tony's blog

Monday, February 12, 2018

What an interesting week!


What an interesting week we’ve just had and what does it mean going forward?
As a professional Treasurer and market pundit I’m supposed to be an expert on all market moves and with a coherent theory of what’s happening, why and what happens next.
Well I’m going to let you into a secret – reading the markets right now is pretty tough.
There are so many conflicting risks and issues in the market and the Global experiment with loose monetary policy and economic stimulus means that no one really knows what the consequences of all this is going to be. Don’t let anyone fool you into thinking differently.
We’ve had close to zero interest rates for some time – so long that many in market don’t realise that this isn’t normal. It isn’t! And in the UK alone we have had £435bn of QE which many feared would stoke up asset values and create rampant inflation. And by and large that hasn’t happened either.
Global investors have been chasing yield and this has not been possible through Gilts or deposits and so has helped fuel the spiralling price of equities. In the US, regardless of the political scene (some would say because of – I’ll let you decide), the economy is now growing well and, with almost full employment inflation, now beckons. This means rates will have to rise more quickly. At the same time the Fed is looking to reverse out QE which is giving fears that this will be bad for the economy and that Bull run on equities should end. Who knows if that’s true? And all this at a time when a new and economically inexperienced Chairman of the Fed has barely got his feet under the desk
But what of the UK? Last week the vote was to leave rates on hold but for Mark Carney to signal that rates will have to rise sooner rather than later. This is the Governor’s forward guidance that he is so keen on.  At the same time we have a possible withdrawal of both QE and the remaining asset purchase schemes such as TFS and all with the backdrop of the Brexit ‘fog’. Piling on risk and uncertainty is not good for consumer confidence or businesses trying to plan.
At an international level we will have to see if the Bull run has well and truly ended or whether this is just a temporary volatile period. Was it just the price correction driven by market fundamentals of an overpriced equity market or something deeper? What about the influence of High Frequency traders using AI for algorithm based trades? No one knows! Many will argue that fundamentals are still good and that this is just a market wobble that will soon pass. I’m not so sure. One to watch because despite our tendency to look inwards in the UK, we can’t escape the wider panics in Global Financial markets…as we saw in 2007.

Monday, February 5, 2018

TFS - End of an era?

It’s still so early in the New Year but already we have seen the end of the Funding for Lending Scheme – a cheap source of funding to banks and building societies.
Soon, by the end of this month, we will probably see the end of new borrowings under the ‘Funding for Lending on speed’ otherwise known as the Term Funding Scheme (TFS). This was put in place in August 2016 at the same time that Base Rates fell to ¼% and it was the Bank of England’s mechanism to ensure that the rate cut was passed onto borrowers. In essence, lenders could borrow under this scheme at Base Rate flat. Right now there’s nearly £107mn drawn under this scheme and it was increased in size as recently as November last year.
The effect of the TFS has been to fuel mortgage lending at subsidised rates and dampen the requirement  for more conventional funding such as retail deposits, securitisation and covered bonds.
So, assuming that TFS is not extended – there’s always room for a last minute reprieve – then what will this mean? Well for a start we will begin to see more competitive retail deposits. Good for savers but expensive for lenders. If a price war starts for deposits then not only will they get more expensive as a funding source but they may well start to become more volatile as deposits move from one bank to another chasing the best rate. That’s not good. Expensive and unstable. Definitely not ‘strong and stable’.
Securitisation and covered bonds should make a come-back. Since the credit crisis these funding mechanisms have been decidedly muted and we really need the large historical issuers such as Santander, Lloyds, Barclays and Nationwide to re-start their programmes in earnest. Although this could have the short term effect of increasing securitisation costs for everyone as the supply and demand dynamics cut in, medium to long-term this can only be good news as we finally get these markets back on track and focus investors on buying them. On the whole – I can’t wait for these distorting schemes to go. They were very important at the time and have done their job. Now we need to get back to business as usual. Finally!

And mortgage rates? Well they will have to rise to reflect the increased funding costs. Standby for some last minute cheap deals as lenders take their fill of remaining TFS availability. Make hay while the sun shines!