A few months ago I reported on how both the Bank for International Settlements and the International Monetary Fund were continuing to promote the narrative of ‘populism‘ being a detriment to the global economy. The BIS warned about the dangers of a rise in ‘protectionism‘ being a potential trigger for a financial downturn (in the wake of Brexit and Donald Trump). A month later the IMF cautioned about the ‘threat of protectionist actions’ and how this was a near to medium term danger.
Two months on from the IMF’s warning, the German federal election results have given Alternative for Deutschland (AfD) 12.6% of the vote, meaning they are now the third largest political force in Germany with over 80 seats in the Bundestag. The comparisons to the rise of Nazism have dominated the press coverage, given that the AfD are recognised as a far right party with reactionary tendencies. The similarities to Brexit and Trump are evident in that they too are widely perceived as an example of right wing reactionism. The rise of ‘right wing’ movements gaining both positions of power and greater political influence, at a time when central banks are working in concert to ‘normalise’ monetary policy, is a trend that is now becoming blatantly apparent.
On the economic front, both Bloomberg and the Financial Times have reported that stock buybacks are now visibly starting to retreat. Kristina Hooper, who is global market strategist at Invesco, cited some possible reasons for this. According to the FT, Hooper thinks it may be down to:
elevated equity valuations and rising scepticism around what the Trump administration could achieve on tax reform and economic growth.
There was no mention of the fact that the drop in buybacks directly coincides with the Federal Reserve’s programme of raising interest rates under the presidency of Donald Trump. The FT themselves admit that borrowed money is a significant component for allowing corporations to buy back their own stock which, as a consequence, inflates the share price. The downward trend in buybacks is likely to continue in line with the Fed raising rates again in December and into 2018.
- The Bank of England has warned that British high street banks risk losing as much as £30bn from defaults on credit cards and personal loans credit were the economy to take a turn for the worst.
- The Old Lady of Threadneedle Street cautioned that the UK’s growing £200bn consumer debt pile threatens some to damage the capital positions of some of Britain’s biggest banks should a sharp downturn in the economy take place.
- In a sombre statement from the central bank’s Financial Policy Committee, the burgeoning consumer credit market was described as a “pocket of risk.”
- Recent figures show that the annual rate of growth for unsecured consumer borrowing through credit cards, overdrafts and personal loans still stood at 9.8pc in July. At the end of July, total unsecured personal borrowing stood at £201.5bn, the highest since December 2008.
- Angela Merkel has secured a fourth term as German chancellor but with her authority diminished, after her conservative bloc secured the lead position in parliamentary elections but failed to halt the march of rightwing populists.
- Alternative für Deutschland (AfD) was celebrating its historic third place success last night, having secured 13% of the vote, according to exit polls, marking the first time in almost six decades that an openly nationalist party will enter the Bundestag.
- Merkel’s centre-right Christian Democrat-led alliance secured 33% of the vote, according to exit polls, about 12 points ahead of her main rivals, Martin Schulz’s centre-left Social Democrats, which secured around 21 points, marking the poorest result for Germany’s oldest party since 1949 and pushing it on to the opposition benches.
- Dallas Federal Reserve Bank President Robert Kaplan said on Friday he remains “open-minded” on a December rate increase but remains concerned current weak inflation may be the result of hard-to-counter structural trends.
- “I am open-minded on one more rate increase,” for this year Kaplan said, but “the structural change in our economy is more powerful and the rate of structural change is greater and it is creating some headwinds for inflation and affects wages also.”
- Kansas City Fed President Esther George said on Friday the muted market reaction to the launch of the Fed’s balance sheet reduction plan earlier this week was a welcome development for the central bank.
- The plan “was very well telegraphed,” and the absence of any sharp response among investors is what the Fed had hoped, George said.
- “My hope is this continues to operate smoothly and as many have noted in the background,” said George, who opposed the third and final round of asset purchases used to fight the crisis until 2014. With the balance sheet now declining, George said she hoped the quantitative easing strategy “will be kept in a box” and not be used again.
- The expected gradual pace of rate increases is “appropriate…but we do have to keep moving,” she said.
- Monetary policy is not the right instrument to address financial imbalances in the euro zone and governments need to rely on their own tools to tackle local issue, European Central Bank President Mario Draghi said on Thursday.
- “Financial and business cycles can potentially become de-synchronised, meaning that financial imbalances can grow in an environment characterised by relatively muted inflation,” Draghi said in his capacity as the head of the European Systemic Risk Board.
- “In such an environment, the use of monetary policy is not the right instrument to address financial imbalances, and may lead to substantial deviations of aggregate output and inflation from their desirable levels,” he added.
- A crucial tail wind for the stock market’s continued bull market appears to be losing its gale. And the one hope to whip it up again is looking increasingly less likely.
- Stock buybacks, after years of steadily increasing, are on the retreat. According to S&P Dow Jones Indices, companies in the S&P 500 spent roughly $120 billion on stock repurchases in the second three months of 2017. It’s not a huge decrease from a year ago, but it’s the fifth consecutive quarter in which the trailing 12-month figure for buybacks has dropped, the first time that’s happened since the market meltdown in the Great Recession.
- Corporate share buybacks have been the single biggest source of demand for US equities since the financial crisis, as companies largely shunned business investment plans in favour of ploughing their earnings — and, increasingly, borrowed money — into their own stock.
- Companies in the S&P 500 bought back about $120bn of their own stock in the second quarter, a 9.8 per cent decrease from the first quarter of the year, and a 5.8 per cent decline from the same period in 2016, according to S&P Dow Jones Indices numbers released on Monday.
- For the 12 months ending June 2017, S&P 500 companies spent just over $500bn on buybacks, according to S&P Dow Jones, down 14.5 per cent from the preceding 12 months.
- Federal Reserve Chair Janet Yellen’s inflation strategy may have a shelf life of about four months. After that, a gang of newcomers might have to decide what to do next.
- Given such unknowns, central bank transitions are risky for investors. That’s one reason U.S. presidents have a long history of reappointing Fed chiefs. By early 2018, as many as three new governors and a vice chairman will have the power to decide whether they maintain Yellen’s strategy of gradually hiking into an inflation “mystery,” as she calls it. Yellen’s four-year term as chair ends in February, and an extension isn’t guaranteed.
- “They will have to decide how much weight they put on this view that the Fed has” of inflation being temporarily low, said Torsten Slok, chief international economist at Deutsche Bank AG. “Do they believe the wolf is coming or will they say there is no wolf to worry about?”
- The change in leadership at the top of the world’s most important central bank “is incredibly under-appreciated by financial markets,” he added.