The Bank of England unsurprisingly kept rates on hold last week and we have heard no more from Governor Mark Carney to help in determining the timing of any shift in policy.
One interesting comment came from Nemat Shafik, the new deputy governor, who told a Treasury select committee that the amount of spare capacity in the economy is lower than the Bank predicted in May.
As this is one of the key indicators used to justify policy it could be read as another hint that rates will rise late 2014 rather than early 2015. However, saving June’s high inflation figure that shouldn’t form a trend, the only pressure point appears to be house prices in Kensington & Chelsea. It is difficult to see the Bank moving too quickly and risking growth when so many other potential threats remain in place.
It’s the (whole) economy, stupid
Mario Draghi, President of the ECB, used a speech in London to call for greater powers to force Eurozone member states to enact, or at least keep promises given on, structural reforms in their economies.
The European Commission was given new powers to enforce fiscal responsibility in the aftermath of the global financial crisis and Mr. Draghi called for this to be extended. “There is a strong case for us to apply the same principles to the governance of structural reforms as we do to fiscal governance,” he said. “The essential cohesion of the union depends on it.”
“But for firms, companies to access this credit they must be in a condition to work. If it takes nine months to open a new business and then once it’s opened, it’s overwhelmed by taxation, it’s very hard for this business to ask for credit,” Mr. Draghi added.
One lesson that we have learned from the last five years is that there are no simple solutions. It is not just about money supply or inflation. Equally, it is not just about the amount that governments spend or don’t. A fully thought out, holistic approach that considers all factors is the one that is most likely to work.
Banco Espírito Santo – a hitherto inconspicuous Portuguese bank – caused global markets to wobble late last week, when its major shareholder missed a debt payment. Market poise has been quickly restored on the basis that this should scarcely be a systemic issue for Portuguese banking, let alone the European banking system – assuming competent official responses.
However, it highlights again, what the IMF termed ‘pockets of vulnerability’ in Portugal’s banking sector and the potential for the ECB’s banking review to find nasty surprises in the woodshed.
Tis’ the (earnings) season to be jolly, hopefully
In the midst of one of the longest and strongest bull markets in history it would be easy to be jittery about the current high index levels and seemingly overblown valuations. We will know far more after the current earnings season is fully underway.
Alcoa, which traditionally kicks off the season in the US, reported very encouraging figures. Alcoa reported profit of US$138m, compared with a loss of US$119m a year earlier. Revenue edged down 0.2% to $5.84b. Many analysts look to use Alcoa as a bell-weather for the overall economy, in that it serves so many sectors, so this is encouraging news. As it also highlights the rewards that are now expected from five years of cost-cutting, efficiencies, cleaning up balance sheets and greater focus on the core for many big corporates it may be that this class of equities are not as frothy as they first appear.
M&A is back, sort of
Most analysis of the 1H14 M&A market focused on the high value we saw pass hands. At US$1.7t, 2014 had the strongest first half since the onset of the GFC. What has distinguished this year from the intervening years is the broad base of transactions being undertaken. In 2010-12 it was all about resources. Last year it was about life sciences, consumer products and technology. This year we are seeing industrials, telecoms and media joining in. It is still a predominantly US led recovery, but as with the economy, where the US goes others follow.
There are some hopeful signs of a return of M&A globally in terms of the number of deals, with the US in particular showing an increase 2Q14 against 2Q13. However, companies are still navigating a very complex set of challenges. Geopolitical issues, modest – and fragile – economic growth and increasing shareholder activism is ensuring that managing costs and delivering measured and sustainable growth remains a permanent feature of this complex business landscape. Within that context, we should only expect a modest increase in deal volume globally in 2014-15.
There are strong reasons for believing the second half of 2014 will be as healthy as the first half and we should expect the deals to keep flowing.
It’s just like watching Brazil
As any fans of Mr. Collins know, words and phrases can change over time. To be condescended to was a good thing back in the early 19th century (Middle English (in the sense ‘give way, defer’): from Old French condescendre). Not so today.
In the same way fans singing the praises of their team for its free-flowing, incisive attacking that inevitably leads to a goal by comparing them to the great team of Pelé, Carlos Alberto Torres, Jairzinho, Tostão, Gérson and Rivelino will have to change. It will be sung at the opposition when they are getting spanked at home.
What we do now with “Are you Scotland in disguise” I have no idea.
And then the Germans win
A sublime goal, fit to end a thrilling final, at the culmination of a wonderful tournament.
The 2014 World Cup will be remembered for the overall excitement of many of the games. Even the nil-nils towards the end were edge of the seat stuff. Well done to the Germans for winning. They were the strongest team throughout, from the 4-0 opener against Portugal to the 7-1 humiliation of Brazil.
That said, the final was a closely fought affair featuring the two best teams. I called it as the final several weeks ago and it could have gone either way. I had Argentina to win, based on no European team ever having won outside Europe. Just goes to show what I know about football.