Monetary Policy

With central banks and governments pumping huge amounts of funding into their domestic economies, they are obviously very keen that companies act with prudence and look after their surplus cash sparingly, by cutting back on distributions such as dividend payments and any share buyback plans.

Our take on all of this is that the central bank has acted in a very targeted and timely way, adding large volumes of liquidity at even lower rates, along with significant capital to the banking system.

Monday was one of those days investment professionals will remember all their lives, and compare with similar standout days from the past.

The big question for us now is how long the impact of the virus may last, and how much of a supply and demand shock will there be as a consequence of the various efforts to stall its spread.

Given where asset prices are at the moment, we would categorise inflation as a low probability, but high impact, risk.

Next month’s budget now has the green light to be Johnson’s fiscal bazooka, with tax cuts, housing schemes and infrastructure projects already mooted.

In what was Mark Carney’s last meeting as governor of the Bank, the MPC delivered a mixed message.

A rate cut now makes very little sense to us, and wastes one of the few bullets the BoE has left in its armoury. If they do decide to cut next week, we think it will be reversed within 12 months.

Yesterday we most likely witnessed Mario Draghi’s last monetary policy package. The European Central’s next meeting on October 24 will be the president’s last, and given the extent of the measures unveiled on Thursday it is looking like a non-event.

The European Central Bank faces quite a conundrum ahead of its upcoming monetary policy meeting on September 12. ECB President, Mario Draghi, has clearly signalled that a cut to the refinancing rate (currently at minus 40bp) is likely and markets are now pricing this in with an 85% probability. The problem is, the ECB has also signalled that it will simultaneously consider tiering the bank reserves this rate actually applies to.

The average yield of the bond market today is 1.46%, while its average duration is 7.05 years, going by the widely used proxy of the Barclays Multiverse Index.

Since the two anti-establishment parties (The League and Five-Star) formed a coalition and took control in Italy, markets have been uncertain on the domestic government policy that was promising many things to many people and ultimately creating considerable friction with the European Commission (EC).