but might well be advised to hold back given the uncertainty over the upcoming budget, Brexit negotiations and some softness in the economic outlook.
Then there are the geopolitical shocks. Strife in Catalonia could arguably turn into something much worse and tear Spain and the EU apart.
The biggest risks could be in Asia. A nuclear-laden misjudgement over North Korea or an implosion of China’s credit bubble, referred to by the IMF in its World Economic outlook report, are big worries.
So far volatility on the equity markets has been almost non-existent in spite of concerns of irrational exuberance. But that is no reason for october complacency.
Export bonuses
THOSE of us counting on the post-Brexit depreciation of the pound to produce a positive effect similar to Britain’s ejection from the Exchange Rate Mechanism a quarter-of-a-century ago have been disappointed. There are reasons for this. The 1992 episode allowed interest rates to fall rapidly igniting an expansion of the economy.
This time you have to dig deep into the trade figures to see the gains. There are obvious benefits such as the boom in overseas tourism and the way in which foreign earnings, for the UK’s transnational companies, are worth much more than before.
The big disappointment is that some exporters have chosen to raise prices, eroding new-found competitiveness.
Reasons for doing so are a response to the way that publicly- quoted companies operate. The stock market values them on earnings and dividends. Chief executives are incentivised by bonuses and share options. If raising prices provides a quick profits hit why not do so rather than seeking to maximise exports?
What may be necessary is a lesson from the playbook of Nobel prize winner Richard Thaler. A nudge in the direction of public interest over bonuses, with an implied threat, could do the trick.
Lounge lizards
FOR the last 70 years, since the IMF and World Bank held their first annual meeting in London, the two organisations have coexisted. They have shared facilities and sought to operate out of the same press room. Sadly for the Bank it has sometimes felt like the neglected relation.
Current president Jim Kim is changing that. The Bank is inaugurating its own ‘press lounge’ at an HQ a block nearer the White House than the IMF. And President Kim has promised to drop-in. Very grand.